TaxTMI 
TaxTMI 
2016 (8) TMI 1182
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....bmitted that since the appeals are against the appeal effect order passed by the Assessing Officer, based on fresh inputs from the Transfer Pricing Officer, the appeal can only be filed before the Dispute Resolution Panel or the CIT(A). It is submitted that this Tribunal is not the forum for the first appeal, that the assessment was done de novo in terms of the directions of the Tribunal and that it was not case of mere arithmetical exercise having been done at the assessment stage. He urged us to reject the appeals as non maintainable, with the liberty, maybe, to the assessee to file the fresh appeals before the CIT(A) along with a petition seeking condonation of delay, if so advised. He submits that the order not having been appealed before the right forum, the matter has now achieved finality. As for condonation of delay, that is the prerogative of the forum which the assessee ought to have approached anyway. 3. Learned senior counsel opposes these submissions on two grounds. His first plea is that if the stand is taken that this order is to be taken on the same footing as an assessment order passed under section 143(3), the order must stand quashed for the short reason that ....
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....nate bench, we procced to adjudicate upon the grievances of the assessee against the appeal effect order. 6. Learned Departmental Representative, however, has one more preliminary objection. He submits that the core issue in this appeal is whether a foreign entity can be tested party or not, and since there are conflicting opinions by the coordinate benches, on this issue, the matter should be referred to a special bench. When it was pointed out to the learned Departmental Representative that right now we are in the second round of proceedings, and that issue has already been decided in favour of the assessee in the first round of proceedings before us, and the appeal against the Tribunal decision is pending before Hon'ble High Court on that issue, he submits that even in the impugned order the Transfer Pricing Officer has not accepted the stand of the Tribunal, and the issue is thus open for adjudication. He submits that since the same issue is coming up in the other years, which are in the first round and at least one of which is also being heard along-with these appeal, this issue should be referred at least for the years other than the years in the second round of proceeding....
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....on that mere pendency of an appeal before the Hon'ble High Court cannot be a reason enough to decline reference to the special bench, in a situation in which admittedly there is a cleavage of opinion by the division benches. We are urged to recommend constitution of a special bench, to Hon'ble President, for adjudication on this issue. 8. Learned counsel for the assessee vehemently opposes these submissions. His stand is that the matter that this specific issue, i.e. a foreign party being taken as tested party, is now before Hon'ble jurisdictional High Court in assessee's own case in the first round of assessment, and no useful purpose will, therefore, be served by recommending constitution of special bench on the same issue. It is pointed out that Their Lordships have admitted, in assessee's own case for the assessment years 2006-07 and 2007-08 and on Commissioner's appeal, the question "Whether Income Tax Appellate Tribunal was justified in directing the Transfer Pricing Officer to accept GMDAT as the tested party" for adjudication on merits. Our attention is then invited to several decisions of successive Hon'ble Presidents of this Tribunal, to the effect that when Hon'ble ju....
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....were contrary to the law laid down by the other division benches, and, therefore, per incurium. Learned counsel for the assessee then took us through the order of the coordinate bench, in the first round of proceedings, holding that, on the facts of this case, GMDA, which is a non-resident entity, should be treated as a tested party, and justified the stand so taken by the coordinate bench. Learned counsel submits that referring a matter to a special bench cannot be a matter of course particularly when a well-considered view is taken on that issue in assessee's own case, just because in some other case a contrary view is taken on an altogether different set of facts. It is only when the bench has doubts on correctness of the earlier decision that there can be occasion for making a reference to the special bench. There is no good reason, according to the learned counsel, to doubt the correctness of the view so taken by the coordinate bench in assessee's own case. Learned counsel then made elaborate submissions on merits of the proposition as well. On the strength of these arguments, we are urged to follow the decision of the coordinate bench and not to refer the same to Hon'ble Pres....
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....ssed on 2.12.2004 have been placed on record. I have also gone through carefully the earlier communication dated 23.6.2009 written by the Members who at that time constituted the Special Bench to the then Hon'ble President, ITAT containing a similar suggestion. On the communication, the President had passed the following note: "Let S.B. consider whether case it is necessary to adjourn hearing of the case till the matter is disposed by the Hon'ble H/C". (Date: 28-7-2009) The Special Bench need to be reconstituted thereafter due to transfer of two of the Members. The Members of the Special Bench as constituted thereafter reiterated the earlier suggestion in their note dated 6-9-2010. They have held that the same reasons given in the earlier communication dated 23.6.2009 continue to hold good. The situation as of now is that the earlier orders of the Tribunal for the AY's 90-91 & 91-92, which are against the assessee, are pending in appeal before the Hon'ble High Court awaiting adjudication of the substantial question of law. For the AYs 92-93 & 93-94, a Special Bench has been constituted to decide the same question. I agree with the point made by t....
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....on such a special bench, the views expressed by the Tribunal remain, and shall always remain, subject to the approval of Their Lordships. When the matter is awaiting adjudication by Hon'ble High Court, the special bench decision, irrespective of the numeral strength of such a special bench, is nothing more than writing on the sand which is bound to get washed away by a wave, of binding judicial precedent, approaching the sand. Having said that, we must take note of the fact that another special bench of this Tribunal, in the case of Summit Securities (supra), has touched a different chord. Presenting an antithesis of the views expressed by the special bench in the case of Tivoli (supra), this special bench, inter alia, states as follows: 13. The learned counsel for the assessee has raised objection to the continuation of the Special Bench on the ground that similar question of law has been admitted by the Hon'ble Bombay High Court in the case of Zuari Industries Ltd. (supra). The only reason advanced by the learned Authorised Representative for the deconstitution of the Special Bench is the admission of the question of law by the Hon'ble High Court in March, 2007. It is not the ....
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....in favour of one party, be it the Revenue or the assessee and the aggrieved party appeals against the said Tribunal order which is admitted by the Hon'ble High Court. Suppose similar issue comes up before a subsequent Bench which finds itself unable to endorse the view taken by the earlier Bench. The only course open to the subsequent Bench, as per the aforestated three judgments, is to make a reference to the President for the constitution of a Special Bench instead of recording a contrary decision at its own. On the constitution of the Special Bench if an argument is taken that since the substantial question of law has been admitted by the Hon'ble High Court against the earlier order of the Tribunal and hence such reference be withdrawn, there would be a deadlock. The subsequent Bench would land itself in a quagmire, being neither in a position to swallow the earlier view nor spit it out. Following the earlier decision of the Coordinate Bench would be difficult because of its non-concurrence with it. In the like manner it would find its hands tied to directly record a contrary conclusion because of the prevalence of the aforestated legal position expressed by the Hon'ble Supreme ....
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....istency qua different Benches of the Tribunal until the matter receives consideration of the higher judicial forums. It is further pertinent to note that the practice, similar to the constitution of Special Bench by the Tribunal to resolve a possible conflict in the views amongst various Benches of the Tribunal and not waiting till the matter is finally decided by the High Court, is also uniformly followed by the High Courts as well. Whenever a view is taken on a point by a Bench of a High Court and the subsequent Bench of the same High Court finds it difficult to accept the same, the practice is to refer the matter to the Chief Justice of the concerned High Court for constitution of a Larger Bench. Notwithstanding the fact that SLP against the judgment of its earlier Bench has been admitted by the Hon'ble Supreme Court, the Hon'ble High Court does not stop its functioning to wait for the outcome before the Hon'ble Supreme Court for an indefinite time. The Larger Bench so constituted hears the matter and gives its conclusion, which becomes final qua various Benches of that High Court until the final judgment is rendered by the Hon'ble Supreme Court. 19. The Hon'ble Delhi High Co....
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....in the case of Dilip N. Shroff vs. Jt. CIT (2007) 210 CTR (SC) 228 : (2007) 291 ITR 519 (SC) was cited in which the view was taken in assessee's favour. Finding it difficult to approve the earlier view in Dilip N. Shroff (supra), the matter was placed before the Larger Bench to take a final decision, which has since been decided in Union of India & Ors. vs. Dharamendra Textile Processors & Ors. (2008) 219 CTR (SC) 617 : (2008) 14 DTR (SC) 114 : (2008) 306 ITR 277 (SC). 21. In the name of precedents, the learned senior Authorised Representative in support of his objection, apart from relying on certain administrative orders passed by the Hon'ble President, has relied on the solitary case of Harsha Achyut Bhogle (supra). That case rested on the facts in which the Tribunal decided the issue against the assessee in his own case in the earlier year. When the subsequent year came up for hearing, the assessee came out with a request that a Special Bench be formulated on the subject because the Tribunal in another case had taken a different view. The Division Bench dealing with the assessee's case for the subsequent year observed that the facts of the other case cited by the assessee we....
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.... case of Daks Copy Services (P) Ltd. vs. ITO (1989) 34 TTJ (Mumbai)(SB) 604 : (1989) 30 ITD 223 (Mumbai)(SB). In that case the point in question was decided against the assessee in an earlier year. When the subsequent year of that assessee came up before the next Bench, it was noticed that a contrary view was also available. In order to resolve this conflict a Larger Bench of three Members was formed. In that case also a preliminary objection was raised on behalf of the Revenue that since the point in controversy was already decided against the assessee by the Tribunal in an earlier year and such matter was pending before the Hon'ble High Court, the same view should be followed in the subsequent assessment years as well and as such there was no need for a Special Bench. Repelling this contention, the Special Bench held that when the subsequent Bench was not convinced with the earlier view, the constitution of the Larger Bench for resolving the conflicting decisions of the Benches of the Tribunal was in order. 24. Adverting to the facts of the instant case we find that situation is identical apart from the change of parties. Whereas in that case the Revenue raised preliminary obj....
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....ressed into service once again. We are unable to find a solution to the likely problem to arise if the assessee's contention is accepted and the Special Bench is deconstituted and again the Division Bench finds itself unable to agree with the earlier view. Will the assessee in that case again request the Division Bench to make a reference for the constitution of Special Bench and on such constitution will again request to dismantle it? Law does not permit a person to both approbate and reprobate. When the Special Bench has actually been constituted at the plea of the assessee, now the assessee cannot turn around and argue that the Special Bench be deconstituted. We do not approve such a vacillating stand of the assessee. 26. It is beyond our comprehension as to what difference it makes to the assessee when his case is heard by the Division Bench or the Special Bench. The hearing by the Special Bench inter alia, is only to regularize the working of the Tribunal aimed at achieving a uniform view by different Benches on the point. The assessee's interest is not affected in any manner whether the case is heard by the Division Bench or the Special Bench. The assessee's logic for with....
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....e by the Tribunal in the appeal for earlier years and the matter was pending before the High Court in Reference under s.256(1) of the Act, the same view should be adopted for the assessment years with which we are concerned and that no departure from that view should be made on the ground that a different view had been taken in the case of another assessee by another Bench of the Tribunal". This plea was rejected by the special bench on the ground that "we are bound to consider all the aspects of the points in controversy afresh and come to independent conclusion and the fact that in the earlier years the point had been decided against the assessee would not by itself preclude the special Bench from talking a contrary view". The issue whether constitution of a special bench would be justified in a situation in which the matter is pending before Hon'ble High Court in assessee's own case was neither raised by the parties nor decided by the special bench. It is only elementary that a judicial precedent is binding for what is actually decides and not for what may even logically follow from this. As held by Hon'ble Bombay High Court in the case of CIT vs. Sudhir Jayantilal Mulji [(1995)....
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....he assessee himself. We must also bear in mind the fact that, placed in a lower tier of judicial hierarchy, we, being a division bench, have to harmonise these binding precedents. Viewed in this perspective, and with analysing the legal position with this objective, we find that the sum total of these discussion is that (a) Summit Securities decision was in a situation in which the appeal admitted, and pending for final adjudication, by Hon'ble High Court was in the case of a person other than the assessee concerned, and would not, therefore, apply to the fact situation before us; (b) Dak Copy Centre decision did only deal with the limited plea of the assessee that special bench should follow earlier division bench in assessee's own case, even if a contrary view is take by a division bench in some other case; and, therefore, (c) Tivoli decision holding that when the matter is admitted, and pending for final adjudication, by Hon'ble jurisdictional High Court in assessee's own case, there is no need for constitution of special bench on the same issue, holds good law and there is no contrary judicial precedent to the same. Respectfully following the esteemed views of the special bench....
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.... the course of proceedings before the Transfer Pricing Officer, the assessee's claim of DM-DAT as tested party, as also the transfer pricing study in support of this stand, was noted but rejected. The Transfer Pricing Officer was of the view that "in the absence of reliability of data, it is not possible to treat GM-DAT as tested party as further analysis of transfer pricing is based on reliability of these data". The Transfer Pricing Officer was further of the view that selection of GMDAT as tested party because the tested party should be least complex entity which does not own valuable intangible property or unique assets, while GMDAT owns unique intangibles and carries out large number of related party transactions with its subsidiaries. He also noted that the GMDAT is receiving royalty/ technical knowhow fees from large number of its subsidiaries in different parts of Europe and Asia. It was also noted that there is no dispute about ownership and development of manufacturing intangibles by GMDAT. The assessee's plea about availability of sub-segmental data, which does not reflect impact of intangibles, was also rejected because, as noted by the TPO, "entity should be least comp....
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....ations. On the similar lines, though with some variations in comparables selected for Tech Centre Operations, the Assessing Officer also made ALP adjustments for the assessment year 2007-08 which were quantified at Rs. 237.73 crores the CKD imports and Rs. 18.98 crores for Tech Centre operations. Aggrieved, the assessee carried the matter in appeal before a coordinate bench of this Tribunal. 16. The coordinate bench, vide order dated 2nd August 2013 in the first round of proceedings, remitted both of these issues to the file of the Transfer Pricing Officer. The operative portion of the order of the coordinate bench was as follows: (A) On the issue of ALP adjustment for CKD Kit imports 11.6.1. We are in disagreement with the revenue's argument that GMDAT should not be selected as a 'tested party' as the comparable as the comparable companies selected by the assessee doesn't fall within the ambit of TPO's jurisdiction and, thus, he can neither call for any additional information nor scrutinize their books of accounts. The Revenue can get all the relevant particulars around the globe by using the latest technology under its thumb or direct the assessee to furnish ....
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....d to Ace Software Exports and KLG Systel Limited. 17.8.2. The assessee had identified itself as low-end engineering and R&D work and a small markup of 7% was given for its work. However, the TPO analyzed the selected parties and rejected for the reasons recorded [which have been cited supra] the following companies: (i) Onward Technologies Limited; (ii) Pentasoft Technologies Limited; (iii) Tata Technologies Limited 17.8.3. However, it was contention of the assessee that the TPO erred while stating that assessee's tech-center is engaged in providing high-end research services. Tech-Center is essentially engaged in provision of engineering design and analysis of automobile parts, assemblies and manufacturing tools. This entails provision of computer-aided design and data translation services. Such services involve product assembly documentation, exterior and interior surfacing / designing, 3D modeling and 2D drawings etc. 17.8.4. It was further submitted that Tech-Center focuses mainly on providing routine services in relation to next generation materials, designs, manufacturing processes. Primary research and development of strategy (including id....
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....y the companies quoted it should be taken as comparables and also as to why the companies selected by the TPO cannot be as comparables so as to enable the TPO arrive at a conclusion as directed by us supra. It is ordered accordingly. 17. That's how the Transfer Pricing Officer came to be in seisin of the matter again so far determination of the arm's length price of CKD Kits and Tech Centre revenues are concerned. 18. In the remanded proceedings, the Transfer Pricing Officer noted that "the facts have been wrongly represented by the appellant before the ITAT and these wrong set of averments before the ITAT have formed the basis of decision by the ITAT" and then he gave the detailed analysis of how, according to him, decision of the Tribunal was fallacious and incorrect. He also noted that "during the course of set aside proceedings before this office, the assessee has not complied with the directions of the ITAT contained in the above order", and specifically pointed out that in the present case, "inspite of specific requests made by the TPO to the assessee to produce suitable data in respect of non-resident tested party and also to produce person well conversant with the suc....
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....ple stressed by ITAT in its order. 8.4.1 It is also seen that Appeal No. 495 of 2014 and 500 of 2014 of department have been admitted by Hon'ble Gujarat High Court, vide oral order dated 16/09/2014, wherein following questions of law were raised: (A) Whether the Income Tax Appellate Tribunal was justified in directing the Transfer Pricing Officer (TPO) to accept GMDAT as tested party? (B) Whether the findings recorded by the Income Tax Appellate Tribunal are perverse to the records of the case? 8.4.2 In view of the above, and in view of the failure on the part of the assessee to cooperate with the TPO in executing the directions of the ITAT, it is impossible to determine ALP by taking AE as tested party. Therefore, with due respect to the directions of the Hon'ble ITAT, the ALP determined by the TPO as per original order taking assessee as tested party is retained as it is. Thus, the adjustment of Rs. 33.49 crores made to the international transaction of import of CKD kits and other raw materials, recovery of costs and purchase of capital assets is proposed as per original order. 19. As regards the ALP adjustment in respect of Tech Centre oper....
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....ws: Kind reference is invited to the decision of Hon'ble ITAT in the case of the above assessee for AY 2006-07 and 2007-08. The issue of benchmarking of various transactions has been set aside for fresh determination. The case has been referred to this office by the AO for compliance with the order of the Hon'ble ITAT and necessary action. 2. In light of the various directions given by the Hon'ble Bench, you are requested to furnish further information as detailed below; A: Purchase of CKD Kits - 8. Detailed annual accounts of GMDAT with reference to the components included in the CKD along with cost allocation details. Individual cost centre ledger accounts in respect of components of the kits, the basis of costing of the component with reference to the total cost of the centre where it was produced, the final pricing of these components, details relating to other expenses incurred by GMDAT related to their manufacturing and the proportion in which they have been integrated in CKD costs may also be furnished. 9. Kindly ensure that a competent person aware of finances of the tested party who can demonstrate as to how the GMDAT's ....
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.... royalty receipts on transfer of technology. 12. With regard to your selection of comparables, you have benchmarked the profits made by the tested party (GMDAT) in its transaction of manufacturing and export of completely knocked down kits from Korea to India. To this extent, your comparables should have dealt in CKDs, located in South Korea and should have exported to similar geographical locations. Kindly furnish an analysis of each of your comparables with regards to their comparability with your tested party with reference to their functions, assets and risks. 13. As regards your contention relating to use of multiple year data, it is now a settled principle that data for the relevant year is to be used. To this extent, your study does not conform to the settled principles of law and is, therefore, liable to be rejected. Kindly explain why the TP study should not be rejected to exclude the multiple year working. 14. It has been your contention that the TPO has adopted GMDAT as tested party while benchmarking royalty payment while assessee's selection of GMDAT has been rejected by him. This has been one of the major grounds on which the ITAT has directed adoption of....
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....counts. 8. Your attention is invited to a series of judicial pronouncements relating to non-selection of cases as comparable in case of related party transactions. Please explain why the comparables selected by you should not be rejected on this ground. C: With regards to benchmarking of royalty: 4. The observations of the ITAT are reproduced below; "19.12. On considering the contentions of the rival parties, it is observed that the tussle between the parties has been narrowed down to the issue of comparing of the agreements. The assessee had taken the agreement entered into between the assessee and Isuzu and treated as CUP where the TPO had as CUP the agreements of (i) Namyang-Henglong; and (ii) Delphi- Jingzhou. This has been assailed by the assessee for the reasons narrated above. The agreement entered into by the assessee as well as the agreements of unrelated parties referred to by the TPO contained [terms and conditions] the nature and scope of services involved which required to be examined. The DRP had, without involving itself in analyzing the contentions put-forth by the assessee with that of the TPO in rejecting the assessee's comparab....
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....eport prepared by the auditor vis-à-vis the PLP data submitted by the assessee (alongwith the annual figures for GM Korea for FY 2005-06);(b) back up excel files referred by the auditor while preparing the segmental audit report for FY 2005-06; and (c) reconciliation of the back up excel files with the annual standalone financial statement of GM Korea. It was also, inter alia, explained that only single year data is being used in the present case and that it is not a case of use of multiple year data. The assessee also filed segmental data of GMDAT, along with certificate dated 8th January 2013 issued by Deloitte Anjin LLC Korea, and complete financial statements of the GMDAT. The copies of these detailed replies, as also the documents furnished before the Transfer Pricing Officer, have been placed before us in the paperbooks and examined by us. It is, therefore, clearly incorrect statement of the Transfer Pricing Officer that the requisite information has not been furnished by the assessee. We have noted that the assessee has produced Certified PLP data from the statutory auditors of GM Korea, Consolidated annual report of GM Korea, Allocation keys, Reconciliation of the ce....
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....g AE as tested party and after verifying "OneSource database" (foreign database) used by the assessee. Since this database is paid database and TPO has no access to the same, the assessee was directed to provide the access to the said database and other information relating to segmental PLI working made by the assessee. Accordingly, Ms. Shweta Kashyap, CA/AR attended this office along with Shri Kunal Keshani, CA/AR on 06/11.2015 and explained the segmental PLI working of the tested party for AY 2006-07 & AY 2007-08. They demonstrated the process of selection of comparables through "OneSource database" by using the similar keywords to find out the comparable companies functionally similar to the tested party. Since the tested party is located in South Korea, the region was restricted to Korea only to avoid geographical differences. The soft copy of screen shots of search process is enclosed in CD. 3. As a result of search, 74 comparable companies located in Korea are found. On further examination the search result, it is found that only 33 companies are functionally similar. Since the assessee has selected TNM method for benchmarking, the above 33 companies are found broadl....
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....ame is shown at 54.50 Million USD. This shows that the segmental PLI working made by the assessee is not reliable. However, as per the directions of the Hon'ble ITAT, segmental PLI of the assessee is accepted subject to above mentioned arithmetical correction. Thus after adopting the correct figure of segmental revenue as above, the revised profit comes to 5.32 Million USD (Seg. Revenue 63.44 Mn USD (-) Seg. Cost 58.12 Mn USD) and the OP/OC% comes to 9.15% as against (-) 6.23% shown by the assessee in respect: of tested party. (iii) For AY 2007-08. the segmental revenue (for sale of CKD kits, components, spare parts, accessories and capital goods) i.e. revenue from related parties is shown at 81.73 Million USD whereas payments made by the assessee to GMDAT during AY 2007-08 alone comes to 81.30 Million USD (Total value of above transactions in INR 353,15,40,392 divided by 43.44 i.e. prevailing rate of one dollar and further converted into Million). The figure of 81.30 Million USD is revenue from Indian AE only. The details of revenue earned by tested party from above mentioned international transactions from other AEs are not available. However on the basis of availabl....
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....ion whereas, the profit worked out by the TPO is 5.32 Million USD. This shows that 3.59 Millions USD is paid more than the ALP. The value of payments made by the Indian party is 63.44 Million USD. However, after reducing the extra profit of 3.59 Millions USD, the ALP price of International transaction comes to 59.85 Millions USD. Thus the adjustment of 3.59 Millions USD equivalent to Rs. 16,01,49,900/- (35,90,000 USD X 44.61 prevailing USD rate in INR) needs to be made. 5. In respect of AY 2007-08. it is seen from PLI computation of the comparables that the average PLI margin single year data comes to 2.20% (NCP i.e. profit/cost) whereas the PLI margin of the tested party (AE) is 10.50%. This shows that the AE has earned extra profit by 8.30% than the arm's length price from the transaction with Indian AE. In other words, the assessee has paid more price to the AE than the arm's length price. Since the difference ALP margin and actual margin earned falls beyond the benefit of +/-5%, adjustment is required to be made in this year. The ALP profit for AY 2007-08 comes to 1.63 USD Million whereas, the profit worked out by the assessee is 7.77 USD Million. This sh....
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....aphical differences. The soft copy of screen shots of search process is enclosed in CD. The learned TPO has mentioned that the Appellant has followed the directions passed by the Hon'ble Bench and explained the benchmarking exercise followed in the transfer pricing documentation in relation to international transaction of import of parts and components by selecting General Motors Korea Company ("GM Korea") as the tested party. The Appellant appeared before the learned TPO and explained in detailed search strategy, margin computation of tested party and comparable companies. Appellant also provided all back-up financial data in hard and soft copies for both tested party and comparable companies vide submission dated November 6, 2015. * Para 3 of the submission - Extract from the learned TPO's submission is reproduced below for Your Honours kind consideration: 3. As a result of search, 74 comparable companies located in Korea are found. On further examination the search result, it is found that only 33 companies are functionally similar. Since the assessee has selected TNM method for benchmarking, the above 33 companies are found broadly engaged in similar ....
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.... documentation to carry out the fresh search. Considering the same strategy was adopted, there was no need to carry out the fresh search and the learned TPO should have considered the same comparables as selected in the documentation instead of running a new search. The learned TPO is bound to accept the Appellant's analysis on account of following reasons: * Analysis undertaken in accordance with the law The Appellant has complied with all requirements as prescribed under the Act read with Rule 10D of the Rules. The transfer pricing analysis was undertaken as per the procedures outlined and in good faith, to comply with all the provisions of law and to provide a true and fair analysis. * No reasons to believe that the transactions were not at the arm's length with providing any cogent reasons As provided in section 92C(3) of the Act, the TPO can proceed to determine the arm's length price only in circumstances enumerated under clause (a) to (d) provided therein. Section 92C(3) of the Act provides as under: "Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material infor....
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....dicial and quasi-judicial controversies as it must in other spheres of human activity. So far as the income-tax assessment orders are concerned, they cannot be reopened on the score of income escaping assessment under section 147 of the Act of 1961 after the expiry of four years from the end of the assessment year unless there be omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. As already mentioned, this cannot be said in the present case. The appeal is consequently allowed, the judgment of the High Court is set aside and the impugned notices are quashed. The parties in the circumstances shall bear their own costs throughout." The Gujrat High Court in the case of CIT vs Harikishan Jethalal Patel [1987] 168 ITR 472 (Guj) has held that when there is no dispute as to the facts of the case or the material available on record then remanding back of the proceedings is no warranted. The High Court held as under: 13. In the present case also, as pointed out earlier, the Income Tax Officer never doubted the genuineness of the firm and/or the transaction. On the record, there is no material whatsoever to doubt eit....
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....ttached to this for sample screenshot of the financial information of companies selected by the learned TPO. Also, it is should be noted that the learned TPO erred in selecting majority of new companies as comparables. These companies are functionally dissimilar or they don't have segmental results for the relevant activities. Further, the computations carried out by the learned TPO didn't reconcile with the financial back-up even after excluding 'Other Revenue'. * Para 3 (i) of the submission - Extract from the learned TPO's submission is reproduced below for your Honours kind consideration: (i) The segmental PLI computation submitted by the assessee, which was prepared on the basis of report of independent auditor, is for the period from 01/04/2005 to 31/03/2006 for AY 2006-07 and for the period from 01/06/2006 to 31/03/2007 for AY 2007-08. However, the data of all the comparables is for Jan. to Dec. period. Though the financial statements of tested party (GMDAT) are also for the period Jan. to Dec., the assessee has prepared segmental accounts for the period from l" April to 31" March and no justification is given in the TP study report. However, since the H....
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.... and further converted into Million). The figure of 63.44 Million USD is revenue from Indian AE only. The details of revenue earned by tested party from above mentioned international transactions from other AEs are not available However, on the basis of available figures, the segmental revenue of the tested party should have minimum 63.44 Million USD whereas in the segmental accounts, the same is shown at 54.50 Million USD. This shows that the segmental PLI working made by the assesee is not reliable However, as per the directions of the Hon'ble ITAT, segmental PLI of the assessee is accepted subject to above mentioned arithmetical correction. Thus after adopting the correct figure of segmental revenue as above, the revised profit comes to 5.32 Million USD (seg. Revenue 63.44 Mn USD (-) Seg Cost 58.12 Mn USD) and the OP/OC % comes to 9.15% as against (-)6 23 % shown by the assessee in respect of tested party. (iii) For AY 2007-08, the segmental revenue (for sale of CKD kits, components, spare parts, accessories and capital goods) i.e. revenue from related parties is shown at B'1.73 Million USD whereas payments made by the assessee to GMDAT during AY 2007-08 alone c....
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....uired to be made in this year. The ALP profit for AY 2007- 08 comes to 1 63 USD Million whereas, the profit worked out by the assessee is 7.77 USD Million This shows that 614 USD Millions is paid more than the ALP The value of payments made by the Indian party is 81.73 USD Million. However, after reducing the extra profit of 6.14 USD Million, the ALP price of International transaction comes to 75.59 USD Millions. Thus the adjustment of 6.14 USD Million equivalent to Rs. 26,67,21,600/- (61,40,000 USD X 43.44 prevailing USD rate in INR) needs to be made. The Appellant would like to state that the learned TPO has erred in computing the margins of the tested party i.e. GM Korea for assessment years 2006-07 and 2007- 08. The learned TPO has erred in adding the value of import of parts and components and spare parts of other associated entities as well which resulted in a higher value. The total value of import of parts and components and spare parts from GM Korea as per Form 3CEB is provided below for Your Honours consideration: Particulars Amount (INR) AY 2006-07 Amount (INR) AY 2007-08 Import of parts and components from GM Korea 2,269,447,566 3,275,793,039 Imp....
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....no adjustment should be carried out in relation to the same. * Para 3 (iv) and 3 (v) of the submission - Extract from the learned TPO's submission is reproduced below for Your Honours kind consideration: (iv) In the TP study report, the assessee has used filter of sales more than zero and no upper limit is applied. The same approach is adopted while selecting the comparables under report. (v) For computation of PLI of the comparables, the assessee, in its TP study report has excluded the interest income, dividend income and non-recurring income. The assessee has considered the other income as operating, however, TPO has not the same as operating income in absence of details of such other income. In respect of expenses, the assessee has excluded nonrecurring expenses-interest and financial charges The TPO has adopted similar approach The learned TPO has proposed to exclude other income for the purpose of margin computation. In this regard, it is respectfully submitted that the learned TPO never raised this contention before in the original assessment or remand proceedings. Further, it is pertinent to note that the comparables financial reports obtained ....
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.... AY 2007-08 (NCP in percent) Country Name Financials Dae Jin Industrial Company 5.16 6.97 South Korea Standalone Profit and Loss account Jico Co., Ltd. 3.38 2.71 South Korea Standalone Profit and Loss account Pusan Cast Iron Company Limited 7.38 7.69 South Korea Standalone Profit and Loss account Saeron Automotive Corporation 14.79 17.68 South Korea Standalone Profit and Loss account WOOSU AMS CO., LTD. 0.20 3.90 South Korea Standalone Profit and Loss account Yeonghwa Metal Co., Ltd. 15.98 17.60 South Korea Segmental (Automobile parts segment and pipe fitting & connector segment) Arithmetic mean (in percent) 7.82 9.42 * Para 3 (vi) of the submission - Extract from the learned TPO's submission is reproduced below for Your Honours kind consideration:- (vi) The basic principle to compute the arm's length price is that to find out what would have been the price of the similar services/goods transferred by the independent parties (uncontrolled parties) in the similar circumstances. lt is settled legal position as decided by the....
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....As regards corrections in segmental PLI working of the tested party, and allegedly erroneous inclusion of imports of spare parts and component of other AEs, it was submitted that the assessee itself has done so and that the TPO has not, therefore, changed the method of computation. According to the TPO, while computing PLI margin of tested party, the revenue earned from the tested party from similar activity, i.e. segmental activity, and related expenditure has to be considered". As regards the related party transactions issue, it was submitted that since "effect to the directions of Hon'ble ITAT could not be given and there was occasion before the TPO to verify the comparability of comparables" earlier. He thus justified the stand taken by him in the earlier report. 27. As we take note of the above facts, it is necessary to take a look at the stand taken by the TPO in the impugned order. We have noted that the TPO reiterated the impugned ALP adjustments on the ground that "with due respect to the directions given by the Hon'ble ITAT, in absence of any data being supplied by the assessee with respect to GMDAT, it is not possible to conduct the transfer pricing study adopting the....
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....e to conduct the transfer pricing study adopting the GMDAT as tested party", but once his attention is drawn to the information already furnished by the assessee, and the certification of such information by public accountants, he no longer has a grievance on that issue. As regards the TPO's observation to the effect "in order to ensure conformity with the above principle, the assessee was called upon to submit the data relating to the tested party which was available with it for the purpose of benchmarking. Such data has been submitted by it in response to the letter dated 10/7/2014. The data merely comprises of the consolidated annual report of GMDAT for 2004 and 2005, a PLP schedule and the profit statement from supply of CKDs to Indian company", we may only refer to the uncontroverted clarifications given by the assessee to the effect that the assessee has produced the documents before the TPO during the original and remand proceeding - namely (a) certified PLP data from the statutory auditors of GM Korea;(b) consolidated annual report of GM Korea; (c) Allocation key (d) reconciliation of the certified segmental report prepared by the Auditor vis-à-vis the PLP data submi....
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....-examine the matter. In any case, the assessee has, as we have noted earlier, met these issues now being raised by the TPO. There are clear and blatant errors in the report filed by the TPO, inasmuch as even interest, dividends and nonrecurring incomes are included in the operational income, but nonrecurring expenses, interest and financial charges are excluded from the operational expenses. Such an approach is ex facie incorrect. Similarly, adjustments to the revenues are incorrect inasmuch as these donot take into account transactions with other AEs. The inferences drawn by the TPO are unjustified and incorrect. The figures given by the assessee, explaining these variations, demonstrate the same, and when the TPO was called upon to appear and explain the same, he did not have anything specific on these pointed issues. The TPO did file a reply but it did not comprehensively deal with these issues. We have anyway noted that the TP study was very much before the TPO at the remand stage as well but he had no issues with the selection of comparables but now he conducts a fresh study and enlarges the scope of comparables. Such an approach, in our humble understanding and subject to wha....
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....of rejectionwhere applicable, in Annexure 2. The business description of the comparables has also been set out at page 1417 onwards. The TPO has no issues with the same, no comments on these inputs and yet he proceeds to draw the fresh comparables on the basis of new search. It is only elementary that unless the TPO is able to show infirmities in the TP documentation of the assessee, he cannot embark upon the exercise of the process of benchmarking afresh. Rejection of the TP documentation by the assessee is a sine qua non for the TPO resorting to the fresh exercise of choosing comparables and started the process of determination of arm's length price de novo. The action of the TPO is inappropriate and unsustainable in law. 30. As we uphold the grievance of the assessee, we make it clear that this decision essentially rests on the basic legal position that the TPO cannot be allowed to make an altogether new case at the stage of remand proceedings, even though, as we have noted earlier, there are clear inconsistencies in the approach of the TPO even at this stage, such as, for example, on estimation of segmental revenues, on inclusion of nonrecurring revenues, interest and divide....
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....rsoft and the claim of the assessee is that due to this extraordinary event, this comparable should be excluded. A large number of judicial precedents are also cited in support of this argument, including the coordinate bench decisions in the cases of Behr India Ltd [(2014) 52 taxmann.com 447], Capital IQ Information Systems (ITA No. 1961/Hyd/2011, approved by Hon'ble AP High Court vide judgment dated 5th June 2014), CES Pvt Ltd (ITA No. 1445/Hyd/2010, approved by Hon'ble AP High Court vide judgment dated 16th July 2014), and Zavata India Pvt Ltd. There is no specific argument against this exclusion. Consistent with the stand taken by the coordinate benches, we uphold the grievance of the assessee and direct the TPO to exclude this comparable. So far as Roltas India Limited is concerned, we have noted that this company has almost 25% (24.77 % to be precise) related party transactions, and that, for this reason alone, this comparable deserves to be excluded. That apart, even the functional profile of the comparable is different inasmuch as apart from engineering services, this entity is admittedly engaged in design, procurement and construction management activities as well. For all....
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....is adjustment, as noted by the coordinate bench in the first round of proceedings, in a rather mechanical manner. When the matter reached coordinate bench for adjudication, it was remitted to the file of the TPO by observing as follows: 19.11. We have carefully considered the lengthy submission made by the assessee which has been equally refuted by the revenue by its elaborate submission 19.12. On considering the contentions of the rival parties, it is observed that the tussle between the parties has been narrowed down to the issue of comparing of the agreements. The assessee had taken the agreement entered into between the assessee and Isuzu and treated as CUP whereas the TPO had as CUP the agreements of (i) Namyang- Henglong; and (ii) Delphi-Jingzhou. This has been assailed by the assessee for the reasons narrated above. The agreement entered into by the assessee as well as the agreements of unrelated parties referred to by the TPO contained [terms and conditions] the nature and scope of services involved which required to be examined. The DRP had, without involving itself in analyzing the contentions put-forth by the assessee with that of the TPO in rejecting t....
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....essee has paid royalty to M/s. GMDAT. This agreement was exactly the same on account of product royalty with the assessee's product royalty agreement. Accordingly a show cause notice issued to the assessee proposing to use the above agreement as CUP to benchmark the ALP of royalty payment. In its reply dated 30.9.2010 assessee had stated that it has benchmarked its transactions with internal CUP available on similar agreement with the third party i.e. Isuzu Motors Limited, Japan to obtain certain technical information and assistance in relation to manufacturing of Tavera in India and as per this agreement, Isuzu charged royalty at the rate of 5% of net selling price to the assessee for providing technical information and assistance in this regard. The assessee further had stated that net royalty payment was approximately 0.54% of the gross selling price and hence same was below 3% and should be accepted as benchmark rate for royalty transaction. However, the contention of the assessee was not accepted by the TPO stating that Isuzu's agreement and this agreement is not exactly comparable with assessee's agreement for royalty for M-200 project; whereas agreement between K....
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....ough strictly speaking, the principle of res judicata does not apply to income tax proceedings, but where a fundamental aspect permeating through the different assessment years have been found as a fact one way or the other, and the parties have allowed the position to be sustained by not challenging the order, it is not allowed to change the position in any subsequent year. The Supreme Court in Radhasoami Satsang vs. CIT (193 ITR 321) has clearly laid down the above rule of law by making the following observation: One of the contentions which learned senior counsel for the appellant raised at the hearing was that, in the absence of any change in the circumstances, the Revenue should have felt bound by the previous decisions and no attempt should have been made to reopen the question. He relied upon some authorities in support of his stand. A Full Bench of the Madras High Court considered this question in T.M.M. Sankaralinga Nadar and Bros, Vs. CIT[1929] 4 ITC 226. After dealing with the contention, the Full Bench expressed the following opinion (p. 242). The principle to be deduced from these two cases is that where the question relating to assessment does not vary with t....
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....following observations were made: In view of the judgments of this court in Union of India vs. Kaumudini Narayan Dalal [2001] 249 ITR 219; CIT vs. Narendra Doshi [2002] 254 ITR 606 and CIT Vs. Shivasagar Estate [2002] 257 ITR 59, the principle established is that if the Revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in the case of one appellant, then it is not open to the revenue to challenge its correctness in the case of other appellant without just cause. In the instant case, there is no just cause mentioned by your goodself in the Notice or the Order explaining the basis for taking a view contrary to the view taken in the earlier year. In Union of India Vs. Kaumudini Narayan Dalal And Another (249 ITR 219), the Supreme Court has reiterated the view that if the Revenue has accepted a point raised by the appellant, it is subsequently debarred from challenging the same point. This is how the Supreme Court ruled: The order under challenge in this appeal by the Revenue followed the earlier judgment of the same High Court in the case of Pradip Ramanlal Sheth vs. Union of India [1993] 2....
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....ound in the subsequent year The Supreme Court in Radhasoami Satsang Vs. CIT [1992] 193 ITR 321 observed that where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. The Supreme Court has dismissed the SLP filed by the Department against the decision of the Delhi High Court (supra) in CIT Vs. ARJ Security Printers (vide 266 ITR 4 Reporter.) It is submitted that the law laid down by the Hon'ble Supreme Court in the case of Radhasoami Satsang (supra) would apply to the Assessee's case as well with equal force. As submitted above, the application of CUP as the most appropriate method for benchmarking assessee's international transactions have been accepted by your goodself during the TP audit proceedings for the earlier financial year. The facts of the case, the nature of international transaction and the manner of application of the CUP have remained the same in financial year 2005-06. Accordingly, a complete and fun....
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....any efforts to show as to this CUP input in different in respect to the royalty transaction undertaken by the assessee, such an external comparable can indeed be accepted. We see no infirmity in the same and we, therefore, confirm the action of the TPO on this count. 43. To the extent above, the ALP adjustment of Rs. 4.89 crores is confirmed. 44. Let us now take up issues, other than transfer pricing issues, raised in these appeals. 45. So far as the assessment year 2006-07 is concerned, the only other grievance of the assessee is against disallowance of Rs. 8,02,194 on account of provision for obsolete inventory. 46. So far as this issue is concerned, we have noted that while the Assessing Officer has, following order of a coordinate bench in assessee's own case for the assessment year 2006-07 which he was directed to follow in the first round of proceedings, allowed the provision of Rs. 2,50,68,560 on account of provision for slow moving stock and inventory, he has estimated market value of such stock at 3.2% as was held by the coordinate bench. The amount of estimated value thus worked out to Rs. 8,02,194. The assessee is aggrieved and is in appeal before us. 4....