TaxTMI 
TaxTMI 
TaxTMI 
2016 (11) TMI 1362
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....cation of the profit split method. 2. Whether in the facts and circumstances of the case, the Ld. CIT(A) has erred in applying the judgment of M/s Philips Software, M/s Sony India and the premises of circular 12 and 14 of 2001 in this. 3. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in making subjective observations without examining the issues proving to the contrary relating to selection of comparables, usage of contemporaneous data and the application of the mean margin of the comparables." 3. The brief facts of the case are that the 99.99% of the shares of the appellant company are held by Bio Rad USA and is engaged in the trading activity of diagnostic products, reagents and equipments manufactured by Bio Rad USA. It has two business divisions namely Life Science Group and Clinical Diagnostic Group. In business segment of clinic diagnostic group it purchases goods from its associated enterprises and resale them in the local market. In life science group assessee receives commission on direct sales made by the associates enterprises in Indian Market. The assessee provides after sales support services of equipment sold in the Indian Market for ....
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....89450/- therefore cost incurred by the assessee is Rs. 18148519/- which is (-) 22.33% loss over the cost. He compared this PLI by selecting 7 comparables and worked out arithmetic mean of the comparables at 7.99% and held that arm's length commission income should be Rs. 18054213/- in place of Rs. 12545078/-. Consequently an adjustment of Rs. 5509135/- was proposed. Based on this the ld. Assessing Officer incorporated the same in his final assessment order. Over and above this ld. Assessing Officer disallowed depreciation on computers claimed by the assessee @ 60% which is allowable to the assessee according to the ld. Assessing Officer @ 25% only and therefore, addition on account of depreciation was computed at Rs. 49053/-. Consequently, order u/s 143(3) of the Income Tax Act was passed by the ld. Assessing Officer on 30.03.2005 assessing the total income of Rs. 13179999/- against the return income of the assessee of Rs. 7604070/-. 6. Assessee being aggrieved by the order of the ld. Assessing Officer preferred appeal before the ld. CIT (A). The ld. First appellate authority relying on the decision of the Bangalore Bench of ITAT in case of Philip Software Centre (P.) Ltd. v. ....
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....FAR analysis between parent and subsidiary and submitted that the assessee assumes no commercial risk and also do not undertake any responsibility of development, manufacturing distribution warranty and storage and financing operation. The 30% of the residual profit has been rightly allocated. It was further contended that the ld. Transfer Pricing Officer has not given the FAR analysis of comparable companies and without that he has computed their margin. He further referred to the FAR analysis of the company to show that in the absence of the FAR analysis of comparables the order of the ld. TPO is erroneous. It was further submitted that the ld. TPO has never confronted the comparables selected to the appellant and therefore, the order of the ld. Transfer Pricing Officer required to be set aside. 9. We have carefully considered the rival contentions and also perused the relevant material placed before us. The ld. First appellate authority has decided this issue as under : '5.8 I have carefully gone through the Assessment order and the various submissions of the appellant. In fact the Assessing Officer/Transfer Pricing Officer were given copies of the submissions made by the ....
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....nstant case it has not been mentioned in either the order of the AO or the TPO the clause of sub-section (3) of section 92C that has been invoked by them to reject the ALP, thereby rendering their calculations bad in law. (iii) Transfer Pricing Officer in his order in his discussion under the head commission received- Life Sciences division has wrongly mentioned that: "the assessee has admitted that similar products are being sold under both the segments and the same have been compared under CUP method followed by the assessee, it will be incorrect to assume that the entire general administration, marketing and selling expenses pertained only to the distribution segment." In fact in its letter dated 9th March, 2005, the appellant clearly states otherwise, the observations made are strongly denied. A copy of this letter has been places as Annexure 1 on Page No. 24-25 in the Paper book. This fact has remained un-answered in both the Remand reports. (iv) Secondly, the T.P.O's observations that "the profit split method followed by the assessee compared to the one of the associate enterprise with the gross receipt of commission without examining the real profit of the segment pr....
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....anization, its functions, extent (value) and use of its assets, business plans, products, intergroup entities and the risk profile and correspondingly the output of the FAR study is characterization of the entity, understanding of business, risk and opportunity assessment. The appellant contented that typically an enterprise with low function and low risk will not be expected to earn a high margin. 5.12 Similarly the appellant contented that the TPO did not see the amount of assets employed in the respective business. All business work on the concept of return of investments and therefore a business employing large capital will invariably have higher return and vice a versa. In the absence of such an analysis, it would not fair to state that a proper, complete and accurate analysis was done and conclusion arrived. 5.13 As regard risk, the appellant further contended that it is imperative to identify the risk assumed by each entity in a transaction - risk related to market, inventory or finished goods and raw material, manpower, technology employed, price, credit default, capital, exchange fluctuations, service/product liability, performance, statutory, legal, etc. It becomes nece....
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....milarly market research is further classified in to many more sub-functions like customer analysis, choice modeling, competition analysis, risk analysis, product research, advertising research, market mix modeling etc. Comparables performing different sub-functions will have different financial performance indicators. Similarly it can not be assumed that the two entities in similar business shall earn similar margins since margins are also a derivate to the functionality preformed, the assets employed. Therefore I hold that a simplistic classification like "market research" will lead to incorrect comparables as has done in this case and therefore erroneous conclusion. 5.18 Appellant has contended that it used profit split method because it was the most suitable method given the circumstances. As is accepted practice the profit split method may be applied where the operations of two or more associate enterprises are highly integrated, making it difficult to evaluate their transactions on an individual basis and the existence of valuable and unique intangibles makes it impossible to establish the proper level of comparability with uncontrolled transactions to apply a one-sided metho....
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....here as to which of the four conditions prescribed in s. 92C(3) are being satisfied therefore rendering his order void. In the present case also the TPO fails to adhere to this circular. (ii) It has also been held in the above mentioned case that "For purposes of making a comparability analysis it is essential that (a) the data should relate to the financial year and (b) be contemporaneous i.e. exist on the specified date. If one of the conditions is not fulfilled, the data should not be included for comparison." 5.22 In the present case the Learned TPO has not shown whether the data of the companies selected by him are contemporaneous or not. In fact except for mentioning the percentage of net margin over cost no other details have been provided. No information as to how this figure has been arrived at and whether the various factors affecting the business of the appellant have been considered or not have not been discussed. No attempt has been made by the TPO to prove that the data selected by him is contemporaneous. Therefore the data used by the Learned TPO cannot be relied upon. (iii) It was also held by the ITAT that "There was no infirmity in the TP study conducted by the....
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....ded sales in India. Based on this a FAR analysis was conducted and it was stated that no commercial risk with respect to the trading operation are assumed by the assessee and therefore, 30% of the residual profit is allocated to the assessee and balance 70% was allocated to the associates enterprises. On the residual profit of 29.05% assessee applied 30% which is 8.71% and as the commission income is less than 10%, hence it was submitted that commission income is at arm's length. In this methodology the ld. Transfer Pricing Officer found defect for the reason that the segmental allocation of the expenses shows that the net profit of the commission business was 27.76%. On the allocation of the number of employees it was found by him that there were 55 employees out of which 11 employees were on account of commission income and 20 employees for distribution business and therefore the contention of the assessee was that only 20% of the salary is required to be allocated to the segment. On the basis of allocation of other expenditure the redrawn segmental accounts submitted by the assessee demonstrated a net loss of Rs. 4059069/- in the commission income segment. Therefore the ld. ....
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....h Court vide order dated 16.02.2009 deserves to be set aside. Hence, we set aside all the four grounds of the appeal to the file of the ld. TPO to determine ALP of international Transactions after giving assessee a proper opportunity of hearing. In view of this the appeal of the revenue is allowed with above direction. 11. In the result the appeal of the revenue in ITA No. 2384/Del/2013 for AY 2002-03 is allowed for statistical purposes. ITA No. 3330/Del/2010 Assessment Year 2003-04 12. The revenue has raised the following grounds of appeal for the Assessment Year 2003-04 in ITA No. 3330/Del/2010 as under:- "1. The Ld. CIT(A) has erred in law and on facts in deleting addition of Rs. 4687692/ -on account of Arm's Length Price as: (a) the Ld. CIT(A) has failed to examine that there was no analysis including mandatory comparability analysis carried out by the assessee so as to establish the application of the profit split method. (b) the Ld. CIT(A) has erred in applying the judgments of Philips Software, Sony India and the premise of Circular 12 and 14 of 2001 in this. (c) the Ld. CIT(A) has erred in making subjective observations without examining the issues proving to....
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....four years and at the end of the period the client has a right to purchase the above equipment for a token amount. At the time of placing this equipment at the place of the client there is minimum guarantee of quantity of reagents etc. to be purchased by the client from the assessee. 17. The ld. Departmental Representative relied upon the order of the AO whereas the ld. Authorised Representative relied upon the order of the ld. CIT(A) and also placing reliance on the decision of Hon'ble Supreme Court in case of ICDS Ltd. v. CIT 350 ITR 527. The ld. Authorised Representative further relied upon the decision of coordinate bench in ITA No. 482/Del/2009 AY 2004-05 dated 18.02.2010. 18. We have carefully considered the rival contentions. The coordinate bench has considered the identical issue wherein depreciation was allowed on machineries which are installed at the manufacturing premises of another company from whom assessee purchases the packed fruit juices. The coordinate bench in ITA No. 482/Del/2009 dated 18.02.2010 vide para Nos. 5 to 7 has held as under:- "5. We have considered the rival submissions. A perusal of the decision of Hon'ble Supreme Court in the case of Liq....
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....has provided the machinery for the purpose of manufacturing the products under the Product Supply Agreement. A perusal of the agreement also shows that it is clearly understood that the machinery would belong to the assessee and not the Dynamix and Dynamix had no charge or claim over the machinery. Even the servicing, maintenance and spare parts of the machinery was to be in done in the presence of the representative of the assessee even though the cost for the same was to be borne by Dynamix. Its has also been clearly understood between the parties that the Dynamix cannot use the machinery provided by the assessee for the purpose other than manufacturing products as agreed upon in the Product Supply Agreement. In these circumstances, as it is noticed that the machinery has been provided by the assessee to Dynamix for the purpose of manufacturing the product of the assessee it would have to be held that the machinery has been used for the purpose of the business of the assessee and consequently the assessee would be entitled for claiming the depreciation. 6. In respect of the depreciation in regard to the Visi Refrigerators, it is noticed that these refrigerators have been install....
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....under:- "1. The order of the Ld. CIT(A) is erroneous & contrary to facts & law. 2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the addition of Rs. 6488,415/- made on account of depreciation on rented assets. 3. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in deleting the addition of Rs. 3,03,209/- made by disallowing the excess depreciation claimed on computer peripherals. 4. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in deleting the addition of Rs. 6,11,626/- made by capitalizing the seminar expenses. 5. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in deleting the addition of Rs. 3,26,520/- made by the AO on account of Bio-Rad display stand. 6. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in deleting the addition of Rs. 59,93,211/- made u/s 92CA(3) of the I.T. Act on account of T.P. adjustments." 22. The first ground of appeal is against the order of the ld. CIT(A) deleting the disallowance made on acco....
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....re on display stand. During the year the above sum was incurred for display stand in seminar. The ld. Assessing Officer held this expenditure as capital in nature instead of revenue expenditure and consequently allowed depreciation @ 25%. On appeal before the ld. CIT(A) the expenditure were held to be revenue in nature. Before us the ld. DR relied upon the order of the ld. AO and ld. Authorised Representative relied on the order of the ld. CIT(A). 31. We have carefully considered the rival contentions. The ld. CIT(A) has deleted the disallowance after verification of the invoices which demonstrated that expenses were incurred for display panel, banner stand and other kinds of display literature. He therefore held that looking to the nature of the expenditure and durability and longitivity of these items such expenditure is revenue in nature. We find no infirmity in the order of the ld. CIT(A). Hence, ground No. 5 of the appeal of the revenue is dismissed. 32. Ground No. 6 of the revenue is against deletion of Rs. 5993211/- on account of transfer pricing adjustments. 33. The parties before us submitted that this ground of appeal is identical to ground Nos. 1 to 3 of the appeal of....
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....d depreciation on computer peripherals like printers, scanner and UPS @ 60% whereas the ld AO allowed it @25%. Ld CIT(A) has allowed the claim of the assessee of depreciation @ 60% on such assets following the decision of the Hon'ble Delhi High Court in BSES Rajdhani Power Ltd. (supra) and therefore we do not find any infirmity in the order of the ld. CIT(A). Ground No. 2 of the appeal of the revenue is dismissed. 42. Ground No. 3 of the appeal is against deletion of disallowance of marketing expenses of Rs. 718575/- holding it as capital expenditure. 43. The facts relating to this expenditure are identical to ground No.4 of the appeal of the revenue for AY 2004-05. 44. The ld. DR relied upon the order of the ld. AO and ld. Authorised Representative relied on the order of the ld. CIT(A). 45. We have carefully considered the rival contentions. The ld. CIT(A) has held that these are the expenses for the marketing of new products launched by the assessee in the same line of business. They are routine in nature and further the decision of Hon'ble Supreme Court in case of Madras Industrial Investment Corpn. Ltd. (supra) do not apply to the facts of the case. We do not find a....
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....nd has dismissed the ground of the revenue holding that the assessee is eligible for the claim of depreciation on rented assets. Similarly, we also dismiss the ground No. 1 of the appeal of the revenue. 54. Ground No. 2 of the appeal is against the depreciation on computer peripherals @ 60% instead @ 25% allowed by the AO. 55. The assessee has claimed depreciation on computer peripherals like printers, scanner and UPS @ 60% whereas the ld. AO allowed it @ 25%. Ld CIT(A) has allowed the claim of the assessee of depreciation @ 60% on such assets following the decision of the Hon'ble Delhi High Court in BSES Rajdhani Power Ltd. (supra) and therefore we do not find any infirmity in the order of the ld CIT(A). Ground No. 2 of the appeal of the revenue is dismissed. 56. In the result the appeal of the revenue is dismissed. ITA No. 3526/Del/2012 AY 2007-08 57. The revenue has raised the following grounds of appeal for Assessment Year 2007-08 in ITA No. 3526/Del/2012 as under:- "1. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 82,1 7,372/- on account of depreciation on rented assets. 2. The Ld. CIT(A) has erred on facts and in law in deleting addition ....