TaxTMI 
TaxTMI 
2015 (9) TMI 609
X X X X Extracts X X X X
X X X X Extracts X X X X
....th price, on the ground that an abnormal item was 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 commiss....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... arithmetic mean of 7.68%. Accordingly based on +/-5% variation 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 an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on division: Rupees Revenue Sales 31,87,61,777 Add: Duty Draw Back 4,08,751 Total .................................... (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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd, agency service activity merely involves coordination between customers and the head office and undertaking certain marketing and logistic services and therefore the same does not involve purchase and sale of the finished goods, warehousing of inventory of finished 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s warranted. Accordingly, adjustment of Rs. 20,87,795/- in respect of international transactions of agency service activity was therefore held not sustainable and was directed to be deleted. 20. Before us, the ld DR relied upon the findings of TPO to contend that allocation of expenses was proper and, CIT(A) was not justified in re-computing the allocation 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iness. ii) The target customers for the two business segments are different. While the distribution and agency function are performed by the same team of people. iii) There is a separate team of people for the two business segments iv) For rendering marketing support service, the assessee is required to perform different functions, such as (a) collecting marketing 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot find any merit in the contention raised by the learned counsel that these are closely linked transactions undertaken by the appellant. On the contrary the nature of transactions are functionally different and even the risk assumed are different. We thus negate the stand of the assessee and uphold the findings of CIT(A) in benchmarking the distribution/agency function separately. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ervice activities at Rs. 3,97,70,618/- is higher than the arm's length price of such services, computed as per basis adopted by the TPO at Rs. 3,75,38,999/-, no adjustment on this account is warranted. Accordingly, adjustment of Rs. 20,87,795/- in respect of international transactions of agency service activity is, therefore not sustainable and is directed to be deleted." 29. Having regard to the above factual conclusion we uphold the action and reject the grounds raised by 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or benchmarking experience has been emphasized: - Mentor Grpahics (Noida) Pvt. 109 ITD 101 (Del) - Sony India (P) Ltd. 106 ITD 175 (Del) - Skoda Auto India (P) Ltd. vs. ACIT 122 TTJ699 (Pune) - Egain Communication Pvt. Ltd. vs. ITO 118 ITD 243 (Pune) - Schefenacker Motherson Ltd. vs. ITO (in ITA Nos 4459 & 4469/D/2007) - Honeywell Automation India Pvt. Ltd. vs. DCIT (ITA No. 4/PN/0)" 33. On perusal of the above, CIT(A) has held that foreign exchange loss or gain is required to be 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s been done in this case. Such adjustments also matched the requirement of the context (TP principles). The basic issue involved was whether the cost paid or charged for international transactions was at arm's length or not. The factors which go to influence price, cost or profit are/were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of the Revenue is not clear. If depreciation is not leading to any difference, 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 f....