TaxTMI 
TaxTMI 
2017 (2) TMI 691
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....of transfer pricing adjustment in respect of 'Import of crystal and crystal components'. Briefly stated, the facts of the case are that the assessee company, with its original name of Swaropearl, was incorporated in India in 1996. It is a part of Swarovski group, a globally famous brand for crystal and crystal related products. It is a world-wide market leader in crystal jewellery and accessories, grinding and dressing tools, precision optical equipment and synthetic gemstones. The group has production locations in twelve countries and has sale companies in several countries in Asia, Europe, South America, USA and Canada. The assessee company was initially registered as a 100% export oriented unit for undertaking activities of coating of raw beads, polishing and knotting of crystals etc. Later on, the assessee also started imports and sale of Crystal goods and Crystal components. Apart from 100% EOU division in Pune, the assessee carries out its trading activities from a domestic unit in New Delhi which has further two sub-divisions, namely, Consumer Goods Division (CGD) and a Crystal Components Division (CCD). Major customers of CGD and CCD are designers and garment manufacturers ....
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....he assessee pressing hard to import at lower prices from its AE vis-à-vis the price charged from unrelated parties in India. After rejecting the CUP as the most appropriate method, the TPO took recourse to the Transactional Net Margin Method (TNMM), which we will discuss infra in detail. That is how, he proposed a transfer pricing adjustment of Rs. 4.72 crore. The AO made such an addition. In the first appeal, the ld. CIT(A) accepted the application of the TNMM as the most appropriate method as against the main contention of the assessee for the application of the CUP method or the Resale Price method (RPM) in alternative. He, however, accepted the contention of the assessee that the TPO should not have taken data of comparables for several years for calculating the ALP. Accordingly, it was directed that only the current year's data should be used. In this manner, the issue of transfer pricing adjustment was restored. Aggrieved thereby, the assessee is in appeal before us against the adverse findings returned by the ld. CIT(A). 3. We have heard the rival submissions and perused the relevant material on record. Only the international transaction of `Import of crystal and c....
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....es entering into such transactions, which could materially affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction ;' 4.2. Sub-clause (i) of Rule 10B(1)(a) provides for, inter alia, identifying the price paid for property purchased. Sub-clause (ii) talks of making adjustments to such price on account of differences, if any, between international transaction and comparable uncontrolled transactions, which could materially affect the price in the open market. Sub-clause (iii) provides that the adjusted price arrived at under subclause (ii) is considered as ALP in respect of the property purchased. Usually the CUP is the method of first choice because it seeks to directly compare the price paid for goods with the price paid in a comparable uncontrolled transaction. Comparison of price paid for goods purchased in contradistinction to the profit rate in other methods - gross or operating - offers best comparison as sometimes profit may be influenced by certain other extraneous factors thereby reducing the reliabil....
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....nternational transaction reported by the assessee is a common pool of both the Crystal goods and Crystal components, without there being any separate identification for each of them. We have noticed above that Crystal goods and Crystal components are different in terms of utility and value etc. and it is evident that the range of comparables is restricted to Crystal components alone. In view of the fact that the assessee did not report any comparable uncontrolled transaction of Crystal goods, we fail to appreciate as to how such rates charged in transactions of Crystal components can be considered as a benchmark for Crystal goods as well. In such circumstances, applicability of CUP to a single combined international transaction of Import of Crystal goods and Crystal components, cannot be considered as the most appropriate method. 4.4. However, the other view point of the TPO, as accentuated by the ld. DR, that the unrelated parties made purchases of Crystal components for export and hence no customs duty was payable went on to prove that the assessee's purchases were not at ALP because it bargained more, does not prove the case. In our considered opinion, the relevant factor is ....
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....1,654,056 1,478,171 -470,298 1,381,492 P/L for Period [=Net Income] 1,233,984 1,047,810 -485,282 954,396 Cash Flow 2,264,028 1,977,898 299,564 1,589,348 Total Assets 12,627,944 12,053,465 9,523,353 7,896,459 Shareholders Funds 3,375,307 2,141,323 1,093,512 1,578,794 Current Ratio (x) 1.65 2.19 1.47 1.85 Profit Margin (%) 4.77 4.8 -1.83 8.36 Return on shareholders Funds (%) 49.01 69.03 -43.01 87.5 Return on capital Employed (%) 30.58 23.11 -4 33.29 Solvency Ratio (%) 26.73 17.76 11.48 19.99 5.3. The TPO mentioned below the table that Swarovski, Korea made a gross profit margin in the region of 48% to 58% during the period 31.12.2002 to 31.12.2005 and net profit margin in the range of 1.9% to 7.7%. 5.4. Then, he tabulated figures of Swarovski, Singapore in relation to five Calendar years from 1999 to 2003 in para 7.3 of his order, as under:- SWAROVSKI SINGAPORE TRADING PTE LTD. FINANCIAL PROFILE Unconsolidated data 12/31/2003 12/31/20042 12/31/2001 12/31/2000 12/31/1999 12 ....
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.... that the amount of adjustment is different in the Primary and Secondary analysis, namely, by applying net and gross level margins. Eventually, he averaged the amount of adjustment computed under both the methods for proposing a final transfer pricing adjustment of Rs. 4,72,74,425/-. This is the amount of addition made by the AO. 5.8. The ld. AR contended that the TPO was wholly unjustified in, firstly, choosing the TNMM as the most appropriate method and then, applying the same in a wrongful manner. 5.9. We will first take up the calculation of profit rates as has been challenged before us. The TPO considered four calendar years of Swarovski, Korea for working out the profitability at gross margin in the range of 48% to 58% and then at net level of 1.9% to 7.7.%. It is obvious from the Table itself as reproduced above, that the manner of determination of percentages of 48 to 58% and 1.92 to 7.77% is not deducible. Even the ld. DR could not point out how these percentages were computed. Similar is the position qua the working of margin of Swarovski, Singapore. The TPO referred to profit margin at net level of 5.64% as on 31.12.2003. It can be seen from the Table drawn by the ....
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.... company, determined as per sub-clause (ii) above is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin. It is this adjusted net profit margin of the unrelated transactions or of the comparable companies, as determined under sub-clause (iii), which is used as benchmark for the purpose of making comparison with the net profit margin realized by the assessee from its international transaction as per sub-clause (i). Sub-clause (iv) states that the net profit margin realized by the enterprise, as referred in sub clause (i), is established to be the same as a net profit margin referred in sub-clause (iii) of the comparables. Sub-clause (v) states that the net profit margin thus established is taken into account to arrive at an arm's length price in relation to international transaction. To summarize the position under this method, the net operating profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employ....
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....9 foreign companies were engaged in altogether different lines of business, such as, Sports goods, Bicycle shops, Manufacture and trader of shoes, Drug proprietors and sundries, Dealer of raw material for construction products, Grocery and related products, Purchase and sale of electrical energy and engaged in producing wine and olive oil products, etc., etc. Notwithstanding the fact that the TPO selected foreign companies as comparable, even such companies operate in altogether different lines of business, which contention has remained uncontroverted on behalf of the Revenue. This also distorts the calculation of ALP by the TPO. In view of the foregoing discussion, we are not inclined to approve the working of ALP done by the TPO under the TNMM. 6.1. Now, we take up the issue about the selection of the most appropriate method between RPM and TNMM in the given facts and circumstances. The ld. AR vehemently argued that if the CUP method is not to be applied, then, the next most appropriate method is Resale Price Method (RPM). This was opposed by the ld. DR who contended that the assessee characterized RPM as not the most appropriate method in its Transfer pricing study report and....
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.... obtaining of the services by the enterprise from the associated enterprise ;" 6.4. A perusal of the above mandate transpires that sub-clause (i) of Rule 10B(1)(b) provides that the price at which the goods purchased by the enterprise from its AE are resold, is identified. Such resale price under sub-clause (ii) is reduced by the amount of normal gross profit margin from the purchase and resale of the same goods in a comparable uncontrolled transaction. The price so arrived at is reduced under subclause (iii) by the amount of expenses incurred by the assessee and the price so arrived at is adjusted to take into account the functional and other differences between the international transaction and the comparable uncontrolled transaction, if any. The adjusted price so arrived under sub-clause (iv) is taken as the ALP in respect of purchase of goods from the AE. It is clear from the command of sub-clause (i) itself that the RPM is applied when the property purchased by the assessee is resold as such. Sub-clause (ii) further provides for choosing comparable cases in which similar property is purchased and resold. Thus it is apparent that this method, by its very language, is applica....
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.... will decide it in the way he thinks expedient. Contention of the ld. AR that the comparables should be restricted to the ten companies which it cited before the ld. CIT(A) or twenty companies which the ld. CIT(A) suo motu chose for making TP adjustment on account of AMP expenses, cannot be accepted. We do not intend to eclipse the power of the TPO by restricting the exercise, which he has yet to undertake for the first time. It is further clarified that if due to one reason or the other as discussed above, such a method cannot be applied, then, resort should be made to the TNMM in the way enshrined in rule 10B(1)(e) of IT Rules, 1962, taking care of the infirmities discussed above in the earlier calculation made by the TPO. B. TP addition of AMP Expenses 8.1. During the course of first appellate proceedings, the ld. CIT(A) observed that no transfer pricing analysis was done in respect of the international transaction of advertisement, marketing and promotion (AMP) expenses. The assessee was called upon to benchmark this transaction. Taking note of bright line test and other relevant factual details, the ld. CIT(A) made an addition of Rs. 1,91,94,998/- towards transfer pricin....
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....hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments of the Hon'ble High Court, after allowing a reasonable opportunity of being heard to the assessee. 9. To sum up, we set aside the impugned order on the issue of transfer pricing additions towards `Import of Crystal goods and Crystal components' and `AMP expenses' and remit the matter to the file of AO/TPO for a fresh determination of their ALP in consonance with our above observations and directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. II. NON-TRANSFER PRICING ADDITIONS 10.1. Now we take up non-transfer pricing grounds in these cross appeals. Ground nos. 24-27 of the assessee's appeal and one additional ground taken by the assessee assail the sustenance of addition on account of Provision for doubtful debts and Provision for doubtful advances. During the course of assessment proceedings, it was noticed by the AO that the assessee made Provision for doubtful debts at Rs. 19,08,162/- and Provision for doubtful advances at Rs. 3,4....
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....ten off as irrecoverable in the accounts of the assessee for the previous year" is deductible. This shows that two conditions must be simultaneously satisfied for becoming eligible for deduction u/s 36(1)(vii). The first is that the amount should be written off as irrecoverable in the accounts of the assessee for the previous year and the second is that the provisions of sub-section (2) of section 36 should be complied with. 10.5. Computation of the amount of Provision for doubtful debts has been placed on page C-5 of the paper book. This is a detailed party-wise and year-wise chart showing Opening balance of the provision for doubtful debts, additions during the period, write back during the period, other incomes written off and closing balance of the provision. On enquiry, it was stated that the assessee is creating Provision for doubtful debts and reducing it from the amount of Debtors for the purpose of reflection in the balance sheet. However, there is no actual write off of the amount of the debtor in the books of account at the time of creating provision. It is only on becoming the debt bad in a later year that the provision is debited and the account of the respective de....
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....f section 36(1), as it stands for the relevant assessment year, there can be no deduction at the time of creating a provision for doubtful debts. The legislature has clarified this position beyond any shadow of doubt by retrospectively inserting Explanation 1 to clause (vii) w.e.f. 1.4.1989 that : `For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee'. This clinches the issue and clarifies the position beyond an iota of doubt that a mere provision for doubtful debts is not deductible in the case of a non-banking assessees. We are, therefore, persuaded to uphold the impugned order in so far as the disallowance of provision for doubtful debts is concerned. However, it is clarified that the amount of actual write off during the year should be allowed as deduction. The chart at page C-5 of the paper book shows such amount written off at Rs. 98,078/-. The AO is directed to verify if such amount has been actually written off in the books of account. If it is so, then, deduction should be allowed to that extent. As provision ....
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....d this amount by treating it as a personal expense. The ld. CIT(A) upheld the disallowance by noticing that the assessee paid premium to National Insurance Company Ltd. and hence, the case falls u/s 36(1)(ib) of the Act. Since the assessee could not prove that the insurance scheme of National Insurance Company was approved by IRDA, he sustained the disallowance. 12.2. We are unable to concur with the view adopted by the ld. CIT(A) in sustaining the disallowance. Admittedly, insurance policy was taken by paying premium to National Insurance Company Ltd. We fail to appreciate as to how the assessee can bring material on record to demonstrate that the insurance policy taken from National Insurance Company Ltd. was approved by IRDA. There is an underlying presumption that all the nationalized insurance companies follow guidelines of IRDA. It is too much to cast such a burden on the assessee to prove that a particular insurance policy taken by it for its employees from National Insurance Company Ltd. was approved by IRDA. Since the assessee paid premium in respect of insurance policy taken for the benefit of its employees, the deduction has to be allowed. We, therefore, allow this gr....
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....itten down value as so increased. This provision indicates that increase in the block of assets is envisaged only by actual cost when an asset is acquired during the previous year. This brings us to consideration of the connotation of the expression `actual cost', which, in turn, has been defined in section 43(1) to mean `the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority'. There are certain Explanations to this provision and none of them deal with the forex loss or gain in the circumstances as are prevailing before us. Then, there is section 43A, which contains special provisions consequential to changes in rate of exchange of currency. This section provides that : `Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expres....
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....254 (SC) in which the Hon'ble Supreme Court, noting the provisions of section 43A held that : `Sec. 43(1) defines actual cost for the purpose of grant of depreciation etc. to mean "the actual cost of the assets to the assessee". Till the insertion of the unamended s. 43A there was no provision in the IT Act for adjustment of the actual cost which was fixed once and for all, at the time of acquisition of the asset. Accordingly, no adjustment could be made in the actual cost of the assets for purposes of grant of depreciation for any increase/decrease of liability subsequently arising due to exchange fluctuation'. Reliance of the ld. AR on India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) is misplaced. In that case, it was held that interest on loan taken for business is deductible, irrespective of the fact that such a loan has been used for revenue or capital purpose. It is obvious that in that case the question was of allowing deduction of interest on capital borrowed for business purpose and not of depreciation on the increased value of asset due to change in foreign currency rate after its acquisition. Obviously, the assessee has been granted deduction of interest on such loan tak....