TaxTMI 
TaxTMI 
2020 (10) TMI 240
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.... and in law, the DRP and AO erred in rejecting comparables namely, P L Enterprise Ltd. and PAE Ltd. from the economic analysis of the Appellant, which were comparable to the Appellant's distribution activity in relation to the international transaction of purchase of finished goods in terms of functions, asset base and risk profile. 3. On the facts and in the circumstances of the case and in law, in relation to the international transaction of purchase of finished goods, the benefit of (+/-) 5% range available under proviso to section 92C(2) of the Act, be granted to the Appellant, if eligible. 4. On the facts and in the circumstances of the case and in law, the AO erred in charging interest under Section 234B and 234C of the Act. 5. On the facts and in the circumstances of the case and in law, the AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. I 3. Briefly stated, the facts of the case are that the appellant filed its return of income for the assessment year (AY) 2011-12 on 30.09.2011 declaring total income at Rs. 9,92,01,580/-. Subsequently, it revised the return of income on 21.02.2012 declaring total income at....
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....asuring and surveying equipments. 2. Matra Kaushal Enterprise Ltd. (formerly known as P L Enterprise Ltd.) - The company is involved in trading of voltage stabilisers and other electronic appliances. The TPO has observed that the company is involved in trading of Voltage stabilizers. The TPO has failed to appreciate and take cognisance of the detailed explanation submitted by the assessee vide Annexure C along with supporting document i.e. extract of Annual report of the Company as Annexure C2 (yellow highlighted paras) vide submission dated January 19, 2015.The assessee would like to reiterate that, ".... on perusal of this, you would appreciate that the company is involved in the trading / distribution of voltage stabilisers, DVD's and other electronic appliances". Further, from the extract of Annual report, it can be clearly observed that (i) company has 100% of trading sales; and (ii) cost of goods sold also shows that the company has opening stock, purchases as well as closing stock of finished goods (trading) only. Hence, this company can be considered as comparable to ETPL's distribution business of measuring and surveying equipments. 3. P A E Ltd. ....
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....hat the company is in the business of supplying, installation and commission of electronic article surveillance systems. On going through the financials it is seen that the company has received INR 2.16 crores from AMC and installation charges. Further, Adtech has 2 vertical business segments namely Retail Chain Segment in the supply and installation of antishop lifting systems and Commercial industrial segment where the company supplies electronic article surveillance equipments. The company has given segmental accounts. The assessee however, worked PLI at entity level despite segmental available. The TPO has failed to appreciate and take cognisance of the detailed explanation submitted by the assessee vide Annexure C along with supporting document i.e. extract of Annual report and Website of the Company as Annexure C5 (yellow highlighted paras) vide submission dated January 19, 2015. The assessee would like to reiterate that, ".... on perusal of this, you would appreciate that the company is in the business of Electronic Article Surveillance Systems, Access Control Systems, CCTV video surveillance through Closer Circuit Television system, Fire Alarm System etc. Installation is....
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....separately for each of the items, it is the profitability as a whole which is required to be considered in respect of such projects. As against this, the AE business is a standalone product selling business in which the assessee acts as a distributor. This business is primarily driven by the brand value of the AE and much less efforts and risks are involved. In its non-AE business, the assessee is benefitted from the expertise developed by it over a period of time in integration of various non-AE products and also from the fact that it has got very little competition." On the basis of the above observations, the DRP held that the AO was not justified in applying internal RPM (based on sale price quoted for goods in the tender documents) for benchmarking the payments made to AE towards purchase of finished goods. Further, the DRP observed that the appellant was not justified in benchmarking the transactions with the AE by considering gross profit at entity level because profit margin in non-AE transactions is much higher. Thus holding that RPM should have been applied to the AE transaction only, the DRP directed the AO to compare the gross profit of the AE business with the....
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.... the DRP in excluding the above mentioned 2 comparables. The arithmetic mean of Gross Profit to Sales computed by the TPO/DRP of the comparables and the appellant's contentions are explained : Sr. No. Name of Comparable Company Assessee in its TP Study OP/OC as per DRP OP/OC as per Appellant Respondent's contention 1. Adtech Systems Ltd. 36.27% 36.27% 36.27% - 2. Alert Fire Protection Systems Ltd. 31.88% 31.38% 31.88% - 3. Kusam Electricals Industries Ltd. 41.74% 41.74% 41.74% - 4. PL Enterprises Ltd. (now known as "MatraKaushal Enterprises Ltd.) 22.24% - - - 5. PAE Ltd. 9.76% - 9.76% • The DRP has excluded this comparable on the reason that this company is engaged into trading of auto batteries, solar and power back systems which is different from the Appellant. • In this regard, the appellant submits that the same comparable has been retained by the TPO as well as by the DRP in the previous Assessment Year i.e. 2010-11. Further, the appellant relies on the following decisions wherein it has been held that under RPM, the focus is more on simil....
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....S and highly specialized industrial measurement systems and high definition surveying systems. Regarding the contentions of the Ld. counsel that the TPO as well as DRP has retained PAE Ltd. as a comparable in the previous assessment year 2010-11, the Ld. DR submits that facts being different, the TPO/DRP has rightly excluded the above company as a comparable in the impugned assessment year. IV 6. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below. The dispute here, as per the contentions of the Ld. counsel which has been extracted fully at para 4 hereinabove, is the exclusion of PAE Ltd. as a comparable by the AO in the impugned assessment year. Before adjudicating the issue, we may refer to the background facts of the case. The appellant has selected itself as a tested party to the transaction and adopted Resale Price Method (RPM) as the most appropriate method. It considered gross profit to sales ('GP/Sales') as the profit level indicator (PLI) since the finished goods were purchased from AEs and then sold to the customers without much value addition. The appellant reported the 5 companies ....
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....) was engaged in marketing and selling of toys and games imported from its AE. The assessee-company also returned some unsold goods to its AE. The assessee adopted transactional net margin method (TNMM) in its transfer pricing report and rejected the resale price method(RPM). The TPO made certain adjustments. He also treated the goods returned to the AE as export of goods to AE. On appeal, the assessee claim that RPM should be followed instead of TNMM, which was rejected by the Commissioner (Appeals) on the ground that the assessee itself had given a detailed analysis as to why RPM could not be taken in its TP report. On appeal, the Tribunal held that (i) RPM is the most appropriate for benchmarking ALP, where resale takes place without any value addition to the product by the assessee, (ii) where, at any stage of proceedings, it is demonstrated by the assessee that most appropriate ALP can be determined by adopting a prescribed method than that chosen by it earlier, same should be considered and (iii) where internal comparables are available, they are preferred over external comparables. Having gone through the above decision, we may mention here that there is no dispute on ....
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....we may mention here that there is no dispute on the ratio laid down in the above case. We are concerned here only with the comparability of PAE Ltd. B 6.2 We may examine the contentions of the Ld. counsel that as the TPO/DRP has retained PAE Ltd. as a comparable in the previous assessment year, it should be included as a comparable in the impugned assessment year. Two companies can be treated as comparable when both are discharging the overall similar functions, though there may be some minor differences in such functions. Notwithstanding the functional similarity, many times a company ceases to be comparable because of other reasons as well. For example, if company 'X', though functionally similar to company 'Y', but has related party transactions (RPTs) breaching a particular level, then, such company should not be considered as comparable to company 'X' in the year in which the RPTs breach has occurred. Also, a company might have been treated as non-comparable due to the TPO adopting its entity level results for comparable with the segmental results of the case before him, but in the later case, the TPO may take only the related segment results. In such a later case, th....
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....year. For the purpose of computing yearly profits and gains, each year is a separate self-contained period time. Under transfer pricing, the transaction (controlled transaction) between the taxpayer and its associated enterprise or related party, as the case may be has to be at arm's length price. It is to this that we turn below. C 6.3 Contextually, we mention below the functions of the appellant and PAE Ltd. Elcome Technologies Pvt. Ltd. The assessee is a subsidiary of Leica Geosystems AG, Switzerland. It represents Leica Geosystems AG, Switzerland (subsidiary company of Hexagon Group, Sweden) for positioning technologies, which includes geodesy, high-end GPS and the highly specialized Industrial Measurement Systems (IMS) and high definition surveying systems. The assessee is engaged in the trading of above related surveying and measurement equipments. PAE Ltd. During the financial year 2010-2011, PAE restructured operations and transitioned from a horizontal organization structure to a more defined, vertical structure. Under the revised organization layout, PAE's business will be divided into 5 business verticals for bett....
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....ared. B.3.2.9.3. While product differences may be more acceptable in applying the Resale Price Method as compared to the CUP Method, the property transferred should still be broadly similar in the controlled and uncontrolled transactions. Broad differences are likely to reflect differences in functions performed, and therefore gross margins earned, at arm's length. B.3.2.9.4. The compensation for a distribution company should be the same whether it sells washing machines or dryers; because the functions performed (including risks assumed and assets used) are similar for the two activities. It should be noted, however, that distributers engaged in the sale of markedly different products cannot be compared. The price of a washing machine will, of course, differ from the price of a dryer, as the two products are not substitutes for each other. Although product comparability is less important under the Resale Price Method, greater product similarity is likely to provide more reliable transfer pricing results. It is not always necessary to conduct a resale price analysis for each individual product line distributed by the sales company. Instead, the R....
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....n a reasonable profit based on its FAR. As gross profit margins represent the gross compensation (after cost of sales) for specific FAR, product differences are less critical than under the CUP method. Nonetheless, the more comparable the products, the more likely the resale price method will produce better results. As regards the external data, the gross profit margin of the reseller in the controlled transaction is compared with the gross profit margin earned by an independent third party in a comparable uncontrolled transactions. Minor differences in the products are acceptable if they are less likely to have effect on the gross profit margin earned from sale of such productsfor example, Gross profit margin earned from trading of Microwave ovens in controlled transactions can be compared with gross profit margin earned by unrelated parties from trading of Toasters. Gross profit margin earned from trading of Laptops in controlled transactions can be compared with gross profit margin earned by unrelated parties from trading of Desktops. This is because, both are consumer durables and fall in within the same industry. RPM is unlikely to give accurate result, if there is diffe....