TaxTMI 
TaxTMI 
2018 (10) TMI 1950
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.... facts and circumstances of the case and without giving any cogent reasons, by calculating arm's length price of advisory services as NIL. 2.1 The learned DCIT pursuant to directions of the Hon'ble DRP erred on the facts and circumstances of the case by calculating arm's length price of advisory services as NIL, without considering the evidences submitted in connection with receipt of advisory services. 3. The learned DCIT pursuant to directions of the Hon'ble DRP erred in facts and circumstances of the case in rejecting following companies as comparables: 3.1 Bright Autoplast Pvt. Ltd. 3.2 K R Rubberite Ltd. 3.3 Lifelong India Ltd. 4. The learned DCIT pursuant to directions of the Hon'ble DRP erred in facts and circumstances of the case in not granting adjustment made to the profit level indicator of Appellant on account of production wastage due to start-up phase of its manufacturing facility at Chennai. 5. The learned DCIT pursuant to directions of Hon'ble DRP has erred in law and on the facts and in circumstances of the case in not granting the benefit of +/- 5 percent as per proviso to secti....
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....s providing design and drawing services using CA software and infrastructure set up. The assessee had entered into various international transactions with its associated enterprises having two segments i.e. Computer aided designing / Drawing & Design Segment, in which no adjustment was made by Transfer Pricing Officer (TPO) and second segment was Manufacturing Segment, wherein adjustment of Rs. 2.20 crores was made and the assessee is in appeal against same before us. The assessee in its TP study report had applied TNMM method as most appropriate method and had computed its PLI after excluding abnormal cost of Rs. 3.02 crores for wastage, etc. and had worked out its PLI at 7.13%. The assessee has selected various concerns as comparables whose mean margin worked out to 11.21%. Since the margins were within +/- 5% range, the case of assessee was that its international transactions were at arm's length. The Assessing Officer had made reference to the TPO to benchmark international transactions undertaken by the assessee. During TP proceedings, the TPO asked the assessee to update margins of comparables and thereafter, the assessee prepared fresh set of comparables of eleven compan....
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....095/-, out of which major transactions were only on advisory services and the other transactions of FA was on capital account. The unadjusted margins of assessee worked out to (-) 11.56% and that of comparables were at 6.39%. The TPO observed that This means that the TNMM used for the benchmarking is not correct. In view of that it is held that the Advisory services are not at an ALP and hence taken at Nil. The arm's length price of transactions was thus, determined at Rs. 2,20,75,181/-. The Assessing Officer proposed the said TP adjustment in the draft assessment order, against which the assessee filed objections before the Dispute Resolution Panel (DRP), which were rejected. The DRP held that TPO had correctly observed that higher wastage was during the months of July and August, 2007 which could be considered as extraordinary and initial trial run wastage. The method of assessee to consider all units scrapped till March 2008 as wastage and that too extraordinary wastage was not appreciated by the DRP. The alternate plea of assessee on without prejudice basis that wastage adjustment to the tune of 28.03% should be allowed, which was the difference between assessee's ratio of ....
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..... In respect of three comparables rejected by the TPO, the DRP held the said concerns to be functionally not comparable and upheld rejection. The Assessing Officer thus, passed final order under section 143(3) r.w.s. 144C(13) of the Act making an adjustment of Rs. 2.20 crores, against which the assessee is in appeal before us. 9. The learned Authorized Representative for the assessee pointed out that adjustment has been made in the segment of advisory services provided by assessee to its associated enterprises. He further stated that during the course of TP proceedings, the assessee had given revised working, wherein fresh set of comparables were picked up whose margins worked out to 4.66% as against assessee's margins at 3.32%. However, the TPO rejected three comparables out of same and revised mean margins of comparables was 6.39%. He further pointed out that TPO also rejected working of PLI of assessee i.e. exclusion of extraordinary cost and the assessee's margin was computed at (-) 11.56%. He then, referred to the order of TPO at page 9, wherein he says that advisory services in manufacturing segment were not at arm's length price and takes arm's length price at Nil....
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....e of TPO. In respect of comparables selected, the learned Departmental Representative for the Revenue pointed out that they were functionally different and hence, not comparable. Coming to the next stand of assessee i.e. adjustment of PLI on account of wastage and scrap, he referred to the orders of TPO and DRP and pointed out that there was no third party evidence. The learned Departmental Representative for the Revenue then referred to case laws relied upon by the learned Authorized Representative for the assessee and pointed out that the decisions were on different facts and where the assessee has not established why the loss and wastage and hence, the adjustment to PLI cannot be allowed. 11. The learned Authorized Representative for the assessee in rejoinder referred to the submissions filed at pages 255 and 256 of Paper Book explaining why losses arisen to the assessee. 12. We have heard the rival contentions and perused the record. The assessee before us has entered into various international transactions with its associated enterprises. The assessee was engaged in the manufacture of headliners, door panels, parcel trays, etc. and also had technical centre for providing....
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.... of tested party could not be adjusted, only the margins of comparables could be adjusted. The assessee claimed that it was an economic adjustment to an extraordinary cost, which is one time non-recurring and needs to be excluded while computing its margins. The learned Authorized Representative for the assessee before us has refuted each of the comments of TPO in this regard. We will deal them one by one. The first allegation made by Assessing Officer was that PLI was later revised and this was not part of transfer pricing report. The learned Authorized Representative for the assessee has referred to para 8.4.2.1 at page 145 of Paper Book i.e. TP study report, wherein this extraordinary cost has been excluded while determining margins of assessee. The second aspect is the objection of TPO that only margins of comparable companies are to be adjusted and not of tested party and the learned Authorized Representative for the assessee stressed that it was one time non-recurring extraordinary item of expenses, which needs to be excluded while computing its margins. The next objection of TPO was the abnormal loss mainly during the months of July and August, for which the learned Authoriz....
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.... the expenditure incurred on account of GDR issue, buyback of shares and restructuring options like ESOP etc. amounting to Rs.1,02,17,339/- should be considered as nonoperating expenses while determining the operating margin of the assessee. Similar is the case with rejected tax refund claim written off since the said expenditure was not related to providing of services to its AEs. As regards the expenses of accounting and MIS process is concerned, we find because of termination of certain projects by the customers, the assessee, on the hope of getting some alternate projects retained its employees assigned to those projects. Since no new projects were received, the salary cost of these employees amounting to Rs.19,35,527/- was claimed as extraordinary item. Since the assessee had to retain employees who are assigned to certain projects which are terminated, therefore, in our opinion, salary cost of these employees has rightly been considered by the assessee as extraordinary item. As regarding the expenses of software team is concerned, we find the assessee during this year has debited such expenditure to the profit and loss account instead of capitalizing the same in the book as w....
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....rating costs and would thus be relevant for arriving at the ALP. 18. The aforesaid issues were considered by the Tribunal. It noted that despite a specific direction issued by the CIT(Appeals), the assessee was unable to adduce any documentary evidence to show that the decision to close the Indian units was taken by the assessee independently and without being influenced by the associated enterprise. The Tribunal thus appears to have doubted the assessee's claim that it was an independent decision, taken without consulting the associated enterprise, to close down the Indian offices. The Tribunal further agreed that the stand taken by the revenue authorities that the closure of the Indian branches would correspondingly reduce the costs of the associated enterprise and therefore, it would be relevant item for consideration in the matter of arriving at the appropriate ALP. The Tribunal opined that transfer pricing is not an exact science and it is difficult to arrive at the ALP with any amount of certainty or definiteness; an element of guess work was always a part of the process. The Tribunal agreed with the assessee that the compensation received on account of closure o....
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....ings the assessee was asked to give transaction wise break up of commission received but inability in this regard was expressed as it was stated that the transactions were numerous and could not collated); b. Services fees - fixed fees for rendering marketing support in form of market survey etc." The CIT (Appeals) proceeded to decide the issue on the basis that the assessee was unable to produce any document to show the circumstances under which the decision to close the offices was taken. He also assumed that the relevance of the closure of the Indian units and the payment of compensation both would hinge upon as to whose decision it was to close down the Indian units. He held that the decision was taken at the behest of the associated enterprises and therefore, for transfer-pricing purposes the assessee must be compensated by them and accordingly the costs of closure are not to be excluded for computing the operating expenses. The decision of the CIT(Appeals) was endorsed by the Tribunal which noted that since MCJ was paying the assessee on the basis of cost plus 10 percent, the a closure of the Indian units would automatically reduce the costs of the associated enterpr....
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....e the operating margin of the assessee company by adjusting the above expenses. Grounds raised by the assessee on this issue are accordingly allowed." 15. The learned Authorized Representative for the assessee also pointed out that similar ratio has been laid down by Mumbai Bench of Tribunal in Pangea3 & Legal Database Systems (P.) Ltd. Vs. ITO (2017) 79 taxmann.com 303 (Mumbai - Trib.), wherein it was held that where a material difference had arisen in case of assessee due to abnormal feature (abnormal loss on cancellation of forward contract) which admittedly was absent in cases of comparables, a suitable adjustment had to be made to factor in material difference in PLI and thus, loss on account of cancellation of forward contracts out of total forex loss needed to be eliminated from operating cost. 16. Looking at the wastage cost of units scrapped, both the TPO and DRP has commented on the wastage in the months of July and August. 2007 at 49.17% and 23.58%, respectively, though it has gone down in subsequent months but in January, 2008 it was 21.56%, in February, 2008, it was 20.06% and in March, it was 20.47%. Hence, the total wastage of the year is to be taken into consi....