TaxTMI 
TaxTMI 
2013 (9) TMI 300
X X X X Extracts X X X X
X X X X Extracts X X X X
....e learned CIT(A) is erroneous and contrary to the provision of law and facts of the case and therefore requires to be modified. 2. The learned CIT(A) erred in rejecting Appellant's contention that the Assessing Officer (AO) failed to issue show cause notice and thus violated principles of natural justice." 2.1. At the outset, we have been informed that no specific issue has been raised in these grounds and these grounds are general grounds, therefore no particular legal adjudication is needed, hence, these are hereby dismissed. 3. Ground No.3 is reproduced below: "No intention of shifting profits The learned CIT(A) has erred in law and on facts by not appreciating the fact that as the Associated Enterprise has incurred losses, the Appellant has not incentive and intention to shift profits outside India." 3.1 The only contention of the assessee is that the Associate Enterprise (in short A.E.) Trand Group SPA has suffered losses, therefore, there was no intention of shifting of the profit outside India. We have examined this aspect carefully. The IT Act has prescribed Chapter X, incorporating therein, special provision relating to computation of income from Internat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lled price method" or "cost plus method". These methods are basically price based comparison therefore the comparability of a product was required to be made. Whereas in a situation when the Revenue as well as the assessee have chosen not to determine A.L.P. merely on the basis of the comparability of the product, then, it was not proper to erroneously reject the economic analysis of those comparable instances, is one of the major objection of the assessee. 4.1.1) This objection was further elaborated by Ld. A.R. Mr.Suhail Dutt that once the assessee has chosen the comparable cases, then it becomes the duty of TPO to find whether these cases are in fact comparable or not. Ld.A.R. has emphasized that the comparison can best be adjudged by FAR analysis. By placing reliance on an unreported decision of Mumbai Tribunal in the case of Bayer Material Science Pvt. Ltd. (ITA no. 7911/Mum/2010) he has pleaded that if the TPO was not satisfied as to the comparability of assessee's examples then he should have given a logical reason. Merely by stating that the product was not identical the TPO has summarily rejected the assessee's comparables, according Mr. Dutt. The allegation of ' cherry....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s said that locating identical transaction is not an easy task, hence ALP is to be determined by taking comparable transactions in comparable circumstances and making suitable adjustment. Accordingly assessee's case is that comparables selected are most close comparable transaction in comparable circumstances, in short, this is the submission of A.R. On that basis he has emphasized on 'functional similarity' rather than 'product similarity'. Ld. A.R. has tried to convey that where similar functions are undertaken then in an uncontrolled transaction that comparability analysis is sufficient and should be accepted, instead of chasing the uncontrolled transaction involving identical product. For instance, as per Mr. Butt, in the case of ALP of distributor of 'consumer goods' a similar economic characteristic is good enough for comparability study, instead of searching for a similar product. 4.1.3 ) Two more points has been raised by Mr. Butt. First , that the TPO must identify the infirmity in the selection of assessee's comparables, reliance placed on Philips Software Centre Pvt. Ltd. 119 TTJ 721 ( Bang.Trib.). Second, that TPO is authorized to carry fresh search only if there is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y be case in which an entity may be having comparable transactions, but may not be having relevant operations in an another year. In such a scenario, the entity can never be considered as comparable. In continuation of his argument Ld. D.R. has also cited OECD guidelines. Rather he has objected that the Ld.A.R. has quoted only truncated portion of the Guidelines, so the full text was also referred. 4.3) Having heard these submissions we have noted that undisputedly the assessee had given twelve comparable instances but it was noted that those instances were in respect of companies in the production of 'glass products'. As against that the assessee had manufactured 'glass mosaic'. Although it was informed that there was no major player in the glass mosaic sector but the Revenue Department has selected a comparable instance and bench marked the international transaction against Bisazza India Pvt. Ltd.( in short BIPL ). Although, it is correct that while adopting TNMM method only profit based comparison is advisable, but the start point for every comparison is the product which is the subject matter of international transaction. In our understanding, the logical procedure ought to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....les in A.Y. 2005-06 ( order dated 20.10.2008) or A.O. passing the order u/s 143(3) r.w.s. 92 CA(3) dated 19.11.2008 . Even otherwise all those facts are not before us so as to verify what filters were applied by the TPO in A.Y. 08-09. Rather the issue of consistency for this year is raised in reverse direction therefore not convincing, hence rejected. Moreover the mandatory requirement is to use contemporaneous documentation because such exampleobviously reflect alike/ akin economic condition. Having common economic sense it is easy to mention that the use of current financial year data is more relevant as well as appropriate. The economic data and financial transaction of that very period always has higher degree of comparability, but it must an uncontrolled transaction so as to arrive at the ALP. Ex- post analysis or documentation can be used as a supplement but can not substitute the initial contemporary documentation. In the case of ACIT vs. Birlasoft Ltd. 47 SOT 437 it is held that the expression 'shall' used in Rule 10B(4) makes it abundantly clear that the current year data of an uncontrolled transaction is to be used for the purpose of comparability, while examining interna....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nly after taking objections from the assessee, then include those selected comparables in the final list of comparables. According to the contentions, the voluntary selection of the comparable cases by the TPO is within his power but it is not his duty. However, if cases chosen by the assessee turn out to be incomparable, then the TPO will have to afford one more opportunity enabling the assessee to place the correct instances. In case of unsatisfactory data, the TPO has to undertake the exercise of selection of most suited comparable. None of the essential step was taken by the TPO/AO, Ld. A.R. has pleaded. 4.6 This plank of the argument has been duly considered by us. As far as the process out lined in the case of Bayer Materials Science Pvt. Ltd.( supra ) is concerned no one can have any dispute. But it's application should be in true spirit. In the given circumstances of this case the first onus of selection of comparables was discharged by the assessee. Thereafter it became the duty of the TPO to find whether those were in fact comparable in all respect or not. At that juncture the TPO had emptied the basket of the comparables of the assessee by mentioning that the first cr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y is in the identical business segment. Further it was also noted that the scale of operation was also similar. However, it was noted that BIPL is a Pvt. Ltd. Co. because of this reason the financial report of BIPL were not publicly available. However, vide a show cause the TPO had provided an opportunity to the assessee to inspect the P & L Account and the balance sheet of BIPL. During the assessment proceeding, the assessee had raised this legal objection that the comparable chosen for bench marking was incorrect because the data of the said company was not in public domain. It was submitted that the international transaction of the assessee company must not be bench marked against BIPL. However the director's report of BIPL for AY: 2005-06 was also provided to the assessee. The assessee had objected the selection of BIPL by assigning following reasons: "1. Any data which is publicly not available cannot be used for purpose of benchmarking the international transaction. 2. Any data which was not available with the assessee at the time of carrying out benchmarking analysis cannot be used by the transfer pricing officer. 3. There is lack of transparency and qualitative inf....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed. As per TPO since there was no other major player in glass mosaic sector in India therefore it was not possible to analyze the said industry except the selected one. According to TPO even the assessee had not provided the name of any other company in the manufacturing of glass mosaic in India. The TPO had mentioned that the search from data base like "Capitaline Plus" and "Prowess" have revealed that there were no comparable companies in the business of glass mosaic. 5.5. Even before learned CIT(A) this contention was raised however it was rejected mainly on the ground that as per Circular no.14 of 2001 issued by CBDT the availability of data is more important rather than availability of data in public domain. The TPO has shared the financial data of BIPL with the assessee, therefore, the compliance of the provisions of the Act were satisfied. Thus, according to ld. CIT(A) when there is no legislative provision which requires mandatory use of data in public domain for the purpose of bench marking then the issue raised by the assessee lacks legal sanctity. 5.6. Before us learned A.R. has argued that the information which can be legally obtained and reasonably available to a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction the TPO is empowered to utilize information gathered by him. The power of the TPO under Section 133(6) has been upheld in the case of Maruti Suzuki India Ltd. (2010-TII-01-DEL-TP). Ld. D.R. has also referred OECD guidelines and argued that the guidelines do not prohibit use of such data, but the only condition is that the same should be provided to the assessee for rebuttal. A decision of Kodiak Network India Pvt. Ltd. 51 SOT 191 (Bang) is cited for the legal proposition that the TPO is not required to inform the assessee about the process used by him for issuing the notices under Section 133(6) of the IT Act. The TPO is empowered to utilize the provisions of section 123 of IT Act to obtain such information. In this context, OECD guidelines (para no.3.36) is referred, relevant portion is reproduced below: "Tax administrators may have information available to them from examination of other taxpayers or from other sources of information that may not be disclosed to the taxpayer. However, it would be unfair to apply a transfer pricing method on the basis of such data unless the tax administration was able, within the limits of its domestic confidentiality requirements, to dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the preparation of TP documentation by the assessee) with the conditions being that the data should be of the same period in which the transaction has been entered into and the data should be "comparable". The D.R. has again referred (para 3.36 of OECD guidelines) and argued that the tax administrators have more information available to them from examination of other tax payers. However, it is suggested that it would be unfair to apply TNMM on the basis of such data unless it is disclosed within the limits of confidentiality requirement, to the tax payer. A tax payer has a right to defend its own position. He has thus pleaded that there is no qualification that such material must be available in public domain. The D.R. has thereupon discussed OECD guidelines 2010 which prescribes different kinds of approaches for the selection of potential comparable. One of such approach is called "additive approach" in which a search is carried out and a list of third party is prepared which are believed to carry out potential comparable transactions. However, as per OECD guidelines such "additive approach" has no restriction or requirement that the selection of companies should be made only from....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... data of a private limited company has been collected by the TPO on search, then whether the same can be used for the purpose of determining the ALP, if that data of a private limited company is duly communicated to the assessee. In few other cases which are relied upon by ld. D.R., namely, Maruti Suzuki India Ltd. (supra) and Kodak Networks India Pvt. Ltd. (supra), it is held that the information collected after issuing notices under Section 136(6) is required to be communicated to the assessee and the AO is under obligation to furnish the entire information to the assessee. In the present case, since the undisputed fact is that the assessee had in fact been given an opportunity to contradict the material gathered by the TPO therefore we are of the considered opinion that there was no infringement of the natural justice. 5.10 Both the sides have referred OECD guidelines (para 3.36). On careful reading we have noted that the tax administrator has more information available to them. But the requirement is that it would be unfair to apply those information against the assessee, unless that data/information is disclosed to the assessee so that the assessee can safeguard its legal i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of comparables. As per the argument of learned A.R., TNMM requires broader comparability. The TPO was required to first carry out the FAR analysis before concluding that BIPL was the comparable company for bench marking. According to ld. AR no such methodology was followed by the TPO. He argued that the TPO had adopted the method of "cherry picking". The TPO should have taken into account a range of results. In a number of decisions a view has been conveyed that a single company cannot be considered as a good comparable company for the purpose of bench marking, an argument has been raised before us. 6.2 There was a discussion of a decision of Haworth India Pvt. Ltd. 131 ITT 215 for the legal proposition that a single comparable company can be taken for benchmarking. On this the learned AR has drawn a distinction that in the said cited decision the single comparable as selected by the TPO was factually available in public domain. However, in the present case the case selected by the TPO was not in public domain. He has concluded that since the TPO had selected only one comparable therefore the said basis is required to be rejected. 6.3 From the side of the Revenue, learned DRs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elow: "7. Erroneous selection of BIPL as a comparable company 7.1 The learned CIT(A) has erred in upholding AO's contention that the product comparability is more important than functional comparability when comparison is made based on margins and method adopted for benchmarking is TNMM. 7.2 The learned CIT(A) has erred in law and on facts in disregarding difference in functions, asset and risks between the Appellant and BIPL as BIPL undertakes selling & marketing activities. 7.3 The learned CIT(A) also erred in law and on facts in disregarding certain facts in case of BIPL such: substantial controlled transactions, auditors qualification with respect to transfer pricing policy, absence of other qualitative information." 7.1 In these grounds, the assessee has raised a basic contention that the BIPL was also having "controlled transactions" hence should not have been chosen as a comparable. For the purpose of comparability, learned AR has argued that, as per the definition of uncontrolled transaction in the terms of Rule 10A(a) the comparability of an international transaction ought to have been done with an uncontrolled transaction. The comparison could have been jud....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing such comparable company which was having controlled transaction. 7.3 The next plank of argument is that in a situation when no external comparable is available then the TPO could have adopted "internal comparables". If the 'internal comparable' has direct, as also close relationship to the transaction, than it could have been preferred. The AR has therefore explained that the assessee had exported products to AE i.e, Trand Group and it had also made some local sales in the local market to the Poddar Group of the same product. The total export sales to the Associated enterprise i.e. Trand Group was Rs. 21,63,60,580/- and in the local market it was Rs.4,29,67,496/-. Learned AR has pointed out that the assessee had not considered sales to Poddar Group for the purpose of benchmarking. The reason to avoid was that the Poddar Group held 33% in the assessee company and hence the Poddar Group is also an Associate Enterprise. He has pleaded that if the condition of controlled transaction is ignored then sale to Poddar Group could have provided better comparability. 7.4 Learned AR has also quoted that the assessee had standard price list at which the goods were sold to Trand Group,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Ld. DR has argued that there are various judgments which subscribe a thought that it is very difficult and impossible to find an exactly comparable entity, therefore, it is held that certain criterion is required to be relaxed. Merely by stating that BIPL had controlled transaction, should not discarded the comparable, when specially all the vital features have been matched. The assessee has not demonstrated that by virtue of controlled transaction how the TNMM method is affected. 7.7 About the suggestion of Internal TNMM consideration, Ld. DR has pleaded that an export transaction cannot be compared with the local sales. 7.8 This ground and the A.R's arguments have three limbs. The first limb of argument is that since the BIPL has "controlled transaction" therefore it can not be selected for comparison. Indeed one of the fundamental of determining ALP is that the transaction ought to be uncontrolled transaction. In this connection the case laws cited namely Philips Software Centre Pvt. Ltd. 119 TTJ 721 (Bang. Trib.), Mentor Graphic 109 ITD 101 (Del Trib) are very relevant wherein it is opined that the company having transaction with any related party should not be taken as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsaction and then the profitability is to be computed. The A.O. is therefore directed to first ascertain the magnitude of the controlled transaction and then compute it's effect on the profit margin. For guidance, OECD Guidelines (para 2.78) is helpful, where it is suggested that an appropriate level of segmentation of taxpayer's financial data is needed when testing the net profit it earns from a controlled transaction. Then costs and revenue that are related to the controlled transaction are to be separated, where they materially affect comparability with uncontrolled transaction. Further para 2.79 of OECD says that when net profit indicators of an independent enterprise are used, the profits attributable to the transactions of the independent enterprise must not be distorted by controlled transactions of that enterprise hence to be excluded to the extent if needed. After requisite adjustments the A.O. can arrive at a figure of ALP. We therefore take a decision that for this purpose the matter is required to be re-examined by the TPO/ AO, so direct accordingly. 7.9 Next, the second limb of argument is in respect of application of 'Internal TNMM'. Some times it is find that int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ormed that the assessee company had neither taken the distribution responsibility nor engaged in the marketing of the product. The assessee is engaged only in manufacturing activity. A businessman performing marketing and sales promotion naturally expects higher returns. Apart from this, an another major factor in this regard has also been pointed out by learned AR that the assessee had sold its product to only two parties. There was no risk of recovery in the case of the assessee. On the other hand, the BIPL being controlling the marketing has the credit risk. In the case of Egain Communication Pvt. Ltd. 118 TTJ 354 (Pune) and in the case of Philips Softwares 119 TTJ 721 (Banglore) a ratio has been laid down that the functional comparability is a must to arrive at ALP. Therefore, we are of the view that the FAR analysis of BIPL is to be compared with FAR analysis of the assessee and the factors which are not matching are to be discarded and rest of the factors are required to be matched to a nearest possible figure. It is not out of place to mention here that once the product comparability is accepted therefore the rest of the analysis can be recalculated as per the guidelines dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....08 lacs while working out operating profit. 2. The Ld. Commissioner of Income Tax(A)-XI, Ahmedabad has erred in law and on facts in directing to determine the Arms Length Price by taking value of international transaction of sale of glass mosaic of at Rs.21,63,60,580/- instead of adjusted sale of Rs.25,93,28,049/- determined by the Transfer Pricing Officer (TPO). 9.1 In respect of ground no.1, learned CIT(A) has taken into account that the assessee had started production of new range of Glass Mosaic. It was contended that the trial batches were rejected due to certain defects. Substantial cost was incurred by the assessee. Learned CIT(A) has considered that argument and thereupon arrived at the conclusion that such expenditure was not normal cost and therefore required to be excluded while working out the operating profit. He has directed the AO to exclude the cost of Rs.62.08 lacs while working out the operating profit. Having heard the submissions of both the sides, we are of the view that this aspect can also be examined along with the other factors as demarcated while dealing ground no.7 (supra). Resultantly, we hereby hold that re-adjudication was required by the AO. Hen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the International Transaction had exceeded Rs.15,00,00,000/-. Due to the said reason, the matter was referred to the TPO. A reference under section 92CA (1) was made for A.Y. 2007-08 for the computation of arm's length price in relation to International Transaction. It was noted that the assessee is engaged in the manufacturing of MOSAIC glass. The manufacturing unit is situated at Kadi, Gujarat. The assessee is a subsidiary of Trand group SPA, Italy. It has also been noted that the said company had other five AEs in Malayasia, Hongkong and USA. As far as the assessee is concerned it was found that the international transaction with its AE was as under: "International Transactions- During the year, Pino Bisazza has entered into following international transactions. Description of transaction Amount (Rs.) Purchase of raw material, stores & spares 67,67,963 Sale of glass mosaics 25,00,28,577 13.1 The analysis of the aforementioned international transaction was analyzed in the light of the following points:- "(a) Selection of Tested Party: In the Transfer Pricing Documentation submitted by the assessee, the assessee has selected Pino Bisazza (Indian company....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ated glass, laminated glass, etc. Therefore, according to TPO, those products were completely different from the "glass mosaic" manufactured by the assessee. It was noted by the TPO that the glass mosaic is a luxury product. Because of its aesthetic characteristic the glass mosaic enjoys a premium in the market which is not available to regular glass product. The regular glass product like glass bottles, are the products of mass consumption. The AO has also examined the consumption of raw material and have noticed that the use of raw material, i.e., silka was only 2.9% of the total raw material. It was also commented that the assessee has used costly raw material to manufacture the glass mosaic. On that basis, the TPO had concluded that the other glass industry cannot be compared with the assessee company. 14.2 Thereafter, the TPO had also made out a case that the assessee company had charged very less margin on cost in respect of transaction with AE, than the transaction with non AE. The product wise comparison is summarized as under:- Sale to Non AE Sale to AE Product -V-A GP/Cost 129.57% GP/Cost 3.67% Product-V-B GP/Cost 228.47% GP/Cost 18.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... had selected transaction net margin method (TNMM) as the "most appropriate method" for the purpose of bench marking its transaction. Certain common objections have also been raised, such as that the change in the ALP was ultravires on the part of the TPO and that the price charged in an international transaction has not been determined as per the prescribed rules and that the documents relating to the said international transaction was correctly maintained by the assessee. It was also contested that the TPO had merely stated that the glass and mosaic glass were different in technical and aesthetic characteristic therefore could not be compared. It was contested that the TPO was required to demonstrate that the clauses of Section 92C(3) were attracted before proceeding to re-compute arm's length price. For this legal proposition reliance was placed on following three decision:- "(a) Philips Software Centre Private Limited Vs. CIT 119 TTJ 721 (Bang) (b) Mentor Graphics Noida P. Ltd. V. DCIT 109 ITD 101/ 112 TTJ 408 (Del) (c) ACIT vs. MSS India Pvt. Ltd. (2009-TIOL-416-ITAT-PUNE)" 14.6 According to the assessee, the comparables selected for bench marking the International....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld be Rs.32,46,95,742/- as compared to the transaction value as per books of Rs.25,00,28,577/- the total upward adjustment was thus made of Rs.7,46,67,165/-. This is the cause of dispute in this appeal. 14.10. Although the recommendation of the Dispute Resolution Panel (DRP), Ahmedabad dated 27.9.2011 are not subject to litigation before us, but for the sake of completeness as also to examine the facts of the case we have perused the directions of DRP. It was noted that the assessee is manufacturing glass mosaic at Kardi, Gujarat. It was also noted that the assessee is a subsidiary company Trand Group Spa, Italy. Sales of glass mosaics were made to the said company. The assessee had selected itself as a tested party and applied TNMM method as the most appropriate method. The assessee had furnished certain comparables but those were in respect of products such as glass bottles, glass fibres, insulated glass, etc. On the other hand, the assessee manufactured a luxury product, i.e. Glass mosaic. Because of the aesthetic characteristic the glass mosaic was not compared with the normal glass products. The TPO had compared the product of the assessee with M/s. Italia Glass Pvt. Ltd. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by disregarding provisions of Rule 10B(2) of the Income-Tax Rules, 1962(the Rules). 5.2 The learned AO/TPO and or the DRP has erred in law and on facts in selecting only on comparable company while applying TNMM in case of the Appellant as a single comparable does not appropriately reflect the industry benchmark. 5.3 The learned AO/TPO and or the DRP has erred in using data obtained from section 133(6) of the Act route which is not available in the public domain to the Appellant while undertaking benchmarking analysis in case of the appellant. 5.4 Without prejudice, the learned AO/TPO and or the DRP erred in not granting adjustments for differences in the functional and risk profile of the Appellant vis-à-vis comparable company that performs functions and assumes risks that are significantly different than that of the Appellant disregarding Rule 10B(1)(e)(iii) and 10B(3) of the Rules. 6. Without prejudice, adjustment to be mae with reference to international transaction Without prejudice, the learned AO/TPO and/or the DRP erred in making reference pricing adjustment considering sales to AEs as well as domestic sales instead of restricting adjustment with refer....