TaxTMI 
TaxTMI 
TaxTMI 
2016 (3) TMI 55
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....ce Method? 2. The appellant assessee is engaged in manufacturing and sale of auto electrical products such as Starters, Alternators, Wiper Motors, CDI, Magnetos etc., for four wheel and two wheel vehicles. Its promoters include two Japanese Companies, which are M/s Denso Corporation, Japan and M/s Sumitomo Corporation, Japan. These promoters' share holding is to the extent of 47.93% and 10.27% respectively. M/s Sumitomo Corporation, Japan is an associate company of M/s Denso Corporation, Japan. The two companies exercise an overall share holding control of 58.20%, sufficient to exercise overall management and control of the assessee. 3. In ITA 443/2013, the facts are that the assessee had filed its return for AY 2002-03, declaring a total income of Rs. 19,44,45,442/- which was originally processed under Section 143(1). It was later taken up for scrutiny during the course of which the AO referred the case to the TPO. In issue is the transfer pricing adjustment pursuant to the ALP determination recommended by the TPO and accepted by the AO to the extent of Rs. 1,36,31,665/-. The AO finalized the assessment on 30.03.2005. The assessee's appeal was allowed by the CIT, who on 30.04.20....
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....erefore, deleted. The common order of the ITAT set aside the order of the Appellate Commissioner and restored the adjustments directed by the AO. 6. The appellant/assessee argues that the ITAT fell into error in accepting the AO's decision as opposed to the well reasoned orders of the appellate Commissioner. The assessee urges that to determine if the transaction value of the various raw materials, including payment of royalty, technical knowhow fees etc., is at arms' length, the net profit margin contemplated under Section 92C of the Income Tax Act is determinative. The value of each transaction in respect of every component is to be judged within the net margin derived by the entity. In this regard, reliance is placed upon OECD guidelines, particularly Para 3.9. Learned counsel contends that for the purpose of benchmarking transaction of a broad entity, it is to be considered as a whole or as a class rather than analyzed on a transaction by transaction basis. It is emphasized that all transactions which are integral and ancillary to the main operation of the entity - in the present case, one which engages in manufacturing, have to be taken together. The assessee had appropri....
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....any light why it chose to source the materials from Sumitomo Japan, which it could have purchased directly from the manufacturer, i.e. Denso, Japan. Given the close connection between Sumitomo Corporation, Denso and the assessee, the lack of the explanation coupled with other objective factors justified the addition. It was submitted that the facts for AY 2002-03 and 2003-04 are identical. The Revenue was justified in treating Sumitomo Corporation, Japan as the assessee's AE since the TPO correctly deduced that purchases routed through their entity were with the sole objective of camouflaging obvious fact that the assessee made purchases from an AE, i.e. Denso Corporation, Japan which was the manufacturer. The TPO justly concluded that the assessee failed to discharge its responsibility as to the application of the most appropriate method. Consequently, it failed to give reasonable data, i.e. cost of purchase in the hands of Sumitomo Corporation, Japan, for determination of aggregate ALP by retail price method and that no other method except CUP could be applied for ALP determination of the component value from Sumitomo Corporation. Analysis and conclusions: 9. It is evident from....
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....urther stated that the customs authorities had accepted the import value which could not be questioned by the revenue in income tax proceedings. 11. The TPO rejected the explanation and noticed that Sumitomo Corporation held a substantial holding in the assessee company. He also concluded that the relationship between the assessee, its holding company, Denso and Sumitomo Corporation was such that Denso, Japan could influence the transactions between the assessee and Sumitomo Corporation. This, according to him, fell within the mischief of Section 92B and amounted to an international transaction. The TPO concluded that there was no explanation that could be reasonable sound business practice to support the sourcing of components not manufactured by Sumitomo Corporation. He thereafter concluded as follows: "7.1 The assessee has not submitted any specific evidence to substantiate its argument that cost of production is higher in Japan. It has relied upon general arguments, e.g. high cost of living, difference in wage and electricity charges, ranking in terms of cost etc. The assessee has chosen to ignore certain vital facts. For example, the interest rate in Japan is in the range o....
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....rnational transaction lies with the assessee. The assessee failed to discharge this responsibility as the method relied upon by it is not the most appropriate method for the reasons discussed above. It has failed to give reasonable data, i.e. cost of purchase in the hands of SCJ to determine the ALP by RPM. Therefore, it clearly emerges from the discussion above that no method other than the CUP, i.e. CPM, RPL, TNMM or PSM, can be applied in this case to determine the ALP of the import of the component from SCJ. Since the assessee has not brought out any difference in the quality of components purchased from SCJ and from uncontrolled domestic suppliers, the ALP of imports from SCJ can be determined by comparing it with the prices of uncontrolled domestic suppliers. Though, for some components, the indigenization took place in the subsequent years it can still be used as a valid comparable because it gives fairly good idea about the cost of production of such components. Wherever, the indigenization has taken place in the subsequent years, the uncontrolled domestic price for subsequent years is required to be discounted by the underlying rate of inflation in the Indian economy to ad....
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....ing factors. The differentiating factors highlighted by the assessee, have elaborately been discussed by TPO during the course of proceedings of AY 2002-03, the facts remaining same therefore, I rely on TPO's order of last year on the issue of purchases made from Sumitomo Corporation, Japan. After allowing assessee opportunity of being heard and on the basis of details filed before me, arm's length price of imports of various components made from SCJ and adjustments arising out of arm's length price and book entries have been calculated in Annexure-A, taking rate of inflation at 5% per annum and ignoring imports aggregating to less than Rs. 2 lacs during the year, as was the criteria applied in assessment year 2002-03. As per working made in Annexure-A to this order, total income of the assessee will be increased by an amount of Rs. 9744630/- which calculating its total income for AY 2003-04 on account of adjustment in arm's length price of international purchase transactions of raw material from SCJ." 13. Section 92 (3) of the Income Tax Act reads as follows: "(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or s....
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....s adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; (c) cost plus method, by which,- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark....
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.... enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction or the specified domestic transaction ; (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred t....
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.... it states that the software services obtained by the Deloitte from the third party, are not similar to the services obtained by the Deloitte from the assessee company on account of requirements of different skill, experience, knowledge level, complexity of software projects handled, risk bearing capacity, etc. The entire revenue of the assessee are from the Deloitte. The evidence filed in support of the fact that services are rendered in the form of e-mails show that they are not e-mails relating to marketing, but that they relate only to billing. As rightly pointed out by the learned Departmental Representative, the assessee has no role in interacting with the client to modify, cancel, renew or extend the contract. The assessee cannot, even after expiry of the agreement between the Deloitte and its client, supply services without written consent of Deloitte. Deloitte has to pay the assessee irrespective of it getting payment or not within sixty days of raising invoices. Deloitte is responsible for generation of sales management, delivery of projects, maintaining customer relationship and billing and collection. The assessee has no market risk. The argument of the learned Counsel ....
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.... assessee on the basis of entries in the books of account. Income chargeable to tax or loss as computed in the books is with reference to the previous year. The effect of sub-section is that the profit or loss declared, i.e. computed by the assessee on the basis of entries in the books of account shall not be enhanced or reduced because of transfer pricing adjustments under sub-section (2) or (2A) to Section 92. It states the obvious and apparent. In case the assessed has declared better and more favourable results as per the entries in the books of account, then the income chargeable to tax or loss shall not be decreased or increased by reason of Transfer Pricing computation. Thus, transfer pricing adjustments do not enure to the benefit or advantage the assessed, thereby reducing the income declared or enhancing the declared loss. Pertinently, the Sub-Section makes reference to the income chargeable to tax or increase in the loss on the basis of the entries in the books of account. The concept of set off or adjustments was/is well recognized and accepted internationally and by the tax experts/ commentators. In case the legislative intent behind sub-section (3) to Section 92 was t....
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....e transaction viewed in their totality would differ from one which would have been adopted by an independent enterprise behaving in a commercially rational manner. No reason or ground for holding or the ratio, is indicated or stated. There is no material or justification to hold that no independent party would incur the AMP expenses beyond the bright line AMP expenses. Free market conditions would indicate and suggest that an independent third party would be willing to incur heavy and substantial AMP expenses, if he presumes this is beneficial, and he is adequately compensated. The compensation or the rate of return would depend upon whether it is a case of long-term or short-term association and market conditions, turnover and ironically international or worldwide brand value of the intangibles by the third party." 16. The factual discussion in this case clearly reveals that the assessee chose to import components not from the manufacturer (which was an AE) but an intermediary. Normally, this would have been a commercial decision, which revenue authorities would not question. However, interestingly, the vendor of the components (which constituted over 85% of the raw materials imp....