TaxTMI 
TaxTMI 
TaxTMI 
2013 (3) TMI 666
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....he AO to the Add!. CIT Transfer Pricing. Hyderabad. under s. 92 of the IT Act for determining the appropriate method and amount of ALP in respect of international transactions of the assessee with its associated enterprises. It was found that the assessee had transactions with its associated enterprises during the previous year relevant to asst. yr. 2007-08 aggregating Rs. 16.53.09,321 consisting of the following: Import of raw material Rs. 14.91.25.880 Receipt of management services Rs. 1.54,71,893 Receipt of engineering and designing services Rs. 7,11.548 3. The assessee in its transfer pricing report had taken TNMM as the most appropriate method for making the comparison. They selected 5 comparable companies and determined the profit level Indicator of operating profit/sales (OP/sales) @ 4.6 per cent. The assessee had shown the ratio of operating profit to sales of their company for the year under appeal at 5.40 per cent and hence concluded that there was no requirement for making any adjustment on account of transfer pricing. 4. The TPO has also held that the TNMM applied on the enterprise level is a most appropriate method. In respect of CUP method as the assessee has not....
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....10.38 per cent which was within the band of +5 per cent from the ALP of 14.43 per cent being the average PLI of the comparable companies and hence no further addition was required to be made separately in respect of the other international transactions viz .. purchase of raw materials and Engineering and designing services. Hence, the TPO made an adjustment of only Rs. 1.54.71,893 to the assessee's AE transactions by holding that the ALP of the management fees paid should be nil. 7. Aggrieved. the assessee filed an appeal before DRP. Before the DRP. the assessee submitted detailed reasons necessitating the payment of management fees with associated companies. 8. The assessee further submitted that the learned AO /learned TPO erred on facts and in law In determining the ALP for management services to be nil and in doing so : (i) ignored the commercial expediency of the management services received by the assessee; (ii) did not appreciate the fact that the assessee is a licensed manufacturer of Polartech Products in India and is entirely dependent on the AE for assistance In terms of methods and processes of manufacture. 9. The DRP concluded in respect of transfer pricing as....
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.... not considering the comparable contract for blending activities with a third party": 15. We shall adjudicate grounds 2 and 6 together as both grounds deals with comparability analysis and the application of filters thereof to arrive at the transfer pricing adjustment. 16. Ground 3 reads "the Hon'ble DRP/learned AO erred. In computing the mark-up of appellant by considering certain extraordinary expenses as part of regular operating expense, including management fee which is a one-off payment for assisting in setting up of new plant and should be considered as extraordinary and non-recurring expenditure and excluded from margin computation". 17. According to the assessee the management services fee was paid to the AE in connection with setting up of a new factory at Cherlapally and it should be considered as an extraordinary. non-recurring expenditure and be excluded from margin computation. 18. The TPO had. as briefly discussed above. rejected this claim of the assessee and held the management fees ALP is nil and hence. made an adjustment of the entire management fees of Rs. 1.54.71.893 and no other transfer pricing adjustment was made. 19. The DRP however disagreed with ....
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....ed transfer pricing adjustment. 26. We find that from p. 15, ground 7, para 7.1 of the DRP's order that it has been held by the learned DRP that "though the TPO mentioned that he is excluding the income from sale of scrap in calculation of the PLI in para 15.1 in his order, he has not given any reasons for the same. The assessee claims that the scrap material sold has come from the core manufacturing activity of the assessee. Hence it needs to form part of the operational income only. Inasmuch as there is no evidence to show that they do not relate to the core business of the activity of the assessee, it has to be treated as operating income". 27. Hence, we agree with the assessee on this ground and direct the TPO to follow the directions of the learned DRP and compute the margin of the assessee by including sale of scrap as operating income. 28. Ground 5 reads "the Hon'ble DRP/learned AO erroneously computed the transfer pricing adjustment by applying the arm's length mark-up on a wrong base". 29. The assessee's contention is that only part of the total expenditure of the enterprise as a whole has been incurred in international transaction with the AE (associat....
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....ion, is not justified, when it is admitted position that only 45.51 per cent of raw material has been acquired by the assessee from its associate concerns for the purpose of manufacturing items. The assessee has stated that the operating profit if applied to 45.51 per cent of the turnover would come to Rs. 35,52,573 as against operating profit of Rs. 24,35,175 booked by the assessee, and the difference thereof would only be called for to be made as addition to the profit shown by the assessee. We, therefore, direct the AO to modify- the assessment and make the adjustment only to the extent of difference in the arm's length operating profit with adjusted profit with reference to the 45.51 per cent of the turnover, and not to the total turnover of the assessee. Therefore, to this extent, the addition made by the AO and further confirmed by the CIT(A) is reduced. We order accordingly." 33. Therefore, the transfer pricing adjustment is to be worked out with the ALP determined for the enterprise, as a whole. Thereafter the transfer pricing adjustment for the enterprise as a whole should be allocated to the international transaction on a pro rata basis in the ratio of operating expe....
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.... rejecting zero export is not correct. 40. Under r. 10B(2) the comparability of international transaction with uncontrolled transaction should be judged with the specific characteristics of the goods/services, fair analysis, contractual terms, geographical location, market served etc. From the above it is apparent that when the profitability of the company mainly arose from domestic sales with export sales constituting as little as 0.12 per cent of its total sales, appropriate comparable companies would also be those whose main sales is in the domestic market. 41. Obviously profitability in the domestic market as compared with the profitability in the export market/would be different. Under r. 10B(iii) [sic-10B(1)(e)(iii)] reasonable accurate adjustments have to be made to eliminate material effects of such differences. If reasonable adjustments cannot be made then such comparables may have to be rejected. No such adjustments were provided by the TPO nor any reasoning provided as to why adjustments were not necessary. 42. Therefore, to summarize, we uphold that the two filters used by the TPO namely the turnover filter and the zero export revenue filter were applied incorrectly.....
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....lore Tribunal in Genisys Integrating Systems (supra) as discussed above and that the zero export revenue companies should not (sic) excluded. Hence, the 8 comparables which were rejected by the TPO have to be taken back in addition to the two comparables chosen by the TPO. In other words, the revised set of ten comparables submitted above by the assessee in reply to the show-cause notice is the correct set to be used for comparability analysis. 48. Hence, we direct the TPO to adopt the ten comparables submitted by the assessee in reply to the show-cause notice of the TPO reproduced above while computing the comparable margins to arrive at the ALP for theTNMM. 49. Ground 7 reads as follows "learned TPO erred in not allowing the benefit of range of + / - 5 per cent as provided in proviso of s. 92C(2) of the Act and applicable to asst. yr. 2007-08 while determining the ALP". 50. We have heard the submissions of the parties on this issue. In the decision of Dy. CIT vs. HelloSojt India (P) Ltd. (ITA No, 645 and CO. 40 of 2009 dt, 15th Jan., 2013) [reported at (2013) 153 TTJ (Hyd) 322: (2013) 84 DTR (Hyd)(Trib) 345-Ed.] the Coordinate Bench of this Tribunal dealt with this issue and h....
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....ision towards agency commission of Rs. 14,21,084 was made based on the sales income and is in consonance with the Accounting Standard 1 (AS-I) 55. The AO had treated the amount debited as agency commission to P&L a/cas provision and disallowed the same under the provisions of s. 37 of the Act, which has been upheld by the Hon'ble members of the DRP. 56. The assessee submitted the relevant clauses of the agency agreement are as follows: "Clause 2 : Your scope of work as an authorised selling agent or dealer would be to promote sales of our products in the assigned territory, generate enquiries/order in our favour, follow-up for payments and C Forms, attending or following up of product trails and to give us regular feedback on your activities and the competitors' activity in your territory. Clause 5 : You may stock and sell our products and our billing will be at our list price less your commission on the product. Clause 14 : The dealer's discount or agency commission allowed to you, as a dealer or authorised selling agent will be 7.5 per cent on the .net value (exclusive of/excise duty and sales-tax) of the bill for our Sch. A products and 3 per cent of Sch. B prod....