TaxTMI 
TaxTMI 
2012 (4) TMI 288
X X X X Extracts X X X X
X X X X Extracts X X X X
....d by the appellant in the transfer pricing documentation maintained by it. The Learned CIT (A) has mentioned only one instance where ROCE may not be an appropriate PLI i.e. in the case of a seasonal business. However, even though he himself admitted that the appellant is not engaged in a seasonal business, he still held that ROCE cannot be used in the case of the appellant without providing any cogent reason. 4. The Learned CIT (A), as well as Learned AO/TPO have erred in facts of the case by introducing a new PLI i.e. Operating Profit as a percentage of total cost. The Learned CIT (A) has erred in facts and circumstances of the case by holding that the raw material cost is not a pass through cost and thus rejecting the appellant's contention that raw material cost should be excluded from total cost. 5. The Learned CIT (A) has erred in not allowing an adjustment of +/- 5% while determining the ALP, as provided by proviso to section 92C (2) of the Act. 6. The above grounds of appeals are independent and without prejudice to one another. 7. The appellant craves leave to add/withdraw or amend any ground of appeal at the time of hearing." The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... catalyst i.e. Precious Metals and Wash Coated Substrates. The assessee procures such precious metals (Platinum, Palladium and Rhodium) from its associated enterprise JMUK and wash coated substrates from its associated enterprise Johnson Matthey Malaysia ('JMM'). JMM purchase raw substrates, for further processing, from independent suppliers and performs wash coating operations before supplying to the assessee. The economic analysis carried out by the assessee in the transfer pricing report submitted with the Assessing Officer can be summarized as below :- "(i) On the basis of easy availability of financial data and non possession of intangibles, the appellant selected itself as the tested party in order to benchmark the international transactions with its AEs. (ii) On the basis of functional and risk profile and on examining the available comparable data, the Transactional Net Margin Method QJ ('TNMM') was determined to be the most appropriate method for determination of Arm's Length Price ("ALP"). (iii) For application of TNMM the 'Rate of return on capital employed' was selected as the Profit Level. Indicator ('PLI')....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 92CA(3) dated 22.3.2000 determined the value of the international transactions, with their associate enterprises, at Rs. 62,49,06,744/- as against the purchase price of Rs. 70,82,93,603/- giving a difference of Rs. 8,33,86,859/-. Accordingly, assessee was confronted with the findings of tile TPO vide Note sheet entry dated 24.3.2006. Assessee has filed its reply vide letter dated 28.3.2006 which is placed on record. Assessee's submission in this regard has been considered. In the submission, assessee has more or less reiterated the arguments that were put forth before the TPO. The TPO while analyzing the case of the assessee adopted the Operating profit/ Total cost ratio method as the Profit Level Indicator (PLI). Assessee had shown an OP/TC of 6.79%. However, on comparing the OP/TC of the assessee company with that of the comparable companies, it is seen that assessee had under stated such profit level indicator and the variants in more than the permissible limit of +/5%. The Average OP/TC of the comparable companies worked out to 16.85%. On the other hand the OP/TC shown by the assessee is 6.79%. So the difference between the two ratios is 10.06% which is almost do....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bservation that the reliability of the return to capital employed as a PLI is also dependent upon the extent to which the composition of assets/Capital employed is similar and valuation of the same. Moreover, in those instances in which the operating assets reported in the balance sheet do not reliably measure the capital employed, ROA may be a less reliable PLI than the financial ratios. Also, if the average balance sheet does not accurately reflect the average use of capital throughout the year, ROA may be a less reliable PLI. Such situations occur, for instance, when the business of a company is seasonal. 10.2.5 From the above discussion, since the appellant is not engaged in a seasonal business and the appellant is engaged in the manufacturing of automobile exhaust catalysts and making import of raw-material from its AE, in these circumstances, I am of the view that Return on Capital Employed is not an appropriate PLI in the case of appellant and thus the TPO was right in rejecting such PLI." CIT (A) dismissed the assessee's appeal on this ground. 6. The issue regarding the treatment of raw material which was raised as an alternate contention by the assessee,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nditions of the transactions and business model. In the above back grounds my findings are as under. 10.4.1 In the given case, the appellant purchases the material for the manufacture of finished goods to be supplied to Maruti Udyog Limited and there is no dispute in this regard that the purchase of the materials is as per the advice of Maruti Udyog Limited. Maruti Udyog Limited advises the appellant the price and the quantity which is to be purchased and the appellant acts accordingly. Further the usage of the material also has to be done for the purposes of manufacturing the items which are to be sold to vendors of the Maruti Udyog Limited. Based on the above facts, the appellant claims that the purchase of the materials should be treated as a pass through cost and the appellant should be treated as contract manufacturer and the margins be computed excluding the cost of the material. 10.4.2 It is necessary to examine the role of the appellant in detail both in light of the above facts and also in light of the agreements entered into between the appellant and Maruti Udyog Limited and the AE with respect to the above purchase. 10.4.3 The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ppellant the cost of purchase of the material is to be recovered by selling the product to vendors of Maruti Udyog Limited and not Maruti Udyog Limited. Had it been a true pass through cost Maruti Udyog Limited should have ensured that the price of the precisions metal being purchased by the appellant is made available in advance to the appellant. Let alone being made available in advance, in the given case, the appellant is supposed to recover it not from Maruti Udyog Limited but from the vendors of Maruti Udyog Limited and that too after a prolonged credit period. Even at the end of the credit period, Maruti Udyog Limited does not give a guarantee that in the event of a default by the vendor, Maruti Udyog Limited will make the payment. 10.4.5 In this regard it is worth mentioning here that inspite of opportunities given at the appellate stage, no agreement between the appellant and the "vendors of Maruti Udyog Limited" have been made available so as to know the terms/conditions and the business model. 10.4.6 Further, it is also important to note the accounting entries which are effected by the appellant and the AE in the course of the transaction. The AE at the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by the appellant. AY 2003-04 Return on Capital Employed was considered as the appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO has mentioned that the appellant is a contract manufacturer. However, he rejected the PLI considered by the appellant and substituted the same with his own PLI which is OP/TC (without excluding the cost of raw material). AY 2004-05 OP/TC - Raw Material was considered as the appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO has mentioned that the appellant is a contract manufacturer and also accepted the PLI considered by the appellant. AY 2005-06 OP/TC - Raw Material was considered as the appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO has mentioned that the appellant is a contract manufacturer and also accepted the PLI considered by the appellant. AY 2006-07 OP/TC - Raw Material was considered as the appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO has mentioned that the appellant has classified itself as a contract manufacturer and also....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rinters - [2003 -(264) -ITR-0276-DEL] 10. Commissioner of Income Tax v. Dalmia Promoters Developers (P) Ltd. [2006 -(281) -ITR -0346 -DEL] 11. Commissioner of Income-tax v. Hang Crank Shafts Ltd. - [2008-(173)-TAXMAN -0152 -DEL] 12. Director of Income-tax (Exemptions) v. Escorts Cardiac Diseases Hospital Society - [2008-(300)-ITR -0075 -DEL] 13. Commissioner of Income-tax v. Haryana State Industrial Development Corporation Ltd. - [2010 -(326) -ITR -640 -P&H] 14. Commissioner of Income Tax -25 v. Gopal Purohit -[2010 -(188) -TAXMAN -0140 -BOM] 15. Management Structure & Systems Pvt. Ltd. v. Income Tax Officer, Mumbai - [2010-(ID1)-GJX -0046 -TBOM] ITA No. 6966/ MUM/ 2007 16. Assistant Commissioner of Income Tax v. M/s. L'oreal India Pvt. Ltd. - [ITA No.6745/M/2008)" 8. On this issue, the learned DR submitted that it is a general rule that principle of res judicata is not applicable to the decisions of income-tax proceedings. In assessment for a particular year is final and conclusive between the parties only in relation to that particular year. The decision gave in any particular assessment year is not binding on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the issue of Profit Level Indicator (PLI). After hearing both the sides, we are of the view that PLI are the ratios that measure relationship between profits with costs or resources. The use of a particular PLI depends on a number factors including, nature of activities of tested party, the reliability of available data with respect to uncontrolled comparables and the extent of which the PLI is likely to produce available measure of income. The PLI is selected with its appropriateness for the transaction under view. The PLI represent a logical financial relationship between the two components/variables. In the assessee's case, the assessee has applied return on capital employed as PLI in the transfer pricing documentation. Since the assessee is engaged in the manufacturing of automobile exhaust catalysts and making import of raw material from its AE, the return on capital employed is not an appropriate PLI. Further the operating profit as a percentage of total cost has to be the basis instead of operating profit as a percentage of the total cost minus raw material cost which the assessee claims. The assessee's explanation to justify the same by explaining the business mod....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rectly to the Maruti Udyog Limited but these are supplied to the third party vendors of Maruti Udyog Limited who in turn further sell to Maruti Udyog Limited. We would also like to note that the accounting entries made by the assessee in respect of the transactions entered into with AE show that the purchases of the raw material is a part of the turnover of the assessee. The material is processed and then sent to vendors of Maruti Udyog Limited and total sale value is taken as turnover of the assessee. These accounting entries do indicate the intention of the transacting parties. The accounting of the assessee shows that the cost of raw material is a value added cost and not as a pass through cost. Even the AE which are using the precious precision metal for manufacturing catalyst raw material and they are also accounting the precious precision metal in the same manner as the assessee is doing. AE also do not treat it as a pass through cost. All these facts show that the assessee's claim to treat the cost of purchase of precious metal as a pass through cost has no basis. In view of this, we are unable to agree with the assessee's contention that cost of purchase of precious....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs. 12.3.4 The transfer pricing provisions were brought on the Statute by the Finance Act, 2001 w.e.f. 01.04.2001. With a view to avoid hardship to the taxpayers in the initial years of implementation of these provisions, the Govt. of India, through a Press note issued by the Ministry of Finance (Department of Revenue) on 22.8.2001, expressed its intention of not making any adjustment if the price adopted by the taxpayer was upto 5% less or up to 5% more than the arm's length price determined by the AO. Immediately thereafter, the Board issued the Circular No. 12 dated 23.8.2001 specifying that the AO shall not make any adjustment to the price shown by the taxpayer if such price was up to 5% less or up to 5% more than the arm's length price determined by the AO and in such cases, the price declared by the taxpayer may be accepted. 12.3.5 In effect, the transfer price shown by the taxpayer was not to be disturbed if it was within +/-5% mean ALP range i.e. upto 5% less (i.e. in case of receipts) or up to 5% more (i.e. in case of outgoings) than the arm's length price determined by the AO based on the arithmetical mean of the prices. If the transfer price....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he available to a case where the variation between the transfer price shown by the taxpayer and the mean ALP determined by the TPO exceeds +/-5% of mean ALP. In case, the variation between the transfer price declared by the taxpayer and the mean ALP determined by the TPO exceeds +/-5% of mean ALP, then the arm's length price shall be taken to be mean ALP and not the adjusted mean ALP. Consequently, the transfer pricing adjustment would be made for the difference between the transfer price shown by the taxpayer and the mean ALP determined by the TPO. 12.3.9 Thus, it is clear from the above discussions, that the +/- 5 percent range was provided in Section 92C(2) in lieu of Circular 12 to avoid unnecessary hardship to companies where the adjustment from the arm's length price was with the range prescribed. However, such benefit cannot be considered to be a standard/universal deduction allowed in each and every case where the assessee exceeds the permissible limit and falls outside the arm's length range. If it is considered as a standard deduction, then it would be an incorrect interpretation of the law whose intention was in substance to provide relief t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch less (absolutely negligible and that too on certain issues, having divergent views/opinion), from High Courts/Supreme Courts, the CIT-A being an appellate authority in order to enable the development of wholesome law on a complex subject, in my understanding may respectfully deviate from understanding given by the Hon'ble ITAT. 12.3.13 For aforesaid proposition, I respectfully place reliance on the principle articulated in Special Bench ITAT ruling in the case of Gold Mine reported at 113 ITD 209: " ... 53. Referring to the case before the Rajasthan High Court in CIT v. Mewar Oil & General Mills Ltd. (supra), it is emphatically submitted by Mr. Vora that the aforesaid decision of the Rajasthan High Court, being the only High Court decision, directly on the point, it is well settled, is binding on the Bench, as has been held in CIT v. Akshay Kumar Jain 281 ITR 431(MP); SAE Head Office Monthly Paid Employees Welfare Trust: 271 ITR 159 (Del); CIT v. Sarabhai Sons Ltd. 143 ITR 473, 486 (Guj); and that the decision does not lose its binding force merely because Sub-section (6) of Section 801 has not been specifically reproduced/ incorporated in the judgment sinc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e intervener itself 'because they thought that "relevant provisions were not brought to the notice of the Court"'. 55. It is true that in the case of Director of Settlement, AP v. M.R. Apparao (supra) the Supreme Court observed in para -7 of its judgment that decision in the judgment of the Supreme Court cannot be assailed on the ground that certain aspects are not considered or the relevant provisions of the Act is not brought to the notice of the Court, but these observations were based on the decision of the Supreme Court in AIR 1970 in the case of Ballabhdas Mathuradas Lakhani (supra) wherein the Supreme Court, as stated above, has made observation that High Court could not ignore the decision of the Supreme Court because, "they thought" that the relevant provisions were not brought to the notice of the Court. There was actually no ignorance. We, however, find in paragraph-12 of the judgment of the Supreme Court's observation in Apparao' case as under: Mr. Rao then placed. reliance on yet another decision of this Court in the case of A-One Granites v. State of U.P. and Ors. [2001] 2 SCC 537 to which one of us (Pattanaik, J.) was a party. In tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t not exceeding five per cent of such arithmetical mean. The Ld. AR also submitted that the provisions of section 92C(2) recognizes the method of computing ALP mandate the variation of +/-5%. Ld. AR submitted that the variation of +/-5% is required to be allowed and the ALP is to be determined at 5% less than computed by the Assessing Officer. Ld. AR also pleaded that this position has been clearly explained by Explanatory Memorandum to the Finance Act, 2002, which states that a price which differs from the arithmetical mean up to +/-5% an amount not exceeding of +/-5% of such amount may be taken to the ALP at the option of the assessee. He pleaded that the benefit of +/-5% must be granted while computing the ALP. It is claimed that it should be allowed as standard deduction. 13. On the other hand, the learned DR relied on the orders of the authorities below. 14. We have heard both the sides on the issue. Various Benches of ITAT had decided the issue. In the case of DCIT v. Deloitte Consulting India Pvt. Ltd., the ITAT, Hyderabad Bench 'A' in ITA No.1082/Hyd./2010 has decided this issue as under :- 31. Next we deal with the issue with regard to the allowance ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... detail. He observed that in order to avoid hardships to the assessees in the initial years of implementation of the TP provisions, the Government of India, through a press note issued by the Ministry of Finance on 22nd August 2001 expressed its intention that no adjustment could be made if the transfer price adopted by the assessee was within the band of +/- 5% of the ALP determined by the Assessing Officer. CBDT had issued Circular No.12 on 23.8.2001 specifying that Assessing Officer shall not make any adjustment to the price shown by the assessee if it is within the +/-5% band, the effect of the Circular was that transfer price shown by the assessee was not to be disturbed if it was up to 5% less in case of receipt and up to 5% more in case of outgoing. The relaxation extended by this Circular was in substance brought on to the statute by the Finance Act 2002 by amending the proviso to sec. 92C(2) with retrospective effect from 1.4.2002. It provides a tolerance band. It also suggests that there will be no TP adjustment in cases of marginal variation up to +/- 5% but substantial variation would result in appropriate TP adjustment. Learned CIT(Appeals) has explained the meaning of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ning the ALP. He pointed out that in 2009, the proviso appended to section 92C has been amended but this amendment would be applicable prospectively, because the basis of determination of ALP in respect of international transaction get changed. This amendment effects imposing a new liability by taking the option away from the taxpayers. Thus, according to the learned counsel for the assessee, the amended proviso is not applicable. On the other hand, Learned DR has submitted that under the proviso no standard deduction has been provided to the assessee. 46. On due consideration of the facts and circumstances and perusal of the proviso introduced in 2002 as well as in 2009, we are of the view that this tolerance band provided in the proviso is not to be construed as a standard deduction. In the present appeals, learned TPO has adopted the arithmetic mean of several comparables for taking out a PLI which would be tested with the PLI of the assessee. If that arithmetic mean falls within the range of alleged tolerance band then there may not be any adjustment but if it exceeds then ultimate adjustment is not required to be computed after reducing the arithmetic mean by 5%. The ....