TaxTMI 
TaxTMI 
2013 (8) TMI 75
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....rmeloh, was a Director of the assessee company. 3. The Assessee company out of abundant caution complied with provisions of S.92E in obtaining and filing Form 3CEB from the Chartered Accountant against export sales and purchase of raw materials carried out with M/s O&S Metal Import GMBH, Germany. 4. The return of the assessee was processed u/s 143(1) and consequently a notice u/s 143(2) dated 18.10.2004 was served upon the assessee on 27.10.2004. During the course of the assessement, the Assessing Officer made a reference u/s 92CA(1) of the IT Act to the ACIT(TP), Hyderabad. The TPO had rejected the assessee's TP methods and applied TNMM on the export transactions of the assessee and had arrived at an ALP adjustment of Rs.1,82,56,357/- to the sales of the assessee to M/s O&S Metal Import GMBH, Germany 5. Aggrieved the assessee company filed an appeal before CIT(A)-III. The Learned CIT(A)-III in his order dealt only with the question on whether the M/s O&S Metallimport GMBH, Germany was an AE of the assessee company and made the following observations while concluding that M/s O&S Metal Import GMBH, Germany was NOT an AE : "2.5. I have duly considered the submissions of ....
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....r management in the appellant company. Hence, Clause (i) of Sec. 92A(L) has no application to the facts of this case. 2.9. Clause (m) of section 92A(2) is applicable only where existed any relationship of mutual interest between two enterprises, as prescribed under the Act or by the Board. No such relationship of mutual interest has been prescribed by the Board till date. Hence, TPO has no authority to invoke the provisions of clause (m) of Sec. 92A(2) in the case of the appellant". 2.10. In view of the above discussion, I am of the opinion that the appellant company and M/s.O&S were not the associated enterprises in terms of Sec.92A of the Act. Hence, the provisions of transfer pricing in Chapter X of the Act cannot be invoked at the threshold. The appellant cannot be penalized for making a mistake in filing the statutory report in Form No.3CEB. Whether the mistake of ignorance of law was on the part of the auditors of the company or by any executive of the company, is immaterial. It is a trite law that any non-taxable income cannot be brought to tax even if it is offered for tax by the assessee himself. It is the duty of the Assessing Officer to levy the correct tax as per ....
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....ation as an Executive Director in case of the Alumeco Company. In the list of Directors as on 31103/2005, furnished by the company, signed by its Secretary, filed with the return, all those six persons including Mr. WolfgangOrmeloh are shown as Directors, without any specific designation. Under the circumstance, it shows that all those directors have role in the functioning and in the affairs of the company during the previous year. Further, when the assessee 'company has admitted that Mr. WolfgangOrmeloh was a full time director in their case and moreover they have not denied such finding given by the TPO that Mr. W olfgangOrmeloh was looking after the purchases of raw material from abroad and also was looking after the sales made by the company in European market, it clearly shows that the said Mr. Wolfgangormeloh was acting as an Executive Director in the case of above company. Under the circumstance and having regard to the provisions of such clause (e), in my view, the said O&M Metal Import GMBH, has to be treated as an AE vis-a-vis the above company, in this case. 6. As may be seen, in that clause there is no reference to entire goods manufactured. Thus, it cannot be said ....
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....the role of the said foreign company in influencing the prices and other conditions during the course of such international transactions. Under aforesaid circumstances, therefore, both the TPO & Af) were justified in treating the said foreign company O&M Metal Import, GMBH, Germany as an AE of the Alumeco India Extrusion Ltd. 7. Nowhere mentioned that prescribed authority is CBDT or ACT. It is wrong interpretation by the CIT or AR that relationship of mutual interest has been prescribed by the Board till date. 9. The Learned AR submitted that there was no AE relationship between the assessee company and M/s O&S Metal Import GMBH, Germany as per Section 92A(2) and hence there can be no application of TP provisions in the assesse's case. Without prejudice to this fact, the Learned AR also submitted in detail to the effect that the TP methods used by the assessee company for both import (CUP) and export (CPM) were correct and showed clearly that the assessee's transactions were at arms'-length. The learned AR relied on the decision of ITAT Mumbai 'E' Bench in the case of Sanchez Capital Services (P) Ltd. vs. ITO,3(3)(2) (2012) 26 Taxmann.com 61 (Mum.). 10. We have heard both ....
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.... Executive Director and decide appropriately whether section 92CA(2)(e) applies in the instant case. 16. We also note that as held in Sanchez Capital Services vs. ITO (26 Taxmann.com 61 Mumbai ITAT) the mere filing of Form 3CEB by the assessee does not automatically imply that S.92A conditions were satisfied and there is an AE relationship. Rather, the specific facts and circumstances of the case have to be analysed in order to conclude whether or not an AE relationship actually exists. 17. The Revenue's appeals being ITA Nos. 613 & 614/Hyd/09 for both the assessment year's 2003-04 and 2004-05 are allowed for statistical purposes. ITA No. 845/Hyd/11: Assessee appeal - A.Y. 2005-2006 18. With respect to the assessee's appeal there are 6 Grounds. Grounds 1 and 6 of the assessee's appeal are general in nature and do not require adjudication. 19. Grounds 2 & 3 : 2. The learned CIT(A) is not justified in law in coming to the conclusion that there is Associated Enterprise (AE) relationship on the assumption that Mr. Walfgang Ormeloh is a full time director and was acting like an Executive Director in the appellant company which is contrary to the facts. Learned CIT(A) o....
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....cutive Director and decide appropriately whether section 92CA(2)(e) applies in the instant case". 23. The Learned CIT(A) has also held that S.92A(2)(i) was satisfied because the said sub-section does not refer to the entire goods manufactured and that the given the assessee company purchased a substantial quantity of raw material from the German company as well as exported a substantial quantity of finished goods to the German company it clearly shows there was a mutual beneficial interest and hence this clause was satisfied. The Learned CIT(A) also pointed out that S.92A(2) starts with the phrase "For the purposes of sub-section(1), two enterprises shall be deemed to be associated enterprises If, at any time during the previous year" andhence if the clauses under S.92A(2) are satisfied at some point during the year it is enough to create a deemed AE relationship. Section 92A(2)(i) states that "the goods or articles manufactured or processed by one enterprise are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise". The assessee has to establish that the assesse....
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....PO. 6. Any other ground that may be urged at the time of hearing." 28. In the assessee's appeal in ITA No. 845/H/11, we have remitted the issue to the file of the AO to determine as to the existence of AE relationship. The AO has been directed to verify whether section 92A(2)(e) and 92A(2)(i) are attracted and thereafter decide the issue. Hence, this revenue appeal is also set aside to the AO to decide after adjudicating the assessee's appeal. 29. Hence this appeal of the Revenue being ITA No. 941/Hyd/11 is allowed for statistical purposes. ITA.No.1475/Hyd/2010 - Assessee's Appeal - A.Y. 2006-07 30. There are 6 grounds before us which are as under. Grounds 1 and 6 are general in nature and do not need adjudication. "1. The Ld. Assistant Commissioner of Income Tax (ACIT) is erroneous in law and on the facts of the case. 2. The Ld. ACIT is not justified in law in rejecting the Most Appropriate Method (MAM) adopted by the assessee- company as Cost Plus Method (CPM) for determining the Arm's Length Price in respect of international transactions of export sales of Rs.50,17,96,267/-. 3. The Ld. ACIT is not justified in adopting transaction net margin method (TNMM)....
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.... from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determination of arm's length price in respect of international transactions undertaken with the associated enterprise. In the light of the facts of the instant case as discussed above, it was to be held that the TPO had no mandate to have recourse to external comparables when, in the instant case, internal comparables were available, which could be applied for determining the arm's length price of international transactions with AEs. Therefore, the Assessing Officer/TPO was directed to determine arm's length price of international transactions with AEs by making internal comparison of the net margin earned by the assessee from the international transactions with associated enterprises and the profit earned by the assessee from the international transactions with unrelated parties." 35. There is also merit to the assessee's argument that it is a sick company in BIFR and hence has economic conditions and business circumstances which are unique to it. It would seem erroneous to compare such a loss-making comp....
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....nstant case, we do not find merit in applying external TNMM in the instant case. Hence this ground is allowed in favour of the assessee. 41. As regards Ground 4, this ground does not need adjudication as the external TNMM application is held incorrect and internal CPM is to be adopted in the assessee's case. 42. As regards Ground 5, we direct the AO to compute and arrive at the total income after providing appropriate adjustment of brought forward losses. 43. In the result, the appeal being ITA No. 1475/Hyd/10 is partly allowed for statistical purposes. ITA.No.2070/Hyd/2011 - Assessee's Appeal - A.Y. 2007- 2008 44. There are 8 grounds before us which are as under. Grounds 1 and 8 are general in nature and do not need adjudication. "1. The Learned Asst. Commissioner of income Tax (A.O.) is erroneous in law and on the facts of the case. 2. The Ld. A.O. is not justified in law in rejecting the Most Appropriate Method (MAM) adopted by the assessee- company as Cost Plus Method (CPM) for determining the Arm's Length Price in respect of international transactions of export sales of Rs.87,18,91,410/-. The Ld. A.O. ought to have accepted CPM adopted by the appellant as ....
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....tors which are enumerated therein" The apex court has clearly given primacy to rule 10C (2) for purposes of selecting the most appropriate method, which is wider in scope than the rule 10B (2). The Hon'ble court further observed as under: " ..... the methods quoted above namely CUP, RPM, CPM, PSM, & TNMM are mentioned in Sec. 92C read with rule 10B. The most appropriate method has to be applied for computation of the arm's length price. It will depend on facts and circumstances of each particular international transaction " The Supreme Court has also held TNMM to be the most appropriate method in the case of Service PE- "in our view apart from the orders passed by the TPO/AO the said method (TNMM) is the appropriate method in the case of service PE as the TNMM apportions the total operating profit arising from the transactions on the basis of sales, costs, assets etc" Hon 'ble A-Bench of Hyderabad also considers TNMM is mot appropriate method in the following decisions. 1. Qual core Logic Ltd" Hyderabad in ITA No. 893/Hyd/2011 for the Asst. Year 2005-06 date of pronouncement 31/05/2012 2. M/s. Four Soft Ltd. Hyderabad in ITA No. 1495/Hyd/2010 for the Asst. Year....
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....uld be applied for determining the arm's length price of international transactions with AEs. Therefore, the Assessing Officer/TPO was directed to determine arm's length price of international transactions with AEs by making internal comparison of the net margin earned by the assessee from the international transactions with associated enterprises and the profit earned by the assessee from the international transactions with unrelated parties." 49. We heard both parties. We find that internal CPM is justified and appropriate in arriving at the proper ALP than applying external TNMM and comparing it with different transactions of other companies. 50. We also find merit in the assessee's argument that it is a sick company in BIFR and hence has economic conditions and business circumstances which are unique to it. 51. The assessee pleaded that companies with less forex earnings should be removed and also brought to our notice the following decisions:- (1) DCIT, Mumbai vs. M/s. Indo American Jewellery Ltd. Mumbai (2010) 41 SOT 1 (Mum.) (2) M/s. CRM SDervices India (P) Ltd. (2011) TII-86-ITAT- Del-TP (3) Deloitte Consulting India Pvt. Ltd. vs. DCIT, Circle 1(2) ITA.108....
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....ities needs to be re-examined in detail. We therefore set aside the order to the AO/TPO to compute the ALP of the assessee's transactions using internal CPM as submitted by the assessee and to calculate the appropriate allocation of direct and indirect costs of the assessee to its domestic, export and job-work activities. Hence this ground is allowed in assessee's favour for statistical purposes 57. As regards Ground 3, we have provided detailed reasoning in Ground 2 as to why internal CPM is the Most Appropriate Method and not external TNMM. Hence this ground is held in favour of the assessee. 58. As regards Ground 4, this ground does not need adjudication as the external TNMM application is held incorrect and internal CPM is to be adopted in the assessee's case. 59. As regards Ground 5, We have already adjudicated this issue in Grounds 2 and 3 and hence this ground is allowed in favour of the assessee. 60. As regards Ground 6, it is clear that any adjustments during the computation of the arm's-length price should be restricted only to the international transactions and not to the entire turnover of the assessee. It is illogical to make additions to local transactions....