TaxTMI 
TaxTMI 
2016 (1) TMI 855
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....he order passed under section 92CA(3) of the Act by the TPO. 2.1 That the DRP/TPO erred on facts and in law in inappropriately aggregating the international transaction of provision of agency services with market support services, without appreciating that such services ought to have been aggregated with the distribution segment, being closely linked with such segment. 2.2 That the DRP/TPO erred on facts and in law in not5 appreciating that the distribution and agency segment relates 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. 2.3 That the DRP/TPO erred on facts and in law in not appreciating that the appellant does not employ any separate. Specific personnel/asset for provision of agency services and same employees engaged in the distribution segment perform the necessary functions for provision of agency services. 2.4 That the DRP/TPO erred on facts and in law in allocating common expenses to the agency segment in the ratio of sales, resulting in disproportionate allocation of expenses not commensurate with the func....
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.... and in law in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent entrepreneurs. 2.14 That the DRP/TPO erred on facts and in law in not dealing with the objection of the appellant of comparability adjustment on account of working capital employed by the appellant vis-àvis comparable companies." 2. Briefly stated the facts of the case are that the appellant 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, appellant filed return of income on 20.09.2009 declaring an income of Rs. 3,47,19,813/-. The appellant 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. 24,88,09,859/- from Corning Inc. as part of distribution function of import of rough ophthalmic blanks ....
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....P margins earned by them was found to range from 3.44% to 14.32% with an arithmetic mean of 9.74%. 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 3.44 to 14.32%. Thus, as for financial year ending 31.03.2009 appellant had earned a NCP margin of 8.88% 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 14.12.2012 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 appellant. 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)....
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....direct expenses common to both distribution and agency functions should be done on the basis of gross margin and not on the basis o9f sales, as adopted by the TPO. It is contented that in the event of this issue being decided in favour of the assessee, all other issues raised in this appeal will be rendered academic. Learned counsel thus prays that this issue raised in ground no. 2.4 and 2.5 can be taken up at the threshold itself. 12. Apropos the adjustment of Rs. 20,87,795/- it was contended before the DRP by the appellant that the distribution activity and agency service activity are to be considered together and are not to be evaluated separately to determine the arm's length price in relation to the aforesaid "international transactions" as the aforesaid two activities transactions form part of natural business segment of distribution of ROBs and are inter linked and closely connected in as much as, (i) the two activities relate to the same products and involve 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 cu....
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....01,81,431 Contribution to PF and others 17,11,608 Membership & Subscription charges 33,590 Miscellaneous 5,94,641 Depreciation 6,54,645 Recruitment 18,48,868 Redistributed charge out 14,02,103 Total 422,77,131 18. With respect to the aforesaid ground of appeal, the Tribunal in the appellant's own case for the assessment year 2003-2004, upheld the action of the Ld. CIT(A) and directed the TPO to allocate common expenses in the ratio of gross profit. 19. Following the decision for the assessment year 2003-2004, thus we hold that aggregate indirect expenses common to both the functions 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. Allocation of expenses in proportion to sales would amount to give equal weightage in terms of functions performed, assets utilized and risks assumed to both distribution function as well as agency service activity, which otherwise involves much lesser functions and utilization of assets and risk. 20. In the result, the appeal filed by the appellant is allowed for statistical purpose. Orde....