TaxTMI 
TaxTMI 
2015 (11) TMI 118
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....rt of finished goods Erred on facts and in law by making a transfer pricing adjustment of Rs. 4,70,39,838 to the value of international transaction relating to export of finished goods by rejecting the transfer analysis undertaken (based on selecting Transactional Net Margin Method ('TNMM') as most appropriate method) by the Appellant to determine the arm's length price by: - not appreciating the fact that the international transaction of export of finished goods to associated enterprises and sales to third parties are not comparable; - selecting Cost Plus Method ('CPM') as most appropriate method by erroneously concluding that: (i) for manufacturing function, CPM is the most appropriate method without appreciating the facts in case of the Appellant; (ii) the Appellant has stated different reason for rejection of CPM in the TP report and before the learned TPO; and (iii) CPM being the traditional method is preferred over TNMM. - not appreciating the facts that the gross profit margin workings provided by the Appellant (submitted based on the specific request of the learned TPO) provides information on gross margin based on standard cost of prod....
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....evel (i.e. from the profit of the eligible unit for the year of the Appellant) The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable Honorable Income-tax Appellate Tribunal to decide this appeal according to law. 4. The Revenue in ITA No.736/PN/2014 has raised the following grounds of appeal :- 1) On the facts and in the circumstances of the case, learned CIT(A)-IT/TP has erred in deleting the addition made by the Assessing Officer by disallowing the assessee's claim of bad debts amounting to Rs. 30,63,290/-. 2) On the facts and in the circumstances of the case, learned CIT(A)-IT/TP erred in holding that after the amendment to section 36(1)(vii) ( w.e.f. 01.04.1989), the assessee need not demonstrate to the tax authorities that the debt has become bad whereas the real objective of this amendment was to eliminate the dispute as to the year in which a bad debt was to be allowed. 3) On the facts and in the circumstances of the case, learned CIT(A)-IT/TP has not appreciated that even after the amendment w.e.f. 01.04.1989, the allowance is only....
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....ssee had aggregated the transactions and taking operating margins over the operating revenue as PLI and following TNM Method had taken external comparables and the arm's length price of the transactions had been determined to be the same as their values as per the books of account. The TPO further noted that separate profitability i.e. operating margins over operating revenue in case of the EOU units and DTA units had been worked out at 15.29% and 8.4%, respectively and the weighted average arithmetical mean of the comparables was worked out at 9.21%. The TPO show caused the assessee that in view of the nature of international transactions undertaken, being different in their nature and scope, the aggregation for the purpose of benchmarking of international transactions should not be allowed. The TPO was of the view that the benchmarking done by aggregating the transactions mentioned in the first four heads of the table was not acceptable and therefore, the same was proposed to be rejected. The TPO thus, show caused the assessee in respect of import of finished goods for re-sale. The TPO observed that the transfer pricing study report submitted by the assessee did not contain t....
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....tured and sold, the assessee expressed that working of such details would be very laborious and time consuming. The TPO thus, asked the assessee to submit the split financials and profitability statements up to GP level in respect of certain items by doing the ABC analysis. The assessee furnished the details which are incorporated under para 3 at pages 7 and 8 of the order of TPO. The TPO noted from the working of gross margins that for sample size of items, which are about 100 in number and are accounted for nearly 80% of total sales, the gross profit earned in respect of export to associate enterprises was at 44.71% and in case of non-associate enterprises, it was 53.78%. In view thereof, the TPO was of the view that cost plus method was the most appropriate method to be applied, in respect of the said transaction. 8. The assessee furnished written submissions which are incorporated under para 6 at pages 9 to 17 of the order of TPO. Vide para 6.2.2, the TPO first decides that the combined transaction approach as adopted by the assessee to benchmark the transaction along with other transactions, was not acceptable and was rejected. In respect of imports made from the associate ....
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....sactions relating to import of finished products for re-sale at Rs. 14,11,280/-. 9. Further, applying cost plus method in respect of international transactions relating to export of finished goods / resistors, the assessee furnished the reply and after considering the reply of assessee, the TPO held that the submissions of the assessee that difference in the transactions and their non-compatibility, was not acceptable in the facts of the case. Further, either Rules or OECD guidelines also did not support assessee's contention. The contention of the assessee that application of CPM method was not warranted because finished goods exported to associate enterprises and sold to third parties were not similar in terms of technical specifications and end use application, was also rejected. The TPO in this regard observed that what was benchmarked was the production from the EOU units, which meant that products manufactured therein were for exports only. The market for the export of products was in the hands of assessee was to its associate enterprises as none of the exports from EOU units was to third parties. In other words, the associate enterprises used the EOU units of the assessee....
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....ly and when the transactions were clearly linked and continuing. However, as per the CIT(A), the TP study report of the assessee was not in accordance with paras of OECD Guidelines. The CIT(A) accepted the view of the TPO that manufacturing and trading functions should be segregated and separately benchmarked. 11. The second issue which was considered by the CIT(A) was the application of most appropriate method. The CIT(A) after considering the approach of the assessee of aggregation of transactions and consequent rejection of TNM Method, held that in respect of manufacturing functions, CPM method was the most appropriate method. Then, the plea of the assessee that exports segment could not be compared with the domestic segment as it had sold the resistors technically of different specifications, was also not agreed upon by the CIT(A), in the absence of details that major components of sale to the associate enterprises as well as third parties consisted of different resistors, so as to make the gross margins. The contention of the assessee that exports segment and the domestic segment could not be compared because geographical difference, was also not valid. The CIT(A) noted tha....
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....on of income for assessment years 2006-07 to 2008-09 placed at pages 8.1 onwards. 14. The learned Departmental Representative for the Revenue on the other hand, pointed out that admittedly, in subsequent years, the method adopted by the assessee i.e. TNM Method was accepted by the TPO. Our attention was drawn to the TP Study report placed at pages 33 and 34 of Paper Book and it was pointed out that where the assessee has entered into various transactions which are functionally dissimilar, then the aggregation of transactions cannot be allowed. Further, the learned Departmental Representative for the Revenue relied on the order of CIT(A). 15. We have heard the rival contentions and perused the record. The issue arising in the present appeal in respect of transfer pricing adjustment is in relation to the application of most appropriate method for benchmarking the international transaction entered into by the assessee with its associate enterprises. The assessee during the year under consideration, had entered into various international transactions as under:- Sr No Nature of transaction Amount (Rs) Method applied 1 Import of raw materials 9,84,79,170 TNM....
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....nd export to associate enterprises at 44.71%. The difference in gross profit margins in the above two segments was proposed as an adjustment in the hands of the assessee by the TPO at Rs. 4.70 crores. The Assessing Officer incorporated the above said adjustment in the assessment order resulting in addition of Rs. 4.84 crores. The assessee is in appeal against the adjustment made by the TPO which have been applied by the Assessing Officer and has been upheld against the assessee by the CIT(A). 17. The principal objection of the assessee before us is that it had been consistently following the TNM Method for benchmarking its international transactions with its associate enterprises both in the preceding and succeeding years and except for the year under consideration, the TNM Method followed by the assessee by aggregating international transactions, has been accepted even in the subsequent years. The assessee has placed on record the assessment orders relating to assessment years 2006-07 to 2008-09 at pages 8.1 to 811 of the Paper Book. The perusal of order of TPO under section 92CA(3) of the Act relating to assessment year 2006-07, dated 29.10.2009 placed at pages 8.1 to 8.27 of ....
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....me, where there is no change in the facts in respect of a particular transaction and / or issue or proceedings, then it is the requirement of law that consistency should be maintained and the methodology adopted by the assessee for benchmarking its international transactions should not be disturbed. Where the Revenue from year to year has accepted the method adopted by the assessee for benchmarking its international transactions with its associate enterprises, in the absence of any reasons brought on record, there is no merit in deviating or taking stand contrary to the stand accepted in both the preceding and succeeding years, while benchmarking the international transactions in the hands of the assessee. In the absence of TPO or CIT(A) having been able to demonstrate as to how the facts of the present year are different from the facts of other years, which were before the authorities, there is no justification for taking a different stand. The assessee has time and again explained the reasons why it had adopted the TNMM method and had also explained the difference between the exports made to the associate enterprises and non-associate enterprises and also sales made in the domest....
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.... contention of the assessee is that it had exported tractors to AEs for last several years and the assessee has adopted TNMM method as the most appropriated method for determining the ALP in respect of the transaction of export of tractors to the AEs from A.Y. 2004-05. The said contention of the assessee has not been disputed before us by the Revenue. Admittedly, for all those assessment years starting from 2004-05 onwards and also for the A.Y. 2008 -09 the Assessing Officer has accepted the TNMM method as a most appropriate method for determining the ALP in respect of the sale of tractors by the assessee to the AEs. The assessee has filed the copies of the assessment order for the A.Ys. 2004-05 and 2005-06 which are placed in the Compilation (Page Nos. 282 - 285 of the P/B-2). The assessee has also filed the TPO's order for the A.Y. 2008-09 which is placed at Page Nos. 353 - 354 of the P/B-2. Though the TPO/DRP has gone on discussing the provisions of law but have conveniently ignored to put of record how the facts of the current year are different from the fact in A.Ys. 2004-05 and 2005-06 as in those years the TNMM was adopted by the assesse for determining the ALP which has bee....
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....y same companies as comparable. If TPO desires to reject the comparable as there is a change in the parameters or FAR analysis then he should have brought on record how the parameters of the FAR are different in this year as compared to A.Y. 2005 -06. There is a merit in the contention of the assessee that the tractors segment is niche segment and there is no much difference in the turnover of the comparable entities selected by the assessee. 19. The TPO has expressed his reservation on the Escorts Ltd. and HMT Ltd. comparable selected by the assessee on the ground that those two companies have incurred losses. It is seen that in the A.Y. 2005 -06 those two companies has incurred the losses but in spite of the losses in that year, the TPO has not rejected those two companies as a comparable. We fail to understand why there is inconsistency approach of the TPO in the next assessment year i.e. A.Y. 2006 -07 which is before us, even though there is no change in the parameters of the FAR. The Ld. Counsel argues that those two companies had incurred losses in their normal day to functioning and the losses were not on account of any exceptional factors. In our opinion the approach of ....
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.... 5% of the net operating margin of the export segment and hence, the transactions are at ALP. The assessee has filed the working on the above contention which is as under: Sr. No. Name of the company Net operating margin 1 Tractors & Farm Tractor Ltd. 11.90% 2 Mahindra & Mahindra Ltd. 8.65% 3 Punjab Tractors Ltd. 11.50% 4 International Tractors Ltd. 15.41% Average net operating margin 11.87% Net operating margin of export segment 11.17% 21. It is seen that out of the 8 companies selected as a comparable in this year i.e. A.Y. 2006 -07, 7 companies were also selected in A.Y. 2005 -06 and only KAMCL is added as a new comparable companies in this year. On perusal of the data in our opinion KAMCL cannot be considered as a comparable in the A.Y. 2006 -07 as said company is not admittedly in the business of manufacturing tractors. But in respect of the remaining 7 companies as per the data placed before us, all those companies are in the line of same business i.e. tractor manufacturing. If we put the remaining 7 companies selected by the assessee, the picture is as under: Sr. No. Name of the c....
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....unctions performed and the risk assumed in these two segments and therefore, the same cannot be considered as comparable cases for determining the ALP. There is no marketing risk in the export segment, no risk of bad debts, no product liability risk in export segments whereas the assessee has to bear all these risks in the domestic segment. The contractual statements also defer in the domestic segment vis-a-vis export segments. There are different characteristics and contractual terms in the two segments and further geographical and marked differences are also present. Thus, we are of the view that it is very difficult to make suitable adjustments for these differences, hence the CMA method is not appropriate method for determining the ALP. The learned TPO, in our view, has thus erred in adopting the CMA method as appropriate method. 51. We also find substance in the alternative plea of the learned Authorised Representative in the defective working out of the total of production of the goods sold to the AE by the learned TPO. The learned TPO has computed gross profit margins in the domestic segment at 23.54 per cent while in the export segment at 5.42 per cent. The differe....
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....assessee had a joint facility arrangement or a long-term buy and supply arrangement with its AE, as we have discussed hereinabove, we find that there was no sufficient reasons with the learned TPO to reject CUP method or TNMM adopted by the assessee to determine the arm's length price (ALP). We thus hold that the addition made by the learned TPO as a result of incorrect application of CPM is not justified. It is pertinent to note that in the succeeding asst. yr. 2007-08, the assessee has adopted TNMM for determining the ALP, which has been accepted by the learned TPO. In the case of Brintons Carpets Asia (P) Ltd. vs. Dy. CIT (supra), Pune Bench of the Tribunal has followed the decision of Mumbai Bench of the Tribunal in the case of Asstt. CIT vs. NGC Network (India) (P) Ltd. ITA No. 5307/Mum/2006, dt. 23rd Feb., 2011 (para 15) [reported at (2011) 56 DTR (Mumbai)(Trib) 1 -Ed.] on the rule of consistency and need for not taking the domestic comparables and need for taking up the external comparable in matters of the 'transfer pricing' adjustments. It was held further that the uncontrolled transactions and the external comparables which was adopted by the officer in subsequent year ho....
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....ould be applied and since the margins declared by the assessee are higher than the margins declared by the comparables picked up by the assessee in its TP study report and consequently, the international transactions entered into by the assessee with its associate enterprises being at arm's length price, no addition is warranted in the hands of the assessee. Accordingly, we delete the addition of Rs. 4.84 crores. The grounds of appeal No.1 and 2 raised by the assessee are thus, allowed. 22. The second issue raised by the assessee vide ground of appeal No.3 is against set off of brought forward unabsorbed depreciation before claiming of deduction under section 10B of the Act. The claim of the assessee before the authorities below was that it had set off of brought forward losses of Rs. 4,11,06,003/- against the income resulting into total taxable income of Nil, whereas the deduction under section 10B of the Act at Rs. 7,68,41,580/- was claimed as against the income of EOU units of Rs. 8,01,88,716/-. The Assessing Officer was of the view that the brought forward losses and unabsorbed depreciation were required to be set off against the total income of the assessee first and th....
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....ted out that the Hon'ble Apex Court had held that first the gross total income has to be computed before allowing any deduction. 27. We have heard the rival contentions and perused the record. The issue arising vide ground of appeal No.3 is in relation to the computation of deduction under section 10B of the Act after the amendment to section w.e.f. 01.04.2001. The persons invoking the said provisions are entitled to a deduction under the Act, as compared to the pre-amended provisions of the section, under which the income comprising under the said section was exempt from the total income. The issue arising before us is whether while computing deduction under section 10B of the Act, in cases where the assessee has unabsorbed losses or depreciation, brought forward from earlier years, then whether the said unabsorbed business losses / depreciation are to be adjusted from the gross total income before allowing the deduction under section 10B of the Act or the said losses or the deduction under section 10B of the Act is to be allowed in the hands of the assessee without considering the brought forward unabsorbed losses / depreciation, which can be set off against the other income o....
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.....02.2013 and in CIT Vs. Schmetz India Pvt. Ltd. (2012) 79 DTR (Bom) 356 and also by the Hon'ble High Court of Gujarat in CIT Vs. Ace Software Exports Ltd. in Tax Appeal No.687 of 2012, order dated 18.02.2013 . The Mumbai Bench of Tribunal has also applied the said proposition in various cases. 29. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the ratio laid down by the Hon'ble Supreme Court in Synco Industries Ltd. Vs. AO, (2008) 299 ITR 444 (SC), wherein the issue was whether while computing the quantum of deduction under section 80I(6) of the Act, the Assessing Officer has to treat the profits derived from an industrial undertaking as only source of income in order to arrive at deduction under Chapter VI-A. The Hon'ble Supreme Court held that the gross total income under section 80B(5) of the Act, which is also referred to in section 80I(1) of the Act, was required to be computed in manner provided under the Act, which pre-supposes that gross total income shall be arrived at after adjusting losses of other division against profits derived from an industrial undertaking. The issue before the Hon'ble Supreme Court is at variance wi....