AI Drafter 
TaxTMI 
TaxTMI 
2016 (3) TMI 55
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.... it has directed that the Transfer Pricing Officer should apply Comparable Uncontrolled Price 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 finali....
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....the prices paid to domestic vendors after indigenisation. The adjustment of Rs. 97,44,630/- was, therefore, 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 p....
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....umitomo Corporation does not manufacture but merely traded in the goods. The assessee was unable to shed 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 determin....
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....nso entities to stabilise production through one time delivery of components and raw materials". The assessee further 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 co....
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....g the correctness of the income returned. COMPUTATION OF ALP The responsibilities to establish the arm's length nature of the international 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 year....
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.... components stating that it may not be fair to undertake any comparison between prices charged by Indian vendors and Japanese suppliers as their exist certain differentiating 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. Sect....
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....action, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is 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 sam....
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.... referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction or specified domestic transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent 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 sale....
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....see. As held by the Assessing Officer, as well as the Commissioner (Appeals), the assessee has not furnished personnel have rendered marketing services to the assessee company. In fact, the assessee company has no revenue which has been derived as a result of these marketing expenses. At the cost of repetition, we state that in the TP report, the company's submission is recorded at Page-30, and 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 Delo....
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....****** ***************** ******* 140. Sub-section (3), we do not think incorporates a bar or prohibits set offs or adjustments. It states that Section 92, which refers to computation of income from international transaction with reference to arm's length price under sub-section (2) or (2A), would not have the effect of reducing income chargeable to tax or increase the loss, as the as may be, computed by the 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, t....
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....ons were recorded in the light of the fact in the case of L.G. Electronics (supra). Commenting on the factual matrix of L.G. Electronics case (supra) would be beyond our domain; however, we do not find any factual finding to this effect by the TPO or the Tribunal in any of the present cases. However, in L.G.Electronics decision (supra), it is observed that if the AMP expenses and when such expenses are beyond the bright line, the 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 wo....