AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (4) TMI 41
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....ng to the export of goods entered into by the Appellant with its Associated Enterprise was not at arm's length. 1 : 2 The Assessing Officer / Dispute Resolution Panel erred in rejecting the Transactional Net Margin Method (TNMM) which was determined by the Appellant as the most appropriate method as per the provisions of section 92C(1) of the Income-tax Act, 1961. 1 : 3 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the international transaction relating to the export of goods entered into by the Appellant with its Associated Enterprise was at arm's length and hence no adjustment in respect thereof was called for and the stand taken by the Assessing Officer / Dispute Resolution Panel in this regard is misconceived, erroneous and incorrect. 1: 4 The Appellant submits that the Assessing Officer be directed to delete the upward adjustment of Rs. 13,55,73,433/- made by him to the Appellant's total income and to recompute its total income and tax liability accordingly. 2 : 0 Re.: Adjustment of Rs. 1.19,960/- to the international transaction relating to Corporate Guarante....
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....ce the stand taken by the Assessing Officer/ Dispute Resolution Panel in this regard is misconceived, erroneous and incorrect. 3 :4 The Appellant submits that the Assessing Officer be directed to delete the additional disallowance u/s. 14A so made by him and to re-compute its total income and tax thereon accordingly. 3. The grounds of appeal for assessment year 2013-14 reads as under: 1 : 0 Re.: Adjustment of Rs. 13,16,87,917/- to the international transaction relating to export of goods: 1 : I The Assessing Officer / Dispute Resolution Panel has erred in making an upward adjustment of Rs. 13,16,87,917/- to the total income of the Appellant by holding that the international transaction relating to the export of goods entered into by the Appellant with its Associated Enterprise was not at arm's length. 1 : 2 The Assessing Officer / Dispute Resolution Panel erred in rejecting the Transactional Net Margin Method (TNMM) which was determined by the Appellant as the most appropriate method as per the provisions of section 92C(1) of the Income-tax Act, 1961. 1 : 3 The Appellant submits that considering the facts and circumstances of its ....
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....he Assessing Officer/ Dispute Resolution Panel in this regard is misconceived, erroneous and incorrect. 3 :4 The Appellant submits that the Assessing Officer be directed to delete the additional disallowance u/s. 14A so made by him and to re-compute its total income and tax thereon accordingly. 4. The assessee has also filed common additional grounds for both the assessment years. The common additional ground reads as under: On the facts and in the circumstances of the case and in law, the action of the Assessing Officer ("AO") of making reference to the learned Transfer Pricing Officer ("TPO") without giving any opportunity of being heard, is in violation of the provisions of section 92CA of the Income-tax Act, 1961 and needs to be quashed. The Appellant submits that the reference made to the TPO is not in accordance with law and hence the Order passed pursuant to the illegal reference is bad in law. 5. Regarding the admission of additional ground, the ld. Counsel of the assessee submitted that it is an important legal issue affecting the jurisdiction assumed by the Assessing Officer. Hence, he submitted that the same should be admitted. 6. Per ....
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.... a situation where the assessee has objected before the Assessing Officer that a particular transaction is not an international transaction. However, the ld. Departmental Representative submitted that in the present case, there is no objection whatsoever by the assessee that any of the transactions considered as international transaction have been wrongly done by the Assessing Officer. Hence, the ld. Departmental Representative submitted that there is no merit whatsoever in the additional ground raised by the assessee. 10. We have carefully considered the submissions and perused the records. In this regard, we may gainfully refer to the provision of section 92CA which reads as under: Reference to Transfer Pricing Officer. 92CA. (1) Where any person, being the assessee, has entered into an interna- tional transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm's length price in relation to the said international transaction or specified domestic transaction under....
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....ade under sub-section (1) before the 1st day of June, 2007 but the order under sub-section (3) has not been made by the Transfer Pricing Officer before the said date, or a reference under sub-section (1) is made on or after the 1st day of June, 2007, an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires: Provided that in the circumstances referred to in clause (ii) or clause (x) of Explanation 1 to section 153, if the period of limitation available to the Transfer Pricing Officer for making an order is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to have been extended accordingly. (4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm's length price as so determined by the Transf....
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....tion would certainly be a factor to determine whether or not it is necessary or expedient to refer the matter to the TPO. In case no objection is raised by the assessee to the applicability of Chapter X then the prima facie view of the Assessing officer would be sufficient before referring the transaction to the TPO for determining the ALP. However where an objection is raised about the applicability of Chapter X by an assessee then the requirement for taking a decision after taking on board the objection becomes necessary. In the absence of it being considered at this stage, the same could only be considered by the DRP and as pointed out above, if considered at the very threshold by the Assessing Officer it could save an elaborate exercise of determining the ALP which may turn out to be entirely academic. It is for the above reason that grant of personal hearing before referring the matter to the TPO has to be read into Section 92CA(1) in cases where the very jurisdiction to tax under Chapter X is challenged by the assessee. Admittedly the aforesaid exercise of considering the objection of no income arising or potentially arising from the transaction has not been done in this case....
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....to tax under Chapter X has been challenged by the assessee. It was further expounded that in case no objection is raised by the assessee to the applicability under Chapter X, then the prima facie view of the Assessing Officer would be sufficient before referring the matter to the Transfer Pricing Officer for determination of the AMP. We find that the above exposition and the facts of the present case clearly show that the additional ground raised by the assessee cannot be sustained. It is not at all the case of the assessee that there is any objection to the applicability of Chapter X of the I. T. Act. Hence, on the anvil of the above said Hon'ble jurisdictional High Court decision, this additional ground raised by the assessee deserves to be dismissed. 14. Furthermore, a reading of the CBDT Instruction referred above, provides for three situations where the Assessing Officer must provide an opportunity of being heard to tax payers before recording his satisfaction or otherwise. These situations are as under: (a) where the taxpayer has not filed the Accountant's report under Section 92E of the Act but international transactions undertaken by it come to the notice of....
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....oods 430776529 347689679 TNMM 2 Purchase of Raw Material (Marcoat) 10373706 3993282 TNMM 3 Purchase of Finished goods 756157 7116652 TNMM 4 Investment in Equity capital 5057 - 5 Investment in Preference capital 6902250 - 6 Advance given 414400 - 7 Corporate Guarantee $25,00,000 (value of guarantee as on 31.03.2012) 12,85,50,000 - Determination of ALP : Export of finished goods: Rs. 43,07,76,529/- Purchase of raw materials (Marcoat) Rs. 1,03,73,706/- Purchase of finished goods Rs. 7,56,157/- 18. The assessee has adopted Transitional Net Margin Method for determining ALP for export of finished goods to AE Omni Active Health Technologies Inc, USA. It was s....
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.... 14.96% On the basis of the above, the assessee claimed that the transactions as reported should be treated as at Arm's Length Price. 20. The TPO asked the assessee to provide an updated margin of comparables selected in earlier year, i.e., India Glycols Limited and E.I.D. Parry (India) Limited. The updated PLI come to 6.5% while the PLI of the assessee was 15.21%. Hence, the assessee submitted that the transaction is at arm's length. 21. At this point, the Transfer Pricing Officer noted that during the course of assessment proceedings based on the submissions made by the assessee, it was observed that the average sale price at which goods were sold to AE were lower than the average sale price at which the goods were sold to non AE. The Transfer Pricing Officer issued a show cause notice. In this he mentioned that though the assessee in the TP report has bench marked the transaction under TNMM, no verifiable data has been provided to substantiate the method used. He further added that CUP would be a more appropriate method to bench mark the sale transaction. He proceeded to add that it was seen from the CUP details in respect of export of sale major discrepancie....
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....ered which also supports the above contention of making accurate adjustments to eliminate the effect of such differences. Similarly, the assessee's reliance on the above decision has been considered which emphasize on the variation in the features of the products and geographical locations. However, in the assessee's case since there is no variation in the products sold to the AE and non-AE, the above judgement is not applicable in this case. This office has considered the prir.es for the same products from the AE and non-AE as CUP. 23. The Assessing Officer proceeded to make the computations accordingly and arrived at an adjustment of Rs. 13,55,73,433/- to be made to the international transaction of the export of goods. The assessee filed objections against the above before the DRP. The DRP confirmed the action of the Transfer Pricing Officer by holding as under: 4.3 The DRP has noted that the average sale price at which goods were sold to AE were lower than the average sales price at which the goods were sold to non - AE. The DRP is constrained to note that the price difference is substantial and can't be just explained by geographical factors, volume sale....
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....of assessment proceedings, the Transfer Pricing Officer proceeded with the same and also asked the assessee to provide an updated margin of the comparable selected. The updated margin was given to the Transfer Pricing Officer. From the computation of updated margin also, the PLI of the assessee come to 15.21% which was higher than the PLI of the two comparable companies. Hence, from this analysis of updated comparables also, the transaction was found to be at arm's length. At this juncture, the Transfer Pricing Officer changed his tracks. He observed that no verifiable data has been provided to substantiate the method used. He further held that CUP would be a more appropriate method to bench mark the sale transaction. The assessee objected to the same. In the objections, the assessee also relied upon the OECD guidelines and the ITAT decision in the case of Welspun Zucchi Textiles Ltd. Vs ACIT. However, the Transfer Pricing Officer summarily rejected and held that the application of TNMM is the method of last resort when the comparable price method cannot be applied. However, he noted that in the assessee's case since the comparable price for the same or similar products to the thir....
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....f each particular international transaction provides the most reliable measure of an arm's length price in relation to the international transaction. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:- (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required....
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.... method set out in section 92C(1). The legislature does not provide for an order of preference of method of determining of arm's length price. Now once an appropriate method for determining the arms length price has been chosen and accepted by the Revenue consistently over a number of years, there has to be some cogent reason to make it departure from the consistent method. We do not find that any case has been made out by the Transfer Pricing Officer or the DRP that there was an error committed earlier when the TNMM method was chosen and approved. The Transfer Pricing Officer while justifying the change stated that in T.P. report assessee has bench marked the transaction under TNMM, no verifiable data has been provided to substantiate the method used. Hence, from the above discussion, we find that no cogent reason has been pointed out by the authorities below that the TNMM method applied earlier was not in accordance with the mandate of law as above. It is settled law that resjudicata does not apply to taxation proceedings but it has fairly often been held by the higher courts including by the Hon'ble Apex Court that the consistency should be maintained in the assessment pr....
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....is invited in the case of Glenmark Pharmaceuticals Ltd. in ITA No. 5031/Mumbai/2012 dated 13.11.2013 (A.Y. 2008-09), the Hon'ble ITAT has held that the naked quote rates applicable to the bank guarantee can be made comparable to the corporate guarantee only after downward adjustments (Para 22). In view of the above, a downward adjustment to be naked quotes of the rates of bank Guarantee has been done in this year, while benchmarking this transaction. It is seen that the bank guarantee rates vary generally between 2% to 3% giving an average of about 2.5%. Accordingly, it would be appropriate to charge 2.25% as arm's length rate of guarantee. 32. Against the above, the assessee appealed before the DRP. 33. The DRP proceeded to consider the definition of international transaction u/s. 92B of the I. T. Act. It held that the transaction relating to provision for guarantee and payment of commission for the services by the AE to the assessee would fall within the definition of term international transaction u/s. 92B. It further referred that retrospective amendment brought in Finance Act, 2012 to section 92B has now set at rest all the pursuant ambiguities about the status of guaran....
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....copy of computation of income was filed in support of the claim made by the assessee company. Thus, DRP has taken note of the fact that this has led to double addition. Accordingly, the A.O. is directed to again verify the facts from the original record and given credit of Rs. 4,86,322/- for the suo-moto disallowance made in the computation of income and further, addition should be made only for the balance amount. 38. Upon careful consideration we find that it is now decided by various high courts including the Hon'ble Jurisdictional High Court that no disallowance u/s.14A is required when no exempt income has been earned. 39. In the present case, the assessee's contention is that it has not earned any dividend income from its subsidiary company in India. As regards the income from foreign subsidiary it has been submitted that the same is subject to tax u/s. 115BBD of the Act. We find that principally we are in agreement with the above said submissions of the ld. Counsel of the assessee. However, since the above requires factual examination of the contention that no dividend income has been received from the subsidiary companies in India and dividend income from foreign ....