AI Drafter 
TaxTMI 
TaxTMI 
2015 (12) TMI 1758
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....e reference made by the assessing officer to the TPO merely on the basis that the value of international transactions exceeded Rs. 5 Crores was unlawful and not in accordance with section 92CA(1) of the Act. 3. That the Commissioner of Income- Tax (Appeals) erred on facts and in law in not appreciating that reference made by the assessing officer to the TPO under section 92CA(1) of the Act without recording satisfaction that it was necessary or expedient so to do was unlawful and adjustment made by the TPO/ assessing officer on the basis of such reference was invalid. 4. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not holding that the international transactions entered into with the associated enterprise were at arm's length and no adjustment to the price thereof was called for being made. 5. That the Commissioner of Income-tax (Appeals) erred on facts and in law in disregarding the adjustment made to the prices of international transaction of export to Glyphics Media inc. (GMI) on account of geographical difference, for determining the arm's length applying Comparable Uncontrolled Price (CUP) method holding that such adjust....
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....opean Countries. 13. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the adjustment on account of geographical difference was made on the basis of instance of purchase of similar product by an unrelated party in Europe and USA during the relevant previous year. 14. That the Commissioner of Income-tax (Appeals) erred on facts and in law in upholding the adjustment on account of selling and distribution expenses incurred by the appellant at Rs. 0.27 per CD allegedly being selling and distribution expenses incurred in distributing the products in non US locations. 15. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that the appellant failed to come up with documentation to show that it treats that US and European market differently. 16. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that appellant did not produce adequate documentation for claiming adjustment on account of purchasing power priority considering the various variables, such as, interest rate, exchange rate, price level, etc. 17. That the Commissioner of Incom....
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....cts and in law in holding that for benchmarking analysis, each international transaction is to be compared with the arm's length price determined and the TPO was correct in following such a methodology. The appellant craves leave to add, after, amend or vary from the above grounds of appeals before or at the time of hearing." 3. All the grounds relate to adjustment of Rs. 54,62,582/- to the international transaction of the assessee with its AE Glyphics Media Inc. USA (hereinafter referred to as "GMI") 4. The facts emanating from the orders of authorities below are that for the instant in an order was passed by the Dy. CIT, Circle 5(1), New Delhi on 28.7.2004 u/s 143(3) of the Act, whereby he determined the assessed loss at Rs. 3,21,14,948/- after making an addition of Rs. 54,62,582/- on account of the difference between the arm's length price of international transaction and the book value of the transaction, to the returned loss of Rs. 3,75,77,530/-. 5. During the assessment proceedings, the AO noticed that the assessee had sold 4,39,40,400 CDs and 67,23,400 floppies to its AE GMI, a company incorporated in USA for a sum of Rs. 42,12,03,955/-. As per the economic....
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....is more competitive and price- conscious. USA demands best price being a strong economy with huge demand potential. We compared the price that an independent party (Emtec) was prepared to pay to GMI in USA and to MBI in the European market for the same product. The USA prices were 10-20% lower than the European prices. Accordingly, on a conservative basis, 10% of export price has been loaded on the wholesale price charged by MBI from GMI. iv) The adjusted price of sale to GMI was compared with the average sale price of comparable uncontrolled enterprises. v) The result of such comparison is charted (Table-2) as follows; Table2 Sr. No. Name of Packing Average wholesale price to AE (in US $) Add Specific cost factor (in US $) Add 10% mark up due to difference in US and Europe markets (in US$) Adjusted average wholesale price to GMI (in US$) Average retail price [Arm's Length price] (in US$) Difference in average price [Col. 7- Col. 6] (in US$) 1 2 3 4 5 6 7 8 1 CDR Cake Box - Rotterdam 0.18 0.02 0.02 0.22 0.18 -0.04 2 CDR Cake Box-Direct 0.18 0.02 0.02 0.22 0.19 -0.03 ....
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....s summarized in the order of CIT(A) are as below: "i) The methodology adopted in the benchmarking analysis is not correct as average value of each category of transaction was done with the Arm's Length Price, which is again an average figure. Averaging is not to be done for the transactions in each of the three categories and rather each of the transactions is to be judged separately vis-à-vis ALP. It may be possible that out of several Sales transactions to GMI, Prices are below the Arm's Length price in some instances that would require transfer pricing adjustments. ii) The TPO had no objection to the adjustment made on account of freight differential, though he had reservations about the other two adjustments. iii) The adjustment for selling & distribution was made by adding a figures of Rs. 1.11/- per CD, to the average wholesale price charged from the GMI, to all the three categories of packaging. The value of Rs. 1.11/- was arrived at by dividing the total expenses of GMI for the period 01.04.2001 to 31.03.2002 of US$ 11,84,410, by the total number of CDs sold to GMI and then by multiplying the same with the appropriate foreign exchange rate ....
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....ionery, postage telegram, telephone, advertisement and publicity, sales promotion & execution expenses and miscellaneous expenses. It was also explained by the appellant that these are salaries form marketing Division of MBIL only. However the TPO was of the view that a part of these expenses pertained to domestic sales. According, the TPO computed the relevant sales & distribution expenses pertaining to the export sales to Non-US destination excluding the GMI exports at Rs. 0.27/- per CD as under:- Total sales made during the year: Rs. 680 crores Less: Export sales made to GMI: Rs. 5 crores Balance: Rs. 675 crores Domestic turnover @ 5% to 7% of the total turnover : Rs. 50 crores. Export turnover to Non- US Destination : Rs. 625 crores. Ratio between Export turnover to Non- Us destination and total turnover : 625/675=93% Apportionment of selling & distribution expenses to Non- US destinations: Rs. 8,45,62,531/- x 0.93= Rs. 7,86,43,165/-. Total Number of CDs and Floppies exported to UREs in Non- US destinations = 29,00,26,730 (while working out the corresponding adjustment in GMI's wholesale price, the appellant had used this numbe....
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....PO further observed that the details of exports submitted by the appellant pertained to exports to all destinations including Europe, Morrocco, Colombia, Venezula, Turkey, Australia, Panama, Japan, Mexico, Syria, UAE and Casablanca and not restricted to Europe alone. It was not the appellant's case that there was a price differential between these countries and the USA. Examination of details furnished by the appellant also revealed no price pattern on the basis of destination to a particular country. Accordingly, it was concluded by the TPO that since the uncontrolled transactions included exports to all these counties besides Europe, there was absolutely no justification for making adjustment for geographical market differences. Hence, adjustment on account of geographical differential was not accepted by the TPO while computing Arm's length price." 9. On the basis of the aforesaid TPO computed the ALP as the average of various transactions prices for each of three categories of CD packing viz. Jewel Box Slim case and Cake box and adjustments were made to these average prices for freight differential and selling and distribution expenses in the manner stated hereunder :- Je....
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....ion and the invoice value. 4 10.4-11- S2 Jewel Box invoice from Rotterdam for 980000 CDRs for Rs. 11985321.6 @ Rs. 12.33 Rs. 12.23 Rs. 14.41 Rs. 13.69 980000 @ Rs. 14.41 = Rs. 1,41,21,800/- The book price in the invoice is less than 95% of the ALP. Hence TP adjustment is called for an amount of Rs. 21,36,479/- on account of difference between the ALP Value of the transaction and the invoice value. 5 10-4-11-S2 Jewel Box invoice from Rotterdam 196000 CDRs for Rs. 2485844,48 @ Rs. 12.68 Rs. 12.68 Rs. 14.41 Rs.13.69 196000 @ 14.41 = Rs. 28,24,360/- The book price in the invoice is less than 95% of the ALP. Hence TP adjustment is called for an amount of Rs. 3,38,516/- on account of difference between the ALP Value of the transaction and the invoice value. 6 S.2-13-S1 Slim Box Invoice from Rotterdam for 35800 CDRs for Rs. 465995.712 @ Rs. 13.02 Rs. 13.02 Rs.13.11 Rs. 12.45 35800 @ Rs. 13.11 = Rs. 4,69,338/- The book price in the invoice is less than 95% of the ALP. Hence TP adjustment is called for as per proviso to section 92C(2) of the Act. 7 S.2-13-S.1 Slim Box invoice from Rotterdam 186400 CDRs for Rs. 2410224 @ Rs....
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....USA. Such expenses, it would be appreciated would have been incurred by the appellant had it not been operating in USA through the associated enterprise, namely GMI. The appellant on the other hand has its own base in Europe to undertake selling and distribution function and it has not engaged a sole selling agent/wholesale distributor in that country. The aforesaid adjustment was made considering the fact that much higher expenses are required to be incurred by GMI in promoting sale of CDS manufactured by the appellant in USA and the fact that the appellant does not have any presence in USA The TPOI while computing arm's length price applying CUP method instead of adjusting the sale of GMI by the selling and other expenditure incurred by it, and comparing the sale so adjusted with the sale price to unrelated parties in European countries, on the country made adjustment on account of marketing and selling expenses incurred for promoting the sale of products in European countries and reducing the same from the price charged from unrelated parties in Europe. The adjustment so made by the assessing officer does not recognize the business realities that much higher expenses/cost is req....
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....of prices as sought to be made by the TPO, without eliminating/making adjustments for quantifiable differences in the two transactions is not in accordance with the transfer pricing regulations. The adjustment on account of difference in market, it is submitted, is be taken into consideration to determine the arm's length price that would have been charged from GMI in identical situation as that of unrelated party comparable. It would be appreciated, therefore that the comparison sought to be made by the TPO ignoring the adjustment to the international transactions on account of geographical and other differences as aforesaid so as to apply CUP method is not in accordance with the provisions of section 92C read with rule 10C of the Rules. It is further submitted that GMI while representing the appellant in USA as sole distributor or sole selling agent, incurs significant selling and distribution expenses." b) Adjustment on account of geographical differences It is respectfully submitted that the prices of export of product or commodity vary from country to country for the reasons that (i) the prices being offered by the competitors in the market; (ii) the duties and taxes on ....
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....ographical locations * Gharda Chemicals Ltd vs DCIT (ITA No 2242/MUM/06) * CIT Vs Dufon Laboratories (ITA No 1399/Mum/09) * Dishman Pharmaceuticals and Chemicals Ltd Vs DCIT (ITA No. 154 & 587/Ahd/2007; ITA No.2180 & 3213/Ahd/2007) As per OECD guidelines, while applying any of the prescribed transfer pricing method, adjustments must be made on account of differences between controlled and uncontrolled situation that would significantly affect the prices charged or received by an independent enterprise. OECD guidelines provide that in making these comparisons, material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm's length conditions, it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm's length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circums....
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....ous US market the prices of sale of CDs are generally kept lower than what is charged from customers in Europe. ii) The appellant is a recent entrant in US market for export of CDs from India. The appellant does not have any presence or brand recognition in that country and is developing market through GMI and for that reason the appellant is constrained to price the products competitively while exporting to USA. iii) Marketing of CDs in USA is a different ball game altogether. Such products are sold in USA through various shopping malls/super markets which follow just in time (JIT) approach, i.e., the retailer would rent out a shelf space to the distributor who is required to supply/place on the shelf his products in specified quantity for sale to the customer. The distributor has to maintain requisite inventory and is to replenish the requisite quantity of CDs as soon as the shelf stock is reduced to a minimum level. It would be appreciated that in this case retailer, i.e, the super market/shop mall does not maintain any inventory and expect delivery of the product in the desired quantity and packing on a very short notice. It would be appreciated that the cost ....
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....ale price of consignment of export to LG in USA (referred by the assessing officer), therefore, does not represent the price of sale of CDs in USA as such consignment is meant for sale in Latin America and Miami port in USA is only a transit destination for the shipment. To that extent, the example referred and relied upon by the assessing officer is not of comparable uncontrolled transaction. It has also been submitted before the transfer pricing officer that price of sale of CDs to LG in the consignment shipped to Miami, USA were higher on account of higher memory size of the CDs i.e. being 80 minutes (700 MB), while memory size for CDs sold to both Poland and Germany was 74 minutes (650 MB). It would be appreciated, that the prices of the aforesaid sale of CDs to LG Electronics in USA and Poland and Germany were different owing to the aforesaid reasons and the contention of the appellant that the prices charged for sale of CDs in Europe are higher than in USA for the reasons stated above, which is also corroborated by evidences placed on record, is valid." c) Incorrect comparison of prices by TPO "The TPO while determining the transfer price has compared the prices i....
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....olled comparable transactions during the relevant previous year. The comparison sought to be made by the TPO between prices of individual transaction and the average price of uncontrolled comparable transactions is, therefore, not appropriate and not in accordance with the provisions of the law." d) Without prejudice, the adjustment at best should be restricted to the amounts of profits retained by the associated enterprise "It is respectfully submitted that as per audited accounts, GMI earned gross profit of USD 3,19,231 on total sales of USD 75,54,668, the cost of goods sold being USD 72,35,437. However, GMI had incurred loss of USD 8,65,179 after taking into account the operating expenses incurred for distributing the appellant's products. Thus, appellant could not be expected to have made more profits than the combined profit made the appellant and its AE i.e. GMI, if it were to make sales directly to the third party customers. Further, your Honour's attention is incited to the recent decision fo the Hon'ble Tribunal in the case of Globe Vantedge (P) Ltd. vs. DCIT (ITA No. 2763 & 2764/D/2009) wherein it is held that adjustment on account of arm's length ....
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....d this information been made available to the TPO. The issues relating to the computation of the adjustment factors would have been facilitated by this information. However, the burden of proof was not discharged by the appellant. Therefore, judicial notice of this fact should be taken while working out the adjustment factors. 9.4.5 The appellant had added Rs. 1.11 per CD to the average whole sale prices charged from GMI on account of selling and distribution expenses incurred by GMI in selling the appellant's product in USA. The TPO did not accept this adjustment and on the contrary made this adjustment to the average retail price by way of deducting Rs. 0.27 per CD from the price charged from the unrelated parties in non- US destinations. In coming up with the adjustment of Rs. 0.27 per CD, the TPO analyzed various minor heads of expenses under the broad head of "selling & distribution expenses", which has been discussed in detail at Para no. 5.3 (v) & (vi) of this order. During the course of appellate proceedings, the appellant has raised objections to the adjustment made by the TPO on the ground that the TPO had not appreciated the business realities of the requirement....
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....y the CIT(A) who has held in this regard that the correct way of making adjustment is to start from the export prices charged by the assessee from the unrelated parties in non- US destination s. therefore., the expenses incurred by GMI to develop a market for the assessee's product do not have any relevance for the purpose of making adjustment on account of selling and distribution expense. What is relevant for the purpose of this adjustment is the selling and distribution expenses incurred by the assessee for distributing its product in non- US locations. The TPO in his order has computed Rs. 0.27 per CD as the amount of adjustment that is required to be made on account of selling and distribution expenses. In this case the TPO has computed Rs. 0.27 per CD as the amount of adjustment that is required to be made on account of selling and distribution expenses. The assessee has not pointed out any defect in the analysis done by the TPO and, accepted by CIT(A). This methodology also is in accordance with the judgment of Hon'ble Delhi High Court in the case of Rampgreen Solutions (P) Ltd. vs. CIT ITA No. 102/2015 wherein the Hon'ble High Court held that comparables selected for the be....
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....S & the European market differently. But the same was not done at any stage of the proceedings. ii) The argument of purchasing power parity cannot be loosely used as it has connections with number of other economic variables. The purchasing power parity thereon asserts that the exchange rate between two currencies must be proportional to the price level of traded goods in the two countries. Purchasing power parity is also intimately tied the interest rate parity. The interest rate parity thereon originates from the link between interest rates and inflation rates. Thus, the interest rates, exchange rates, price level and foreign exchange rates form an integrated system. Violations of purchasing power parity lead to arbitrage opportunities and give rise to a gray market. Therefore, for claiming any adjustment factor. No such documentation was done by the appellant and the adjustment factor of 10% was used without any firm basis. iii) The reference to Big Mac Index by the appellant is also misplace. The price of a burger in US could be lower for a number of reasons such as raw material cost, demand conditions, food habits etc. for the European market, a burger could ....
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....m the aforesaid conclusion it is apparent that the CIT(A) has not disputed that geographical adjustment is to be allowed for comparing two sets of transactions. However on the facts of the case of the assessee on the ground as sufficient evidence was not brought on record to substantiate the claim. The question therefore which emerges is that are there sufficient claim of the assessee. The assessee has relied on big map index to contend that US is a lower price market as comparable Europe. It has also been contended that assessee is a recent entrant in US market for export of CDs and does not have any presence or brand recognition. It has been stated that products are sold in USA through various shopping malls/super markets which follow just in time (JIT) approach i.e., the retailer would rent out a shelf space to the distributor who is required to supply/place on the shelf his products in specified quantity for sale to the customer. It has been stated that the distributor has to maintain requisite inventory and is to replenish the requisite quantity of CDs as soon as the shelf stock is reduced to a maintain level and the cost of operations for the distributor in USA is much higher....