TaxTMI 
TaxTMI 
2013 (9) TMI 632
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....ds of appeal : "1. On the facts and in the circumstances of the case, the Assessing Officer/Transfer Pricing Officer erred in making an adjustment of Rs.13,83,86,187 by holding that the international transactions of import of raw material, tools and consumables, stores and spares do not satisfy the arm's length principle envisaged under the Act and in doing so he erred in (a) conducting a fresh comparability analysis and including companies in the comparability analysis which do not satisfy the test of comparability ; (b) not applying multiple year/prior year data for comparable companies while determining the arm's length price ; (c) using data as at the time of the assessment proceedings, instead of that available for comparable companies as on the date of preparing the transfer pricing documentation while determining the arm's length price ; (d) concluding that the amended proviso to section 92C(2) of the Act under the Finance (No. 2) Act, 2009, would be applicable for the assessment year 2006-07 and in not appreciating that even if the arm's length price falls outside the 5 per cent. tolerance band the adjustment would have to be reckoned after allowing the benefit of A&nt....
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....ficer/Transfer Pricing Officer erred in making an adjustment of Rs.13,83,86,187 by holding that the international transactions of import of raw material, tools and consumables, stores and spares do not satisfy the arm's length principle envisaged under the Act and in doing so he erred in (a) conducting a trash comparability analysis and including companies in the comparability analysis which do not satisfy the test of comparability ; (b) not applying multiple-year/prior-year data for comparable companies while determining the arm's length price ; (c) using data as at the time of the assessment proceedings, instead of that available for comparable companies as on the date of preparing the transfer pricing documentation while determining the arm's length price ; 1. Comparability analysis (a) Comparability analysis performed by the appellant not considered by the learned Panel : The appellant has provided a detailed search process (refer page 29 onwards in the appeal memo) and had presented a list of comparable companies which were summarily rejected by the learned Panel without providing proper and cogent reasons and have issued a non-speaking order. Moreover, the learned Pane....
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.... 120% 100% 80% Value added expenses 60% 40% 20% Raw material cost 0% Iljin Automotive P. Ltd. Comparables selected by TPO (iii) The appellant undertakes more of a routine assembly function and hence cannot be compared to companies which are involved in fullfledged manufacturing operations. (iv) Following the above principle the appellant humbly submits that all the comparables selected by the learned Transfer Pricing Officer ought to be rejected as provided below. List of comparables selected by the learned Transfer Pricing Officer and the RM/TC of the comparables: 1. CPEC Ltd. 43.78% 2. Fairfield Atlas Ltd. 50.61% 3. Flender ....
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....9% UT Ltd. 57.67% 42.33% XLO India 60.37% 39.63% ZF Steering 66.08% 33.92% Average 54.69% 45.31% Furthermore, when we draw a correlation between the raw material cost component and the operating margin on sales of the learned Transfer Pricing Officer's set of comparable companies, we would understand that the correlation is fundamentally weak (-0.106). Economic understanding and the cost accounting equation suggests that there is an inverse relationship between the cost of raw materials and the operating profit of a company. Thus, the relationship is bound to be negative in number. According to the principles of statistical inference, a correlation coefficient ranges between 1.0 to + 1.0, with -1 signifying a strong inverse relationship and +1 suggesting a strong direct relationship. Given these principles, a correlation coefficient of -0.106 indicates a weak inverse relationship, enabling us to understand that the movement in RM/ TC and OP/sales are not strongly related. The analysis has been appended below in figure 1 and table 2 for your reference. Table 3 : Correlation between RM/TC and OP/sales for the Transfer Pricing Officer's comparable companies Name of the....
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....ion between the RM/TC and OP/sales of the assemblers suggests a strongly inverse relationship-with a correlation coefficient of -0.845. Table 4 : Cost structure of the appellant's comparables companies Name of the company RM/TC OP/sales Automotive Stampings and Assemblies Ltd. 83.20% 16.80% Axles India Ltd. 81.44% 18.56% Triton Valves Ltd. 82.45% 17.55% Vybra Automet Ltd. 77.91% 22.09% Wheels India Ltd. 80.47% 19.53% Lumax Auto Technology 86.91% 13.09% Table 5 : Correlation between RM/TC and OP/sales for the appellant's comparable companies Name of the company RM/TC OP/sales Automotive Stampings and Assemblies Ltd. 83.20% 2.07% Axles India Ltd. 81.44% 5.18% Triton Valves Ltd. 82.45% 4.52% Vybra Automet Ltd. 77.91% 9.88% Wheels India Ltd. 80.47% 4.59% Lumax Auto Technology 86.91% 2.50% Correlation coefficient -0.84505 Figure 3 : Scatter plot including correlation between RM/TC and OP/ sales of the appellant's comparables companies OP/sales 12.00% 10.00% ? 8.00% &nbs....
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....e rule 10B(2)(a) of the Rules which state that : "For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely : (a) the specific characteristics of the property transferred or services provided in either transaction ; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective patties to the transactions ; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." Also rule 10C(2)(d) states that "In selecting the most appropriate method as specified in sub-rule (1....
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....a India P. Ltd. v. Deputy CIT I. T. A. 6107/Mum/2009 (ii) Asst. CIT v. NIT Ltd. I. T. A. No. 1844/Del/2009 (iii) Vedaris Technology P. Ltd. v. Asst. CIT [2010] 131 TTJ (Delhi) 309, I. T. A. No. 4372 (Del)/2009 (iv) Zydus Atlanta Healthcare P. Ltd. v. ITO I. T. A. No. 3311 and 3312/Mum/2008 (v) Asst. CIT v. Dufon Laboratories 2010-TII-26-ITAT-MUM-TP (vi) Deputy CIT v. Indo-American Jewellery Ltd. [2012] 15 ITR (Trib) 158 (Mumbai), I. T. A. No. 6194/Mum/2008 (vii) Asst. CIT v. Fiat India P. Ltd. 2010-TII-30-ITAT-MUM-TP (viii) Agnity India Technologies Ltd. v. ITO I. T. A. No. 3856(Del)/ 2010 (ix) Deputy CIT v. Cheil Communications India P. Ltd. [2011] 137 TTJ (Delhi) 539, I. T. A. No. 712/Del/2010. The learned Transfer Pricing Officer has not applied any filters and has adopted an arbitrary selection of comparable companies. The learned Transfer Pricing Officer has used only 5-6 of the assessee's products to compare the diverse range of 199 products in the assessee's product portfolio. The appellant would like to state that the number of keywords used in the search process to identify comparable companies is inadequate as it does not capture all the companies which are comp....
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....) 17.64% Z F Steering Gear (India) Ltd. 18.34% Contradicting approach of Transfer Pricing Officer-Characterisation versus Comparison The learned Transfer Pricing Officer (page 7 paragraph 12.11 in her order, page 52 of the appeal memo) has pointed out that, "the assessee supplying to all OEMs as a captive supplier allows the assessee to have an assured return for all the years. Whereas in the case of this comparable the returns will be in accordance with the market demand. When the market demand goes down the profit margin of the comparable company also goes down. The learned Transfer Pricing Officer has characterised the appellant as a captive but has illogically compared the appellant with entrepreneurial companies who are facing market risks. The profitability of these comparables increase/decrease with the market demand and are dependent on market forces. From the above the learned Transfer Pricing Officer herself contradicts her stand since in one hand she characterises the tested party as a "captive supplier" and on the other hand has compared the same with entrepreneurial companies. This clearly brings out that the entire search process followed by the Transfer Pricin....
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....y-wide basis if the company engages in a variety of different controlled transactions that cannot be appropriately compared on an aggregate basis with those of an independent enterprise." From the harmonious reading of the above it can be concluded that the learned Transfer Pricing Officer grossly erred in law and in facts to aggregate the uncontrolled transactions with the controlled transactions for computation of the upward adjustment. The above view is also supported by the Tribunal judgments: (i) Mascon Global Ltd. v. Deputy CIT I. T. A. No. 2205/Mds/2010 (ii) Asst. CIT v. Wockhardt Ltd. 6 Taxmaan.com 78 Mum-ITAT (2010-TII-46-ITAT-MUM-TP), (iii) UCB India P. Ltd. v. Asst. CIT [2009] 317 ITR (AT) 292 (Mumbai) (2009-TII-02-ITAT-MUM-TP) (iv) IL Jin Electronics (I) P. Ltd. v. Asst. CIT [2010] 36 SOT 227 (Delhi) The relevant computation of proportionate adjustment as per the Transfer Pricing Officer is as below : Particulars Transfer price % of total cost Sales 229,34,91,028 NA Total cost 221,01,45,898 100% Unrelated party costs 121,66,57,583 53.62% Related party costs 99,34,86,315 46.38% Operating profit (OP) 8,33,45,130 OP/sales 3.63% TP....
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....m's length price adjustments: A. Background Iljin Automotive P. Ltd. ('Iljin India' or 'the assessee' or 'the company'), was established in 1997, as a subsidiary of the Dong-A Automotive Co Ltd., Korea. Iljin Global is a leading manufacturer of wheel bearings supplying to car giants like Hyundai Motors, Chrysler, Ford USA, GM and others. It has six plants all over the world and is one among the top seven bearing manufacturing companies. The assessee is engaged in the assembly of automotive components such as ball joints, wheel bearings, sub-comer modules, sub-axle assembly, different case assembly, engine mounting brackets, fly-wheel assembly, steering linkages, drum. door hinges and checkers, transmission gears. The automobile components are supplied to Hyundai Motor India Ltd. The assessee had filed its return of income for the captioned assessment year on October 29, 2007, declaring total income of INR 71,241,517. B. Order of the learned Assessing Officer and the adjustment made with respect to corporate tax : The learned Assessing Officer in the draft assessment order made the following disallowances and recomputed the taxable income in the following manner : Sr. No. P....
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....msung Dong, KangnamKu, Seoul, Korea-INR 179,992,178. For the above transactions, the assessee had selected comparable uncontrolled price (CUP) method as the most appropriate method for establishing the arm's length nature of its international transactions with associated enterprises ('AE'). As certified by Iljin Global, they have a standard price list for all the supplies to India, which gives the cost, insurance and freight value of the products in US dollars. Iljin Global has also confirmed that any person in India can order any item mentioned in their price list at the unit price mentioned against the respective items in the price list. In view of the above, the price charged by Iljin Global to Iljin India is the same as the list price offered by Iljin Global to any other customer in India. Further, the Commissioner of Customs, Chennai undertook a detailed study to find out the reasonableness of the import price of Iljin India. In their order they have come to the conclusion that the relationship between Iljin India and Iljin Global has not influenced the invoice value of the imports of Iljin India from Iljin Global and that the invoice value should be accepted as the transac....
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....Officer/learned Transfer Pricing Officer erred in law and in facts in rejecting the assessee's documentation and conducting a fresh comparability analysis. Further, the analysis is incorrect since it does not follow any quantitative and qualitative steps. For details refer page 9. (b) The learned Assessing Officer/ learned Transfer Pricing Officer erred in law and in facts in including companies in the comparability analysis which do not satisfy the test of comparability (for details refer page 13). (c) The learned Assessing Officer/learned Transfer Pricing Officer erred in law and in facts in not applying multiple year/prior year data for comparable companies while determining the arm's length price. Further, the learned Assessing Officer/learned Transfer Pricing Officer erred in using data as at the time of the assessment proceedings, instead of that available for comparable companies as on the date of preparing the transfer pricing documentation while determining the arm's length price. For details refer page 24. 2. The learned Assessing Officer/learned Transfer Pricing Officer erred in law and in facts by rejecting the valuation of import of components conducted by the custo....
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....n full-fledged manufacturing operations, who own patents and conduct extensive research and development. It is humbly submitted herein that the search conducted by the learned Transfer Pricing Officer has resulted in selection of all companies who are full fledged manufacturer. Ideally an appropriate search/benchmarking process should commence with a broad base of companies from where the assessee can identify potentially comparable independent companies. Hence, a typical search process in Prowess/Capitaline Plus should ideally begin with considering the 'economic activity'. This would enable to obtain a broader base of companies which can be further reviewed to obtain a smaller set of potentially comparable independent companies. The same has been considered in a fresh benchmarking analysis undertaken by the assessee which is discussed in page 17. II. Inadequate keywords were used The learned Transfer Pricing Officer had used the following keywords 'gears, flying ring gears, steering gears and front axle assembly' vide paragraph 12.9 of page 6 of the Transfer Pricing Officer's order. The assessee would like to state that the number of keywords used in the search process to i....
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....whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." Also rule 10C(2)(d) states that : "In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account namely : (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions . . ." Reference to OECD Guidelines : Further, the OECD provides the following support : Paragraph 3.43 of page 120 : 'In practice, both quantitative and qualitative criteria are used to include or reject potential comparables. Examples of qualitative criteria are found in pr....
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....by the learned Transfer Pricing Officer. Hence the order should be rendered null and void. Ground 1(b) The learned Assessing Officer/learned Transfer Pricing Officer erred in law and in facts in including companies in the comparability analysis which do not satisfy the test of comparability. 1(b)(i) Statement of facts as submitted to the learned Transfer Pricing Officer/Assessing Officer Kindly refer to the facts mentioned earlier in point (c) of page 4 supra. 1(b)(ii) Facts/transfer pricing approach, modified by the learned Transfer Pricing Officer/Assessing Officer In conducting the search the learned Transfer Pricing Officer has selected the comparable companies which do not satisfy the test of comparability. 1(b)(iii) Do you wholly agree with the modifications in the facts by the Assessing Officer ? if not, give reasons pointing the specific fact or facts with which you do not agree along with the reasons and documentary evidence, if any. The assessee disagrees with the comparables selected by the learned Transfer Pricing Officer. As mentioned earlier the learned Transfer Pricing Officer has not considered quantitative and qualitative filters/analysis and hence the benc....
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....Rane (Madras) Ltd. 59.34% Rane TRW Steering Systems Ltd. 56.30% Shanthi Gears Ltd. 48.31% U T Ltd. 57.60% XL O India Ltd. 60.37% Z F Steering Gear (India) Ltd. 66.00% (ii) Related party transactions: The related party disclosure as applicable to the Indian companies is governed by the Accounting Standard 18 (AS 18) and as prescribed by the Institute of Chartered Accountants of India (ICAI). The accounting standard defines the applicability to the companies and provides the broad framework of disclosures in terms of related parties. The standard applies only to the following companies : Enterprises whose equity or debt securities are listed in India or outside India. All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds INR 50 crore. Turnover does not include 'other income'. Based on the above, the learned Transfer Pricing Officer would note that there is a limitation in applying this filter because all the companies do not disclose the related party details as they do not qualify for the above conditions. Taking a pragmatic view, the a....
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....d. (Merged) 17.64% Z F Steering Gear (India) Ltd. 18.34% (iii) Net fixed assets (NFA)/sales : The assessee being a routine assembler is less capital intensive when compared to manufacturers who are more capital intensive. The NFA/sales of the assessee is 20 per cent. (456,445,343 / 2,293,491,028). Therefore, comparable companies having NFA/sales greater than 30 per cent. were rejected to exclude all companies which are highly capital intensive as they employ high level of fixed assets to churn out equal volume of sales compared to the assessee. Hence, the following comparable companies selected by the learned Transfer Pricing Officer should be rejected based on NFA / sales filter. Shanthi Gears Ltd. 39.07% Fairfield Atlas Ltd. 79.17% (iv) Net intangible assets/sales: The assessee being a routine assembler does not own any intangibles. Therefore, comparable companies owning intangibles and having net intangible assets / sales greater than one were rejected. Hence, the following comparable companies selected by the learned Transfer Pricing Officer should be rejected based on the above filter. Fairfield Atlas Ltd. 2.05% Flender Ltd. (Merged) 21.22% Effect of ....
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....ch process by applying the necessary and appropriate filters and qualitative reviews to determine the arm's length pricing of international transactions with its associated enterprise. The details are as follows : (i) Search from Prowess To identify comparables which performed similar functions as that of Iljin India, the assessee started by using the industry classification (economic activity) query module as given in Prowess and selected companies classified under the manufacturing industry with a sub-classification of 'transport equipment'. The assessee further categorized the 'transport equipment' segment and selected the following categories, namely, automobile ancillaries "Drive transmission and steering parts" and "suspension and braking parts" "Drive transmission and steering parts" "Drive transmission and steering parts" and "other parts" "Engine parts" and "equipment" "Electrical parts" "Electrical parts" and "equipment" "Electrical parts" and "equipment" and "body parts" "Engine parts" "Engine parts" and "drive transmission and steering parts" "Engine parts" and "electrical parts" "Engine parts" and "body parts" "Engine parts" and "other parts" "Equipment"....
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....sion and steering parts", "engine parts, drive transmission and steering parts and suspension and braking parts", "engine parts, drive transmission and steering parts and suspension and other parts", drive transmission and steering parts and equipment" "suspension and braking parts" and "engine parts", "equipment" and "body parts" and "other parts" Companies that are not owned by the Government and co-operative enterprises were selected as such the economic model of companies is not the same as private sector companies 118 Companies with sales manufacturing as a percentage of sales greater than 90 per cent. were accepted in order to select companies that were primarily engaged in manufacturing activity. 113 Companies with a positive net worth were included to exclude companies whose net worth had eroded 111 Companies that had average sales of less than INR 1 crore during the time period, indicating that the companies are starting up operations, were rejected. Moreover, the reliability of the financial data for companies with low levels of sales can be significantly reduced because the same persons are often both major shareholders and key employees, ....
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....ssified these additional companies into 23 broad industry classifications as given in Prowess. This process also included evaluation of NIC information provided by CapitalinePlus for these companies. Thereafter, to initiate the search the assessee selected companies operating in manufacturing industry with a sub-classification of transport equipment which resulted in a total of 17 companies. To ensure comparability the assessee quantitatively screened these companies by comparing economically significant financial data and ratios (refer table below). This step resulted in 3 companies. Companies clearing the quantitative criteria were analysed qualitatively to eliminate companies which were not essentially engaged in similar products using similar technology catering to similar industry and companies that had related-party transactions. At the end of the above described search process, the assessee was left with one company. The summary of our search is given in the table below along with reasons for application of particular screening criteria Summary of search process-Capitaline Plus Criteria and reason for usage No. of companies passing the criteria Total universe....
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.... during the period under consideration Accept/reject matrix : With respect to comparable companies accepted/rejected from Prowess and CapitalinePlus, an accept/reject matrix is provided vide item No. 6 of "Reference of Appendix-Transfer Pricing". Further, the details of the qualitative analysis performed on the set of 16 comparable companies of Prowess and 3 comparable companies of Capitaline is provided in item No. 7 of "Reference of Appendix-Transfer Pricing". Results of search process Based on the abovementioned search process the assessee selected a total of 6 comparable companies in respect of Iljin India's assembling activity, summary of which is shown in table below : Number of comparable companies selected Particulars ProwessTM Capitaline PlusTM Total No. of companies selected 5 1 6 The margin of comparables as per the search carried out by the assessee in accordance with the statutory regulations is as presented below. The data have been computed during the financial years 2004-05, 2005-06 and 2006-07. S. No. Company name* Source Operating profit/sales (average) Adjusted OP/sales (average)** 1 Automotive Stampi....
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....1 percent. which is the margin of the comparables and hence again it is in compliance with the arm's length margin principle of the Indian regulations. 1(b)(iv) Legal arguments submitted by the assessee None 1(b)(v) Case law relied upon by the assessee : Sony India P. Ltd v. Deputy CIT [2009] 315 ITR (AT) 150 (Delhi), ITAT 1(b)(vi) Legal argument relied upon by the Assessing Officer Rule 10B(4) of the Rules Section 92C(3) of the Act Section 92CA(3) of the Act OECD Guidelines 2010 1(b)(vii) Case law relied upon by the Assessing Officer : None 1(b)(viii) Any additional new case law which the assessee may rely upon None. The assessee desires leave to rely upon any new case law during the proceedings before the honourable Panel. 1(b)(ix) Factual and legal arguments against the additions proposed by the Assessing Officer : As evident from the above analysis, none of the comparable companies selected by the learned Transfer Pricing Officer are accepted. Hence, the assessee humbly requests the learned Panel to consider the comparable companies as per the search process of the assessee defined in page 17. Ground 1(c) The learned Assessing Officer/ learned Transfer Pricing Office....
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....ontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into (hereinafter referred to as the "relevant financial year"). In the instant case, the relevant financial year is the financial year 2006-07. Proviso to rule 10B(4) states that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. In the instant case, the relevant prior years are the financial years 2004-05 and 2005-06. As most commercial decisions are primarily based on historical data, it is reasonable to conclude that the prior-year data would necessarily always reveal such facts. Hence prior year data should be used wherever available and not as an exception. Further, such use is essential especially when the data of the relevant financial year is not available on a contemporaneous basis. Further, as per the 2010 revised OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ("OECD ....
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....sis is conducted by the assessee. (f) Use of prior year data, i.e., the financial years 2004-05 and 200506 is specifically permitted by the Rules. 1(c)(iv) Legal arguments submitted by the assessee Section 92D of the Act read with rule 10D(4) of the Rules. Rule 10B(4) OECD Guidelines paragraphs 3.75 to 3.78 It is pertinent to note that Circular 12 of 2001 issued by the Central Board of Direct Taxes ("CBDT") (refer item No. 12 of "Reference of Appendix-Transfer Pricing") states that there is a need to ensure that the taxpayers are not put to avoidable hardship in the implementation of these regulations. The above also finds support in the OECD Guidelines. Paragraph 5.9 of the OECD Guidelines states : Tax administrations also should limit requests for documents that became available only after the transaction in question occurred to those that are reasonably likely to contain relevant information as determined under principles governing the use of multiple-year data in Chapter III or information about the facts that existed at the time the transfer pricing was determined. In considering whether documentation is adequate, a tax administration should have regard to the extent to....
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....ld 'maxim lex non cogit ad impossibilia' which means that the law does not compel a man (or a taxpayer) to do that which he cannot possibly perform, should be considered in understanding and interpreting the requirements of the said rule 10D(4) of the Rules. The above doctrine was upheld in South Eastern Coalfields Ltd. v. Joint CIT (Assessment) [2003] 260 ITR (AT) 1 (Nagpur) : "The same principle has been explained in Craies on Statute Law as follows : Under certain circumstances compliance with the provisions of statutes which prescribe how something is to be done will be excused. Thus, in accordance with the maxim of law, lex non cogit ad impossibilia, if it appears that the performance of the formalities prescribed by a statute has been rendered impossible by circumstances over which the persons interested had no control, like the act of God or the King's enemies, these circumstances will be taken as a valid excuse." In ITO v. LIC of India [2001] 79 ITD 278 (Cal), the Income-tax Appellate Tribunal upheld this principle of impossibility of performance as under : "When the law creates a duty or charge and the party is disabled to perform it, without there being any default o....
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.... multiple-year data which is based on both Indian legislative intent and global best practices. Ground 2 The learned Assessing Officer/Transfer Pricing Officer erred in law and in facts by rejecting the valuation of import of components conducted by the customs authority as a representation of the comparable uncontrolled price (CUP). 2(i) Statement of facts as submitted to the learned Transfer Pricing Officer/Assessing Officer The assessee vide submission dated September 10, 2009 had explained that the assessee has followed the comparable uncontrolled price method. The Customs Department's findings categorically states that the relationship between Iljin India and Iljin Global has not influenced the invoice value of the imports and that the invoice value is accepted as the transaction value. Hence, the comparable uncontrolled price method should be considered as the most appropriate method to test the arm's length price for the international transactions between Iljin Global and Iljin India. 2(ii) Facts/transfer pricing approach modified by the learned Transfer Pricing Officer/Assessing Officer The learned Transfer Pricing Officer vide paragraph 12.2 and 12.3 of page 5 of the....
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....r 29, 2007 declaring an income of Rs. 7,12,41,517. The reference was made by the Assessing Officer (AO), i.e., Assistant Commissioner of Income-tax, Company Circle-II(3), Chennai to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of international transactions entered into by the assessee during the year under consideration. The Transfer Pricing Officer-II, Chennai finalised the order on October 29, 2010 determining the adjustment of Rs.13,83,86,187 on account of purchases made by the assessee-company. The Assessing Officer after providing due opportunity of being heard to the assessee, finalised the draft assessment order on December 30, 2010 and forwarded the same to the assessee for filing of its objections, if any. In response, the assessee filed its objections with the Dispute Resolution Panel, Secretariat on February 2, 2011. The only adjustment made by the Transfer Pricing Officer resulted into the only addition made by the Assessing Officer. The assessee filed the grounds of objections along with Form No.35A as under : (a) The Assessing Officer/Transfer Pricing Officer erred in law and in facts in rejecting the assessee's documentation ....
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.... has explained in the order, as to why the comparable uncontrolled price method adopted by the assessee is not acceptable. The stand of the Transfer Pricing Officer that customs valuation cannot be taken as the arm's length price is based on sound footing, due to the following reasons : (i) the transfer pricing rules (TPR) and customs valuation rules (CVR) are very different in terms of scope and application. (ii) the categories regarded as associated enterprises under the transfer pricing regulation (TPR) are much wider in scope than those specified as 'related parties' under the customs valuation rules and the criteria on which a relationship is deemed to exist are narrower under the customs valuation rules. (iii) the customs valuation rules allows for acceptance of the transaction value of the goods/transfer price, despite a relationship between buyer and seller. The approach is different under transfer pricing rules, which requires the arm's length price of an international transaction to be determined by application of any of the methods prescribed. (iv) the transfer pricing rules draw upon the OECD guidelines, whereas the customs valuation rules are based on GATT valuatio....
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....g Officer is that the work done by the assessee is essentially 'assembly work' and hence it should not be compared with manufacturers. 10. To sum up, the objection of the assessee is not tenable, due to the following : (i) the assessee has categorised itself as being engaged in manufacture of automobile components, as stated in the annual accounts and in the submissions made. So, the Transfer Pricing Officer cannot be faulted for making a search for comparables on these lines. (ii) the transaction net margin method calls for only broad similarity in functions and products between the tested party and comparables. As admitted by the assessee, the search adopted by the Transfer Pricing Officer covers a majority of sales of the assessee. (iii) as pointed out by the Transfer Pricing Officer, the point of comparison under transaction net margin method is the functions performed by the companies. The operating profit under transaction net margin method broadly takes into account the functions performed, costs involved, return on capital, etc. (iv) the assessee has not disputed the correctness of the search adopted, except to state that the search should contain few more additi....
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.... prejudicial to the interest of such assessee. Under sub-section (2) of section 144, the assessee within 30 days of the receipt of such draft order can accept the variation made by the Assessing Officer or he can file objections either to Dispute Resolution Panel or to the Assessing Officer. Since the assessee had filed his objections with the Dispute Resolution Panel, then, under sub-section (5) the Dispute Resolution Panel, upon receipt of objection is under obligation to issue directions as it thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment and under sub-section (6) such directions which are put up under sub-section (5) would be further considering the following documents : (a) draft order ; (b) the objection filed by the assessee ; (c) the evidence furnished by the assessee ; (d) report, if any, of the Assessing Officer, the Valuation Officer, or the Transfer Pricing Officer or any other authority ; (e) records relating to the draft order ; (f) evidence collected by, or caused to be collected by, it ; and (g) result of any inquiry made by, or caused to be made by, it. Under sub-section (7), Dispute Resolution Panel is also authorise....
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.... find that similar issue was considered by the hon'ble Delhi High Court in the aforementioned case of Vodafone Essar Ltd. Aÿv.Aÿ Dispute Resolution Panel [2012] 340 ITR 352 (Delhi) against the order passed by the Dispute Resolution Panel-II and Ors. and the said writ petition has been decided by the hon'ble High Court vide their order dated December 2, 2010. The assessee had filed a writ of certiorari seeking the quashing the order of the Dispute Resolution Panel and the Revenue contended before the hon'ble High Court that the order in question deserve to be quashed and the matter was remanded for fresh adjudication. The said order of the hon'ble Delhi High Court is reproduced below (page 322 of 340 ITR) : "Judgment Heard Mr. Syali, learned senior counsel for the petitioner and Mr. Sanjeev Sabharwal, learned standing counsel for the Revenue. By this writ petition, the petitioner has prayed for issue of a writ of certiorari for quashment of the order dated September 30, 2010, passed by the Dispute Resolution Panel-II, the first respondent herein. What could have been a matter of debate was put to rest by Mr. Sanjeev Sabharwal, learned counsel for the Revenue by stating ....