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Before: SHRI S.V. MEHROTRA & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER:
The assessee has filed the present appeal against the order passed by the ld. ADIT, Circle 3(2), New Delhi, vide order dated 18/02/2014 for A.Y. 2006-07 on the following grounds: 1. “That the CIT(A) erred on facts and in law in sustaining addition of Rs. 45,25,240/- on account of the alleged difference in the arm’s length price of the international transactions, on the basis of the order passed u/s 92CA(3) of the Act by the TPO.
2. That the CIT(A) erred on facts and in law in inappropriately aggregating the international transaction of provision of agency services with market support services, without appreciating that such services ought to have been aggregated with the distribution segment, being closely linked with such segment. 2.1 That the CIT(A) erred on facts and in law in not appreciating that the distribution and agency segment relates to the same products, viz., ROBs and involves performing some of the common functions by the same employees and it is not feasible to segregate the cost relating to the same. 2.2 That the CIT(A) erred on facts and in law in not appreciating that the appellant does not employ any separate/specific personnel/asset for provision of agency services and same employees engaged in the distribution segment perform the necessary functions for provision of agency services. 2.3 That the CIT(A) erred on facts and in law in allocating common expenses to the agency segment in the ratio of sales, resulting in disproportionate allocation of expenses not commensurate with the functions per not appreciating that such expenses ought to have been allocated in the gross profit ratio. 2.4 That the CIT(A)/TPO erred on facts and in law in using inappropriate quantitative filters without appreciating that selection of comparable company shall be on FAR analysis and application of such quantitative filters selectively defies the purpose of the benchmarking analysis. 2.5 That the CIT(A)/TPO erred on facts and in law in allegedly rejecting the following comparable companies identified by the appellant on account of functional dissimilarity and low turnover: i. Acquire Talent Services Limited (“ATSL”); ii. Besant Raj International Limited (“BRIL”); iii. Capital Trust Limited (“CTL”); iv. NTPC Electric Supply Company Limited (“NTPC”); v. In House Productions Ltd. (“IHPL”)
2.6 Without prejudice, the CIT(A) erred on facts and in law in not considering correct operating profit to cost ratio of comparable companies considered by the TPO for the purpose of benchmarking. 2.7 That the CIT(A) erred on facts and in law in not considering multiple year data of the comparable companies, required to iron out the fluctuations caused by business/economic/product life cycle. 2.8 That the CIT(A)/TPO erred on facts and in law in not appreciating that use of single year data of the comparable companies may not adequately capture the market and business cycle reflected in the industry. 2.9 That the CIT(A)/TPO erred on facts and in law in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low- risk-bearing captive service provider as opposed to the comparable companies who were independent entrepreneurs. The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing.”
2. From the above grounds, the assessee submitted that ground nos. 1, 2.1, 2.2, 2.4, 2.5, 2.6, 2.7, 2.8 & 2.9 are not pressed. The ld.AR submitted that the remaining grounds have been dealt with by this Tribunal in assessee own case vide order dated 28.08.2015, for A.Y. 2003-04 in ITA No. 2564/Del/2011. He submitted that the facts and circumstances are in the year under consideration are similar. He thus submitted that the grounds stands covered by the order of the Tribunal in the preceding assessment year in assessee’s own case. Ld.DR has verified the same and has not objected to this submission made by the Ld.AR.
3. Ground no. 2: “That the CIT(A) erred on facts and in law in inappropriately aggregating the international transaction of provision of agency services with market support services, without appreciating that such services ought to have been aggregated with the distribution segment, being closely linked with such segment.”
3.1. We see that the above ground has been dealt with by the Tribunal for A.Y. 2003-04 in paragraphs 24 & 25 which have been reproduced herein below: 24. “We have heard the rival submissions and perused the material on record. The first issue which involves consideration as contended by the ld. Counsel for the assessee is that, the TPO/CIT(A) were incorrect in not bench- marking the functioning of import of products from M/s Corning SA France and receipt of agency commission from M/s Corning SA France. According to the assessee since both the functions dealt with the same products/same AE and were in respect of sales made to customer in India, therefore, ought to have been bench marked together, as was done by the appellant in its Transfer Pricing documentation. The conclusion however of the authorities below is that the distribution function and agency service function are not comparable. It has been found that distribution function involves import of furnished goods, its warehousing, advertisement marketing and distribution/sale of productions; whereas agency function involves coordination between customers and the head office and undertaking certain marketing and logistic services. Furthermore the risks assumed in distribution function are contract risk, marketing risk, credit risk, inventory risk etc.; whereas an agency functions assessee does not undertake contract risk, inventory risk, credit risk, etc. There is no dispute to the above findings arrived at by the authorities below.
Having regard to the above factual matrix we are thus inclined to uphold the conclusion of the CIT(A) to benchmark the two independent functions separately. We do not find any merit in the contention raised by the ld. Counsel that these are closely linked transactions undertaken by the appellant. On the contrary the nature of transactions are functionally different and even the risk assumed are different. We thus negate the stand of the assessee and uphold the findings of CIT(A) in benchmarking the distribution/agency function separately.” 3.2. Accordingly, following the order of the Tribunal in the preceding assessment year, being dismissed this ground of appeal filed by the assessee.
4. Ground no. 2.3: “That the CIT(A) erred on facts and in law in allocating common expenses to the agency segment in the ratio of sales, resulting in disproportionate allocation of expenses not commensurate with the functions per not appreciating that such expenses ought to have been allocated in the gross profit ratio.” 4.1. We see that this ground has been dealt with by the Tribunal in the preceding assessment year at para 26 to 29 which have been reproduced herein below: “26. So far as the allocation of expenses is concerned it is noted that the TPO had identified indirect expenses common to both the functions at Rs. 1,93,29,321/- details of which are as under: Particulars Amount (Rs.) Salaries 42,72,231/- Advertisement 30,78,570/- Insurance 3,77,758/- Repairs & Maintenance 8,24,105/- Professional fee 28,31,227/- Rent 12,57,636/- Communication 5,93,240/- Travelling & Conveyance 33,79,299/- Misc. 12,32,610/- Depreciation 14,82,645/- Total (A) 1,93,29,321/- 27. The CIT(A) has held that out of the aforesaid sum of Rs. 30,78,570/- and Rs. 3,77,758/- pertaining to advertisement and insurance have no nexus with the agency function.
28. We find merit in the said conclusion as no material has been lead to discredit the above conclusion. Thus we hold that aggregate indirect expenses common to both the functions are of Rs. 1,58,72,993/- (Rs. 1,93,29,321/- - Rs. 30,78,570/- - Rs. 3,77,758/-). The CIT(A) further more held that allocation of such expenses should be done on the basis of gross margin of distribution function and commission income receipts and not on the basis of sales, as adopted by the TPO. Here too, we do not find any infirmity in the approach adopted by the CIT(A). The CIT(A) has correctly held that allocation of expenses in proportion to sales [the ld.Counsel submitted that it should be gross margin, as held by ld.CIT(A)] would amount to give equal weightage in terms of functions performed, assets utilized and risks assumed to both distribution function as well as agency service activity, which otherwise involves much lesser functions and utilization of assets and risk. The CIT(A) has held as under: “It would not be correct to allocate expenses attributed to purchase/sale of finished goods, warehousing and handling of inventory etc., to the agency service activity, wherein such activities are not involved. Allocation of common expenses in proportion to gross margin/income from the distribution function and the commission income, irons out or eliminate the impact of purchase of finished goods, handling of inventory and undertaking distribution function, etc. Allocation of common expenses in proportion to gross margin from distribution function and commission income is a reasonable and, rationale basis of allocating of such common expenses between the two activities. I accordingly uphold allocation of common cost by the assessee and accordingly computed the adjustment after combining the agency service activity with marketing service function, as follows:
Particulars Rupees Income from market support services 3,41,76,307 Add: Commission income 55,94,311 Total income from market support and agency 3,97,70,618 service activity Cost for market support (from letter dt. 3,21,05,659 16.11.2000) Cost for commission income (as determined in 27,55,968 para 21.3 above) Total aggregated cost 3,48,61,627 Arm’s length marketing support service and 3,75,38,999 agency service income (A) Marketing support and agency service income 3,97,70,618 earned by the appellant (B) Difference (A-B) (-) 22,31,619 Since total income from market support and agency service activities at Rs. 3,97,70,618/- is higher than the arm’s length price of such services, computed as per basis adopted by the TPO at Rs. 3,75,38,999/-, no adjustment on this account is warranted. Accordingly, adjustment of Rs. 20,87,795/- in respect of international transactions of agency service activity is, therefore, not sustainable and is directed to be deleted.”
Having regard to the above factual conclusion we uphold the action and reject the grounds raised
by the Revenue. Ground no. 1 thus stands dismissed. 4.2. We, therefore, following the orders of the Tribunal for assessment year 2003-04, allow this ground in the appeal filed assessee.
5. In the result, the appeal filed by the assessee is partly allowed.