TaxTMI 
TaxTMI 
2019 (5) TMI 1440
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.... making the aforesaid addition, the Ld. AO has erred in making a reference under section 92CA(1) of the Act to the Ld. Transfer Pricing Officer ('TPO') on the following amongst other grounds, rendering the order of the Ld. TPO as unsustainable both in law and on facts: a) as the reference made by the Ld. AO to the Ld. TPO is not in accordance with the provisions of Section 92CA(1) of the Act; and b) as no opportunity of being heard was granted at any stage of the proceedings for this purpose, whether at the proposal stage or even later at the time of grant of approval 3. The Ld. TPO has erred in making the transfer pricing adjustment without establishing the existence of any one of the four preconditions provided in section 92C(3) under section which is a mandatory requirement, for making an adjustment under section 92CA(3) of the Act. 4. The Ld. TPO has grossly erred in making transfer pricing adjustment and that too without giving a show-cause notice. The adjustment has been made overlooking that no opportunity to showcause was granted for making the aforesaid addition. The adjustment made is highly arbitrarily and in violation of princ....
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.... as the PLI in the transfer pricing documentation, has been disregarded without any justification whatsoever. c) in disregarding the Judgment of Hon'ble Tribunal in Appellant's own case for AY 2007-08 to AY 2011-12 wherein TNMM with Berry ratio (modified form of OP/OPEX) as the PLI has been accepted as the most appropriate method for benchmarking the transactions relating to the indent segment. d) in disregarding the transfer pricing approach adopted by the Appellant (being TNMM as the most appropriate method with OP/OPEX as the PLI), despite the fact that this methodology has been agreed upon in the BAPA signed between the Appellant and the Central Board of Direct Taxes. e) in computing ALP for indent transactions by adopting 5 per cent commission rate on arbitrary basis, thereby disregarding that the aforesaid commission rate was not based on any comparable and did not represent arm's length price. 8. The Ld. Dispute Resolution Panel ('DRP') has failed to comprehend that it could not have upheld such a finding of the Ld. TPO which was made without any basis and justification. 9. That the Ld. AO has erred in levying ....
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....so been made, which is not permissible in law as the concept of substantive and protective adjustment is relevant only when an income is to be added in the hands of more than one taxpayer. 6. The Ld.TPO while applying the Bilateral Advance Pricing Agreement ('BAPA') signed by the Appellant in toto on transactions not covered by the said agreement (in making adjustment on substantive basis) has erred in respect of the following: a) in computing the arm's length operating profit / operating expense ('OP/OPEX') as the Profit Level Indicator ('PLI') at the rate of 22.50 per cent for transactions with AEs other than Sumitomo Corporation, Japan ('SCJ'), being the profit margin negotiated in the BAPA. While doing so, the Ld. TPO failed to determine arm's length operating profit margin based on comparability analysis, as mandated under section 92C of the Act. b) in not appreciating that the arm's length OP/OPEX as reflected in the transfer pricing report was 5.16 per cent and in the absence of any adverse finding in respect of such comparability analysis, the said rate of 22.50 per cent could not have been made the basi....
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....amining the validity of initiation of penalty proceedings under section 271(1)(c) of the Act. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised. The arguments taken hereinabove are without prejudice to each other." 2. Brief facts of case are as under: Assessee is a company engaged in business of facilitating import and export activities both directly and indirectly on behalf of various customers in India and overseas through provision of trade related support services and trade related advisory services. Assessee filed return of income for assessment years 2012-13 on 28/11/12 declaring total income of Rs. 18,34,60,380/-. For assessment year 2013-14, return of income was filed on 27/11/13 declaring total income of Rs. 23,08,70,900/-. 2.1. The case was selected for scrutiny and statutory notices were issued to assessee in response to which representative of assessee appeared before Ld.AO and filed requisite details as called for. Ld. TPO passed draft order under section 92CA (3....
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....TPO applied (i) Profit margin agreed in the BAPA for making the substantive adjustment; and (ii) Commission rate of 5% for making protective adjustment by relying on the non-AE indent commission rate (i.e. 3.65%) and thereafter adding a mark-up of 1.35 per for services provided to the AEs (and not to the AEs). The Panel has considered all aspects of the case. The matters for AY 2007-08 to AY 2010-11 are pending in Hon'ble ITAT after the issue being set aside by the Hon'ble High Court for further in-depth examination and findings thereon. Further, the case for A. Y 2011-12 is also pending in the Hon'ble ITAT. The matter involved is same in all the cases including the AYs 2013-14 which are under the current proceedings. The TPO has brought forward that the method used in earlier years as the Hon'ble ITAT has been used to make protective assessment. For substantive assessment, the TPO has applied the rate BAPA for transactions with the AE, SCJ to which the Panel agrees as it is the most appropriate ALP to be used. The Panel finds no reason to interfere with the order of the TPO/AO in view of the cases set are pending in the Hon'ble ITAT. The objections of th....
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....mponents, chemicals, CD changers, others. The exports undertaken by assessee are not very substantial and has been made to AEs only. 3.6. Ld. TPO observed that assessee in TP documentation has analysed the following international transaction: Sumitomo India International Transaction Transfer Pricing Method Profit Level Indicator (PLI) Total value of Transaction (Amount of INR) Margin Comparable Findings Arithmetic Mean Sale of goods TNMM OP/VAE 5,723,620 20.92% 4.03% Purchase of goods 170,977 Rendering of services 435,208,711 Availment of services 62,093,454 Reimbursement of expenses paid/payable 757,438 Purchase of computer software TNMM OP/VAE 5,164,516 20.92% 4.41% Trade receivables 121,799, 3.7. During Transfer Pricing proceedings assessee entered into BAPA which covered assessment year 12-13 and 13-14 under the category, rollback years. It was observed by Ld. TPO that said agreement define....
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....rice. Ld.TPO observed that assessee used TNMM method to benchmark these transaction, and that there was no functional difference between transaction of assessee with Sumitomo Japan and other AEs were found. It was thus recorded by Ld.TPO that transactions shall be benchmarked at same rate of profitability as applied for transactions with Sumitomo Japan. Accordingly transfer pricing adjustment was calculated at Rs. 1,16,22,485/-, on substantive basis in the hands of assessee, in respect of transactions entered into by assessee with AEs, other than Sumitomo Japan. 3.12. Subsequently Ld. TPO benchmarked international transactions of assessee by clubbing both transactions for purposes of ALP determination where Ld.TPO rejected TNMM adopted by assessee for ALP determination and made adjustment in respect of commission segment business by adopting margin of profit for trading with non-AE of assessee. It has been observed by Ld. TPO that similar adjustment was carried out by him for preceding assessment years 2007-08 to 2010-11. Aggrieved by these adjustments subsequently made in the manner mentioned herein, assessee filed appeal before this Tribunal wherein the Tribunal accepted ap....
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....AE and in the Assessment Year 2007-08 the volume of transaction, FOB value wise is 'Nil' in the case of non AE; and the commission earned with the AE is Rs. 7,50,43,686/- and with the non AE it is only Rs. 9,672/-. Similarly the products dealt with AE in automotive segment are entirely different and the geographies involved are Switzerland, Singapore, Thailand and Japan whereas non AE transactions are with Suzuki Motorcycle India Pvt. Ltd. and Bajaj Auto Ltd in India. Likewise under the product 'chemicals' the assessee has undertaken 1044 transaction with AE and only 112 transaction with non AE and the commission with AE is 1.28%, whereas non AE it is 2.26%. Similarly, the products dealt with AE and non AE under this segment are quite different and geography involved with AE are Spain, Japan, Italy, Switzerland, Thailand, whereas with non AE it is India. Likewise in 'electronics' segment the transaction undertaken with the AE are 253, whereas with the non AE it is 5 and again not only the products are different but also geographical location are different with that of non-AE which are mostly with Indian parties and all AE transactions are with various for....
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....umstances, we have to see whether TNMM can be considered as most appropriate method. First of all, it has been brought on record before us that right from the Assessment Years 2003-04 to 2006-07, TNMM has been accepted as the most appropriate method by the TPO. However, instead of 'berry ratio' as PLI, TPO has taken OP/TC as PLI. Further, it has been brought to our notice that from the Assessment Years 2011-12 to 2018-19 under the MAP agreement it has been agreed that TNMM should be the most appropriate method to determine the ALP of the international transaction of the indent keeping into the fact that assessee is a low risk service provider and there is no change in FAR right from Assessment Years 2003-04 to 2018-19. Once TNMM has been accepted under the similar FAR, we do not find any reason to deviate by adopting some other method. Otherwise also we have held that CUP method cannot be applied and other methods admittedly are incapable of capturing the true arm's length result and therefore, we hold that TNMM should be taken as a most appropriate method for benchmarking the said transaction. 18. Now having accepted that TNMM is the most appropriate method, the second is....
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....as to substantiate its margin by bringing comparable uncontrolled transactions to demonstrate that its commission earned in this segment is at arm's length; and the TPO shall examine the same and decide accordingly. Needless to say that TPO shall give due and effective opportunity to the assessee to substantiate its ALP as per direction given above. 20. In the result, the appeal for all the Assessment Years are treated as partly allowed for statistical purposes. 5. On perusal of aforestated observations by this Tribunal in immediately preceding assessment year following points emerge: • there are huge differences in volume on F.O.B. basis and the geographies dealt with in AE and non-AE segment are entirely different. • The products involved in controlled and uncontrolled transactions are not similar and identical in volume value market and geographical location. • The pricing factor which largely depends upon the geographical locations are different in AE and non-AE segment and therefore CUP cannot be applied 94 determining ALP of transaction either with AE or with non-AE. Therefore TNMM is most appropriate method under such cir....