TaxTMI Updates e-Newsletter
Jan 24,2012

Transactional Net Margin Method (TNMM) - comparability adjustments - working capital adjustment - adjustment for higher import content - proviso to section 92C(2) - +/-5% safe harbour - proportionality in computing transfer pricing adjustment - remand to Assessing Officer for recomputation

Working capital adjustment - comparability adjustments - Transactional Net Margin Method (TNMM) - Allowance of working capital adjustment to eliminate material differences in TNMM comparability - HELD THAT: - The Tribunal held that under Rule 10B(1)(e)(iii) the net profit margin of comparables must be adjusted to eliminate differences which could materially affect margins in the open market. Working capital (net current assets comprising receivables, inventory and payables) constitutes such a difference because its cost influences pricing and net margins. The revenue could not resist adjustment merely because the comparables were supplied by the assessee or because the comparables' margins are 'real' rather than notional. The Tribunal accepted the assessee's computation showing a working-capital driven reduction in comparables' margin from 7.18% to 3.77% (a 3.41% effect) and held that this quantum is sufficient to be a material difference requiring elimination; accordingly the TPO/AO/DRP were directed to allow the requisite working capital adjustment while determining arm's length operating margin (allowed pro tanto). [Paras 25, 29, 31, 32, 33]

Working capital adjustment is in principle allowable under Rule 10B(1)(e)(iii) and the assessee's claim is allowed pro tanto; AO/TPO/DRP to give effect while computing ALP.

Adjustment for higher import content - comparability adjustments - Transactional Net Margin Method (TNMM) - Allowance and remittal of adjustment for higher import cost of raw materials/components where difference may materially affect margins - HELD THAT: - The Tribunal applied the same principles of Rule 10B(1)(e) as in the working capital issue and held that higher import content can constitute a difference that, if likely to materially affect profits, must be examined and, where reasonably quantifiable, adjusted. The assessee's workings showed a reduction in PLI from 7.18% to 6.61% after import-cost adjustment (0.57% effect). The Tribunal found in principle for the assessee and, noting factual aspects not tested by lower authorities, remitted the matter to the TPO/AO to examine the claim, verify bona fides and eliminate any difference only if it is likely to materially affect the ALP in accordance with Rule 10B(3) (allowed pro tanto and set aside for fresh examination). [Paras 34, 35, 36, 37, 38]

Import-cost adjustment is permissible in principle; issue remitted to the TPO/AO for verification and appropriate adjustment if the difference is found to materially affect margins.

Proviso to section 92C(2) - +/-5% safe harbour - Transactional Net Margin Method (TNMM) - Applicability of the +/-5% variation (erstwhile proviso to section 92C(2)) to the assessee's case - HELD THAT: - Having considered precedents and coordinate-bench authority, the Tribunal held that where there are contrary decisions between Benches, the Tribunal should follow the decision favourable to the assessee. Applying that principle and the assessee's adjusted computations (including working capital and other permitted adjustments), the Tribunal found for the assessee and allowed the benefit of the +/-5% variation in determining arm's length price (i.e., the assessee's ground on this issue was allowed). The Tribunal directed the AO to give effect consistent with this view. [Paras 41, 42, 43]

Assessee entitled to benefit of +/-5% variation under the proviso in the circumstances of this case; ground allowed.

Proportionality in computing transfer pricing adjustment - Transactional Net Margin Method (TNMM) - Restriction of transfer pricing adjustment to sales proportionate to the international (controlled) transactions rather than to entire segment/entity sales - HELD THAT: - The Tribunal held that when TNMM uses sales as the PLI base, the relevant base must be the sales relatable to the particular international transactions (i.e. proportionate sales connected to imports from AEs), not the entire segment or entity sales. Citing consistent precedents, the Tribunal accepted the principle of proportionality and directed that the TP adjustment be computed only with reference to the proportion of sales attributable to the controlled imports (allowed pro tanto). The AO was directed to recompute adjustments on this basis after verification. [Paras 45, 46, 47, 48, 49]

Adjustments must be restricted to the proportion of sales relatable to the international transactions; AO to recompute accordingly.

Transactional Net Margin Method (TNMM) - remand to Assessing Officer for recomputation - Remittal for application of TNMM to trading/export of components/spares and consequential recomputations - HELD THAT: - The Tribunal found that DRP erred in not directing the AO to apply TNMM in its true spirit to the trading/export transactions and in rejecting RPM as the appropriate method. Given the DRP's inconsistent directions, the Tribunal remitted the trading-segment issue (ground 8) to the AO for fresh computation applying TNMM and accorded the assessee relief by way of remand. Separately, grounds relating to TDS/interest (grounds 13-15) were remitted to AO for recomputation as consequential/settled matters. [Paras 15, 16]

Ground 8 remitted to AO to apply TNMM and recompute; grounds 13-15 remitted to AO for recomputation after hearing assessee.

Remand to Assessing Officer for recomputation - Overall remand to AO/TPO/DRP for giving effect to Tribunal's directions and for verification of figures - HELD THAT: - The Tribunal, having allowed the assessee in principle on working capital, import-cost adjustments, +/-5% variation and proportionality, did not itself quantify final relief. It remitted the matters to the AO/TPO/DRP to rework additions, verify the bona fides of computations, apply permitted adjustments, and recompute tax and consequential reliefs after giving the assessee opportunity of hearing. [Paras 50, 51]

Matters remitted to AO/TPO/DRP for recomputation and to give effect to Tribunal's directions; appeal allowed pro tanto.

Final Conclusion: The Tribunal allowed the assessee's claims in principle on (i) working capital adjustment, (ii) adjustment for higher import content, (iii) applicability of the +/-5% variation under the erstwhile proviso to section 92C(2), and (iv) restriction of TP adjustments to sales proportionate to the international transactions; it remitted the trading-segment method issue (ground 8), the consequential TDS/interest issues (grounds 13-15) and all affected computations to the AO/TPO/DRP for verification, application of TNMM in accordance with Rule 10B and recomputation of additions and consequential reliefs; appeal allowed pro tanto.

Deduction under clause (iv) of the Explanation to Section 115JB - computation of deduction on the basis of book profits as distinct from profits computed under the Act - application of Section 80HHC for computing deduction - binding precedent effect of Ajanta Pharma Limited versus Commissioner of Income Tax-9, Mumbai

Deduction under clause (iv) of the Explanation to Section 115JB - computation of deduction on the basis of book profits as distinct from profits computed under the Act - application of Section 80HHC for computing deduction - binding precedent effect of Ajanta Pharma Limited versus Commissioner of Income Tax-9, Mumbai - Whether the deduction under clause (iv) of the Explanation to Section 115JB is to be computed on the basis of book profits or on the basis of profits computed under the provisions of the Income Tax Act, and whether that question remains open in view of the Supreme Court decision in Ajanta Pharma. - HELD THAT: - The High Court recorded the common question concerning the correct basis for computing the deduction under clause (iv) of the Explanation to Section 115JB and noted that the question is no longer res integra. Reliance was placed upon the law laid down by the Supreme Court in Ajanta Pharma Limited versus Commissioner of Income Tax-9, Mumbai , which, according to the court, settles the issue raised in these appeals. Having accepted that the Supreme Court's decision governs the controversy, the court did not re-examine the merits but disposed of the appeals in conformity with that precedent. [Paras 3]

The substantial question of law is held to be settled by the Supreme Court's decision in Ajanta Pharma and the appeals are disposed of accordingly.

Final Conclusion: The High Court held that the question regarding the basis for computing the deduction under clause (iv) of the Explanation to Section 115JB is governed by the Supreme Court's decision in Ajanta Pharma; the appeals were disposed of in conformity with that precedent.

Exemption under section 10(10C) - relief under section 89(1) - binding precedent and stare decisis - question of law

Exemption under section 10(10C) - question of law - Whether the Income Tax Appellate Tribunal was justified in confirming the disallowance of the assesee's claim of exemption under section 10(10C) when the employer had not itself given any exemption under that provision - HELD THAT: - The Court found that the controversy raised by the Revenue was already conclusively dealt with by earlier Division Bench decisions of this Court. Having considered the submissions, the Court observed that there was no distinguishing feature in the present case to take a different view from those precedents. In view of the binding precedents relied upon, the Court held that the present appeal did not raise any maintainable question of law warranting fresh adjudication.

Appeal dismissed; the Tribunal's confirmation of disallowance is not interfered with in view of controlling decisions.

Relief under section 89(1) - binding precedent and stare decisis - Whether relief under section 89(1) is admissible in cases of voluntary retirement lump-sum ex-gratia payment - HELD THAT: - The Court noted and followed prior Division Bench decisions which held that relief under section 89(1) is admissible in such cases. Relying on those decisions and finding no contrary authority or distinguishing facts, the Court applied that principle to the present controversy and declined to re-open the question.

The principle that relief under section 89(1) is available in the circumstances is followed and applied; no question of law arises for fresh decision.

Final Conclusion: Following earlier Division Bench decisions that govern the controversy, the Court dismissed the Revenue's appeal and declined to entertain a fresh question of law, applying the settled principle that relief under section 89(1) is available in the circumstances.

Remand power of Commissioner (Appeals) - Section 122A of the Customs Act, 1962 - withdrawal of remand power - Validity of remand order - Remand to adjudicating authority for fresh decision and verification of documents - Application of binding precedent

Remand power of Commissioner (Appeals) - Section 122A of the Customs Act, 1962 - withdrawal of remand power - Application of binding precedent - The Commissioner (Appeals) has no power to remand matters to the adjudicating authority in view of the amendment under Section 122A and the Supreme Court decision cited. - HELD THAT: - The Tribunal accepted the submission that the amended provision of Section 122A withdraws the power of the Commissioner (Appeals) to remand matters. The Tribunal relied on the precedential view of the Supreme Court in Mil India Ltd. vs. CCE, Noida (reported as 2007 (210) ELT 188) to conclude that a remand by the Commissioner (Appeals) is impermissible. Applying that principle, the impugned order of remand passed by the Commissioner (Appeals) was held to be unsustainable. [Paras 4]

Impugned remand order passed by the Commissioner (Appeals) set aside.

Remand to adjudicating authority for fresh decision and verification of documents - Validity of remand order - The matter is remanded to the adjudicating authority to decide afresh after verification of documents produced by the respondent and after affording an opportunity of hearing. - HELD THAT: - Noting that the refund claim was rejected by the adjudicating authority and that documents were produced before the Commissioner (Appeals) which require verification, the Tribunal directed that the adjudicating authority should decide the matter afresh. The remand ordered by the Tribunal is to facilitate verification of the documents and to afford the respondent a hearing before a fresh adjudication. [Paras 5]

Appeal disposed of by remanding the matter to the adjudicating authority for fresh decision; connected stay petition disposed accordingly.

Final Conclusion: The Tribunal set aside the Commissioner (Appeals)'s remand (held impermissible under Section 122A and Supreme Court precedent) but remanded the substantive dispute to the adjudicating authority for fresh consideration after verification of documents and hearing the respondent; the appeal is disposed by way of that remand and the stay petition is disposed accordingly.

Limitation in filing appeals - power of Commissioner (Appeals) to condone delay - condonation under Section 35F of the Central Excise Act, 1944 - pre-deposit and stay applications - effect of Singh Alloys precedent on condonation powers

Limitation in filing appeals - power of Commissioner (Appeals) to condone delay - effect of Singh Alloys precedent on condonation powers - Whether the appeal before the Commissioner (Appeals) was barred by limitation and whether the Commissioner (Appeals) could condone the delay beyond the statutory period. - HELD THAT: - The Tribunal noted that the appeal to the Commissioner (Appeals) was filed with a delay of 180 days, whereas Section 35F prescribes filing within 60 days with power to condone a further 30 days. Relying on the Hon'ble Supreme Court's decision in Singh Alloys, the Tribunal held that the Commissioner (Appeals) possesses no power to condone delay beyond the period prescribed by the statute. Since the delay of 180 days exceeded the condonable period, the impugned order dismissing the appeal as time-barred was held to be free of infirmity. Consequently, the stay application and the appeal could not be entertained. [Paras 2, 3]

Impugned order upholding dismissal of the appeal as time-barred is affirmed; stay petition and appeal dismissed.

Final Conclusion: The Tribunal dismissed the stay petition and appeal, affirming the Commissioner (Appeals)'s order that the appeal was time-barred because the 180-day delay exceeded the statutory and condonable period in light of the Singh Alloys decision.

CENVAT credit on duty paid on returned final products - process amounting to manufacture - utilization of CENVAT credit for payment of duty on re-manufactured goods - Rule 16 of the Central Excise Rules, 2002

CENVAT credit on duty paid on returned final products - process amounting to manufacture - utilization of CENVAT credit for payment of duty on re-manufactured goods - Rule 16 of the Central Excise Rules, 2002 - Whether CENVAT credit availed on duty paid on final products returned by buyers could be retained and utilized where the returned goods were reprocessed and cleared on payment of duty - HELD THAT: - The Tribunal found as an established fact that goods returned by the buyers were remelted using the manufacturer's machinery and fresh products (PVC compound, PVC Master Batch, LDPE/HDPE compound) emerged and were cleared thereafter on payment of appropriate duty. Applying Rule 16, as clarified in the CBEC Supplementary Instructions (Chapter 18), where returned goods are subjected to a process that amounts to manufacture the manufacturer may pay duty at the appropriate rate on the goods so manufactured and utilize the CENVAT credit of duty previously paid on the returned goods for that payment. In the factual matrix before the Tribunal the reprocessing amounted to manufacture and the fresh clearances were on payment of duty; consequently the appellant was not required to reverse the CENVAT credit taken on the returned final products. [Paras 2, 3]

The denial of CENVAT credit by the lower authorities is unsustainable; the appellant need not reverse the CENVAT credit and the appeal is allowed.

Final Conclusion: Appeal allowed; impugned order set aside and CENVAT credit availed on duty paid on returned goods for the period April, 2006 to August, 2008 held allowable and may be utilized for duty paid on reprocessed clearances.

Condonation of delay in filing appeal - limitation bar to appeal - vicarious negligence of counsel - discretionary relief where no mala fides or gain

Condonation of delay in filing appeal - vicarious negligence of counsel - limitation bar to appeal - Whether the Tribunal erred in rejecting the application for condonation of delay and dismissing the appeal as barred by limitation. - HELD THAT: - The Court examined the personal affidavit of the counsel before the Tribunal which admitted that, by mistake, the papers intended for filing the appeal were placed in another file and the appeal was not filed within time. The counsel's admission established that the delay arose from the counsel's mistake and not from any mala fide conduct by the appellant or any attempt by the appellant to gain by non-filing. In these circumstances the Tribunal ought to have exercised its discretionary power to condone the delay. The impugned order rejecting condonation and dismissing the appeal on limitation grounds was therefore unsustainable. The Court set aside the Tribunal's order, condoned the delay, and directed the Tribunal to decide the appeal on merits in accordance with law.

Tribunal's order rejecting condonation of delay and dismissing the appeal as barred by limitation set aside; delay condoned and appeal remitted to the Tribunal for decision on merits.

Final Conclusion: Appeal allowed: delay in filing the appeal before the Tribunal is condoned and the Tribunal is directed to decide the appeal on merits in accordance with law.