TaxTMI 
TaxTMI 
2012 (8) TMI 1246
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....by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. TPO for computation of the arm's length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ("Act"). 4. The Ld. AO/Ld. TPO erred on facts and in law in the assessment of the arm's length price of the Appellant's international transactions from associated enterprises in the distribution segment and in doing so grossly erred in the following manner- 4.1 The Ld. AO/TPO/DRP erred on facts and in law in only making general statements and specious reasoning, without providing any supporting evidence, regarding inapplicability of Resale Price Method ("RPM") for the distribution segment and not appreciating that these stated observations do not impair the applicability of RPM in light of the facts and methodology in case of the Appellant. 4.1.1 The Ld. AO/TPO/Ld. Dispute Resolution Panel ("DRP") erred on facts and in law in rejecting the arm's length price determined by the Appellant for the distribut....
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.... the Finance Act 2009 instead of the provision regarding the arm's length range applicable to the financial year 2006-07. The Ld. AO/ TPO/ DRP erred in failing to appreciate that even a price which varies 5% in either direction of the arithmetic mean margins of the comparables may be considered as an arm's length price as per the proviso 2 section 92 C (2) of the Act. 8. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 271(1){c) of the Act mechanically for furnishing inaccurate particulars without recording any adequate satisfaction for such initiation. 9. That the Ld. AO erred in facts and in law in charging and computing interest under section 234B and 234D of the Act. The above grounds of appeal are mutually exclusive and without prejudice to each other. The appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised. The arguments taken hereinabove are without prejudice to each other." 2. At the outset, ground nos. 1 & 2 in the appeal, being general in nature nor any separate submissions having been made....
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....icial decision, hence DRP does not find any infirmity in the action AO and rejects the objection." 4. The ld. ARs appearing on behalf of the assessee did not make any submissions before us on this ground. We find that Hon'ble Delhi High Court in Sony India Pvt. Ltd.(supra) while adjudicating an identical issue held that the instruction issued by the CBDT, prescribing monetary limits of the international transaction for making reference to TPO does not take away the discretion of the AO. It was observed that "A reading of the impugned instruction indicates that it acts as a guideline to the AO in the exercise of the discretion conferred under section 92CA(1). This instruction is in fact helpful in ensuring that the discretion of the AO will not be abused. It correctly interprets the law as requiring only a formation of a prima facie opinion by the Assessing Officer at the stage of the reference. Therefore, the question of the CBDT supplanting the judicial discretion of the Assessing Officer does not arise. It is perfectly possible that, independent of the Circular, the Assessing Officer might still "consider it necessary or expedient" to refer an international transaction of such....
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....sed multiple years' data and considered companies dealing in 'photographic or cinematographic goods'; 'Control Instrumentation & industrial electronics' etc. and functional profile of these companies revealed that M/s Ankuran Chemical Enterprises Ltd.; KPL International Ltd.; Parry Chemicals; PH Trading Ltd. were trading in chemicals and thus, these companies, were apparently not functionally comparable,the TPO, in the light of search conducted on the Prowess data base using 'drugs and formulations' category,identifying five companies as mentioned on page 5 of his order, showcaused the assessee as to why RPM be not rejected and TNMM be followed,using OP/sales as PLI in order to determine ALP of the aforesaid international transactions. After considering the reply of the assessee, the TPO summed up the contentions of the assessee on use of multiple year data as under:- i) "The taxpayer has used multiple year data on the pretext that using single year data of comparable companies may not adequately capture the economic conditions and business cycles reflected in the industry. ii) As per the tax payer, Rule 10B(4) permits use of earlier year data. iii) The t....
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....s support while concluding that it was mandatory to use current year data while determining ALP of the aforesaid international transactions. In this connection, Hon'ble jurisdictional High Court in Denso Haryana Pvt. Ltd.(supra) held that "The approach of CIT (Appeals) is perfectly justified as the Assessing Officer had come to the conclusion that the price at which the goods were imported were higher by comparing the price with the price in the local market which prevailed in the subsequent years. The Assessing Officer was required to compare the said price which prevailed in the local market in the same year." The issue relating to use of current year data is well settled now in view of a number of decisions referred to by the TPO in his order, including the decision of Bangalore Bench in the case of Aztec Software & Technology Services Ltd. and approved by the Hon'ble Karnataka High Court in 23 taxmann.com413(Kar). In the light of view taken in the aforesaid decisions, especially when the ld. ARs have not placed before us any material, establishing as to how earlier years' data would have impact on the profitability of the assessee for the current financial year or that of the c....
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....for example wages and salaries are not segregated as those for employees engaged in production and other employees. The difficulty arises because such information is not publicly available as it is not disclosed in the financial statements of companies. It is emphatically submitted that this difficulty does not exist in case of distribution/trading entities wherein there is no value addition, and there is only purchase of finished goods and resale thereof. It may be recalled that the assessee is also a reseller that does not make any value addition to the products purchased and resold. TPO stated that TNMM and not RPM should have been adopted for establishing the arm's length price adopted by GE Healthcare India for the distribution division. TPO in his order contended that: a) The expenses that the assessee has incurred on account of general selling and administrative expenses will not be captured at the gross level. b) While less comparability may be required in using RPM, it remains the case that closer comparability of products will produce a better result. c) In application of RPM, levels of inventories and costs involved need t....
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....ii) TTK Healthcare ltd. (iv) Cosme Farma Laboratories Ltd. The assessee has objected to the use of these comparables on these grounds. The assessee seems to be unmindful of the fact that TNMM was chosen as the method over RPM because it was found from the documents submitted by it that the assessee was also involved in marketing, selling and brand building. The assessee is paying royalty of Rs. 53 lakhs to its AE for use of the GE monograms and trademarks. Therefore it is not for the assessee to object to the use of comparables on this ground. The assessee must appreciate that all these comparables have passed the RPT filter discussed earlier in this order. Therefore, the grounds raised by the assessee do not have the force to compel one to abandon the use of these companies as comparables. The assessee is also enjoying the benefit of the GE brand. In fact, despite the presence of brand strength that the assessee claims for which it would justify the payment of royalty, the assessee's net margin is below that of the comparables chosen by it also. Therefore, this leads to the conclusion that the payment of royalty is not providing any benefit to the assessee. I....
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....through the annual report of the company, the objection of the assessee is attended to by adopting the pharmaceutical division of this company as comparable. The OP/Sales margin of this segment is worked out below. Segment Revenue : Rs. 8608.15 Lakhs Segment cost : Rs. 7471.44 Lakhs Add: unal1ocated exp. : (in proportion of turnover-40%) : Rs. 162.88 Lakhs Total segment cost : Rs. 7634.32 Lakhs Segment result : Rs. 973.83 Lakhs OP/Sales (%) : 11.31% In the case of Cosme Farma laboratories Ltd the assessee has stated that the company has different pharma products. The assessee must understand that these objections do not take this company out of the set of pharma companies. In the case of Novartis India Ltd, the assessee has stated that the assessee has some expenses in the nature of manufacturing activities. However, the annual report shows that the company is trading in goods. There is no separate manufacturing segment reported. The assessee has also not been able to bring this out. Therefore, the company does not get disqualified on this ground. 4. The objections that the assessee has raised again....
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....regards selection of most appropriate method and methodology adopted by the assessee and the TPO, the DRP dealt with these issues as under:- "4.1 The AO/TPO erred on facts an in law in rejecting the methodology adopted by the assessee for the distribution segment and substituting the same with his own methodology without providing any evidence or back up documentation in support of his statements used to reject the TP methodology adopted by the assessee. DRP's Observation The assessee has argued that the TPO has not provided any cogent reasons for not accepting the search strategy adopted by the assessee in the FY 2006-07 TP documentation. In fact, even for the comparable set adopted by the TPO, no search strategy detailing the quantitative filters applied or screening process adopted has been provide in the TP order. TPO has rejected companies that were engaged in trading of chemical as he has contended that they are not engaged in the exact same business of pharmaceuticals. However, for his analysis he has considered companies engaged in diversified business lines like Cosme Pharma Ltd that deals in nutritional products, creams, gels, etc. ....
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....rading of imaging agents that are often injected in the body. Thus, the comparables analysis for an arm's length analysis should focus on trading of imaging agents and not injections. Further, due to unavailability of companies engaged in trading of imaging agents in the public domain, if a broad set for comparability analysis is to be considered, companies engaged in trading of any chemicals should be accepted as well. DRP finds that the TPO has accepted functional profile of the assessee as a distributor of imaging products and issued a detailed show cause on 18.10.2010. At the cost of repetition it must be stated that in Para 4, the TPO has pointed out the defects in the search process saying that assessee has used key words like photographic and cinematographic goods, control instrumentation and industrial electronics etc. Even DRP agrees with TPO that such a search will not yield correct functional comparables. TPO has concluded in the show-cause as follows "From the description of your activities, under no circumstances can you be compared to companies who deal in industrial chemicals, phenol, plastics and petroproducts. As per your own admission you dea....
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....s correctly relied on Delhi ITAT decision in the case of M/s Carraro India Ltd. We see no reason, based on facts and circumstances, to interfere with the order of the TPO. 4.3 That on facts and circumstances of the case and in law, the AO/TPO erred on facts and in law in selecting current year (i.e. FY 2006-07) data for comparability in the distribution segment despite the fact that at the time of comparison done by the assessee, the complete data for FY 2006-07 was not available within the public domain. DRP's Observation In accordance with rules updated current year margins were used by the TPO hence there is not infirmity in his action. 4.4 That the AO/TPO was prejudiced in rejecting the methodology in the distribution segment for this financial year when the same was accepted in the prior year and there was no change in facts and circumstances over the two years. (i.e. FY 2004-05 and 2005- 06). DRP's Observations Every year is to be considered separately based on facts and circumstances and availability a data for transfer pricing audit. So there is no infirmity in the action of the TPO. 5. That the AO/TPO e....
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....ot consider turnover filter. On the other hand, the ld. DR pointed out that the assessee itself did not consider the turnover filter in its transfer pricing documentation nor raised such an issue before the TPO /DRP and therefore, is not entitled to raise the issue at this stage. In response,the ld. AR relied upon decision in Sony India (P) Ltd. vs. DCIT,315 ITR(AT)150(Del.) wherein turnover of Videocon International, a comparable was found six times the turnover of the assessee and accordingly, the Bench while noticing several other distinctive features or differences which materially affected performance/price of the products apart from having advantage of R&D unit or valuable intangibles, differences in the turnover, differences in the assets, differences in the functions performed and risk undertaken by the said taxpayer and the VIL, excluded Videocon International from the list of comparison. Likewise in Egain Communication Pvt. Ltd. Vs. Income-tax Officer in I.T.A. no. 1685/PN/2007 dated 10.6.2008, oversized companies were excluded. Similar was the situation in Agnity India Technologies Pvt. Ltd. Vs. Income-tax Officer in I.T.A. no. 386/D/2010 dated 4.11.2010; DCIT vs. Deloit....
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.... judgments relied upon by the ld. AR, the ld. DR vehemently argued that most of these judgments being rendered in the case of softwares/ITES, companies and were not relevant in the instant case. OECD guidelines issued in 2010 or ICAI guidelines are not binding, nor such OECD guidelines issued in 2010 could be applied in the AY 2007-08. As regards R&D and marketing expenses incurred by the comparables, identified by the TPO, the ld. DR pleaded that expenses having already been debited, their profitability to the extent had gone down, the ld. DR added. 15. In his rejoinder, the ld. AR argued that the decisions relied upon by the ld. DR were not applicable to the facts of the case. As regards OECD guidelines, the ld. AR pleaded that these have persuasive value. The TPO having not confronted the assessee any FAR analysis, was not correct in identifying the comparables. 16. We have heard both the parties and gone through the facts of the case as also decisions relied upon by both the sides. As is apparent from the aforesaid facts, the DRP noticed that the assessee is engaged in trading of imaging agents that are often injected in the body and due to unavailability of companies, en....
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.....), it was held by the Hon'ble Bombay High Court that the Tribunal was under statutory obligation to entertain a plea involving a pure question of law and decide the same, no matter at what stage it was taken. In the case of CIT v. Ice Suppliers Corpn. [1967] 64 ITR 195 (Punj.) the order of the Tribunal accepting an alternative case of the Department after giving leave to the assessee in that regard was upheld by Hon'ble High Court. A similar view was taken in N.P. Saraswathi Ammal & Ors. vs. CIT (1982) 138 ITR 19 (Mad), CIT vs. Indian Express (Madurai) (P) Ltd. (1983) 33 CTR (Mad) 314, CIT vs. A.C. Paul (1983), 142 ITR 811 (Mad), CIT vs. Ice Suppliers Corporation (1967) 64 ITR 195 (Pune) and ACIT vs. Amarnath Reddy (Chennai) (TM) (2010) 132 TTJ (Chennai) (TM) 377. In view of the foregoing, especially when the ld. DRP and the TPO did not have any occasion to examine the 'turnover filter', we consider it fair and appropriate to set aside the order of the ld. DRP/AO and restore the matter to the file of the DRP/AO to recompute the ALP of international transactions in the light of our aforesaid observations after examining the comparables by applying the turnover filter, in ac....