TaxTMI 
TaxTMI 
2019 (8) TMI 448
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....(TPO) for determining the arm's length price (ALP) of the international transactions. The TPO noticed that the assessee paid Royalty for use of technology amounting to Rs. 3,50,06,690/- to its Associated Enterprises (AEs). The assessee employed Transactional Net Margin Method (TNMM) as the most appropriate method for demonstrating that the transaction of payment of Royalty along with other two other international transactions of `Import of raw materials and components for manufacture of finished goods' and 'Export of manufactured finished goods', were at ALP. At this stage, it is pertinent to mention that qua the remaining three reported international transactions of Commission received; Import of finished goods for sale in the domestic market; and Provision of engineering drawing and design services, the assessee again applied the TNMM as the most appropriate method, but processed all of them distinctly from each other. Instantly, we are considering the international transaction of `Payment of Royalty for use of technology' which was processed by the assessee under TNMM but by aggregating it with the first two transactions of Import of raw materials and Export of finished goods. T....
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....ils. 5. Ground no. 4 of the assessee's appeal is against the confirmation of transfer pricing addition of Rs. 2,24,11,726/- in the international transaction of `Export of manufactured finished goods' with transacted value of Rs. 50,95,90,294/-. This transaction was shown by the assessee at ALP under the TNMM in an aggregate manner considering two other transactions including payment of Royalty, which has been discussed in the earlier part of this order. The TPO observed qua this transaction that number of items were sold by the assessee to AEs and non-AEs, which included Elastic pins, Regulating assembly, Rubber packing, Springs etc. It was seen from the details filed by the assessee in Annexure-1 that for the same product the price charged from AEs was less than that charged from non-AEs, giving a cumulative difference of Rs. 2,24,11,726/-. The TPO, therefore, rejected the application of TNMM on aggregate basis and applied the Comparable Uncontrolled Price (CUP) as the most appropriate method for determining the ALP of this transaction. On being called upon to explain its position on such difference in prices, the assessee, inter alia, submitted that there was a vast difference i....
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....ferred to Annexure-1, whose copy has been placed at page 559 onwards of the paper book. The first item dealt with in Annexure-1 is Elastic Pin. Sale of this product made by the assessee to its AE in Belgium is at the average rate of Rs. 11.52 per unit with quantity of 2855 units as against sale of 20 units made to a Sri Lankan non-AE, namely, Bogala Graphite Lanka Ltd. at the average rate of Rs. 44 per unit. It is thus seen that there is a substantial difference in the quantity sold to AE and non-AEs. Price has been less charged from AEs with sale of higher quantity. Second item in the Annexure is Regulating Assembly. The assessee sold its 100 units to non-AE at a price of Rs. 2658 per unit and 50 units to AE at a price of Rs. 2683.80 per unit. Here, it is seen that the position has reversed in as much as the assessee charged higher price from its AE vis-àvis non-AE on the sale of a lower quantity to AE. The next item is Rubber Packing. The assessee supplied 10 units of this item to Sri Lankan non-AE at Rs. 23.25 per unit as against 1983 unit supplied to its Belgium AE at an average rate of Rs. 6.86 per unit. There is substantial difference in rates charged as well as quanti....
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....e comparability of an international transaction can be properly done with a similar uncontrolled transaction, if the latter has similar characteristics, contractual terms and geographical locations etc. In case, some differences exist between the two sets of transactions, then, the effect of such differences should be ironed out by giving a reasonable adjustment in the profit margins etc. 9. Adverting to the facts of the instant case, we find that though description of items sold by the assessee to its AE and non-AEs is similar, but there are several differences in the two, such as, location of the parties, quantities lifted and customization of products. Such differences have significant bearing on the price charged by the assessee. No adjustment has been allowed by the TPO on account of such differences. In the same manner, the ld. DR also could point out any mechanism for giving adjustment on account of such material differences. In such circumstances, the price charged from AEs and non-AEs cannot be compared under the CUP method. The Hon'ble jurisdictional High Court in Pr. CIT Vs. Amphenol interconnect India Pvt. Ltd. (2019) 410 ITR 373 (Bom.) considered almost a similar situ....
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....factured finished goods and payment of Royalty, automatically gets disturbed and cannot be construed as giving a correct profit level indicator of the distinct international transaction of export of manufactured goods simplicitor. Not only the effect of profit from the transaction of payment of Royalty needs to be removed from the aggregated profit level indicator of the assessee, even the comparables and their PLIs may also undergo change because of such exclusion. Thus, it is evident that the contention of the ld. AR in this regard cannot be accepted. Under the prevalent circumstances, the ALP of the international transaction of Export of manufactured finished goods is required to be separately done. We have held above that the CUP is not the most appropriate method in the given circumstances. In such a condition, there is a need for resorting to another suitable method for determining the ALP of international transaction of Export of manufactured finished goods. We, therefore, set aside the impugned order and remit the matter to the file of the AO/TPO for a fresh determination of ALP of the international transaction of Export of manufactured finished goods by the assessee. It is....
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....ed only at Rs. 13.38 crore, the TPO proposed transfer pricing adjustment of Rs. 9.84 crore on this count. The ld. CIT(A) overturned this proposition by holding that the TPO was not justified in not considering the cost of raw material and depreciation from the ambit of total expenses in his calculation. Relying on a table drawn at page 27 of the impugned order, the ld. CIT(A) held that no transfer pricing addition was called for. The Revenue is aggrieved by the deletion of this addition. 13. We have heard the rival submissions and gone through the relevant material on record. It is noticed that the international transaction under dispute is Receipt of commission. The assessee sold goods on behalf of its AEs and earned indenting commission of Rs. 13.40 crore. As against the assessee applying the TNMM, the TPO has albeit not referred to any specific method for determination of the ALP of this transaction, but appears to have gone with the Cost plus method. Rule 10B(1)(c) of the I.T. Rules gives modus operandi for determining ALP under this method, as under:- " (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services ....
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....f Rs. 40 crore; computing percentage of marketing profit to sales at 8.75% by taking the figures of profit from marketing activity at Rs. 37.08 crore and sales of the assessee at Rs. 422.99 crore; and then applying this percentage of 8.75% to the products sold by the assessee for its AEs at Rs. 136.03 crore to find out arm's length marketing profit on sale of AEs' product at Rs. 11.92 crore. Then he determined the arm's length price of the transaction at Rs. 23.22 crore by adding such profit Rs. 11.92 crore to the costs incurred by the assessee in rendering services at Rs. 11.30 crore. As the transaction is that of earning commission, ideally, the benchmarking should also have been done with reference to an uncontrolled transaction of earning commission only. Notwithstanding the fact that the TPO was required to take the comparable uncontrolled transaction as that of rendering of marketing services alone, he started with the entity level figures of the assessee which also include sale of self goods ostensibly involving altogether different functions, assets and risks vis-à-vis earning commission on sale for AEs. Thereafter again, he went off the mark by excluding the amount ....
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....es. The AO discussed this issue at page 2 onwards of his order. He observed that the assessee claimed deduction of Rs. 11,13,64,581/- under the head "Miscellaneous Expenses". These expenses included Software development expenses of Rs. 23,99,234/-; expenses on premises at Rs. 82,70,109/-. He allowed 50% depreciation on software expenses and following his view for the preceding year, capitalized 80% of expenses on repairs. Since necessary details were not available in respect of the remaining expenses, he disallowed 20% of such expenses which led to the further addition of Rs. 1,94,57,964/-. The assessee furnished certain details before the ld. CIT(A), who upheld the disallowance at 20% of the remaining expenses, against which the assessee has come up in appeal before the Tribunal. 20. We have considered the rival submissions and perused the relevant material on record. The assessee has placed break-up of total Miscellaneous expenses at pages 69-70 of the paper book. Similar issue came up for consideration before the Tribunal for earlier years as well. After allowing full deduction towards software expenses and fees for handling share record and making full disallowance for warran....
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....d of appeal by the Revenue. 28. Ground no. 9 of the Departmental appeal is against allowing deduction towards provision for warranty at Rs. 80,89,982/-. 29. Brief facts of this ground are that the assessee claimed deduction towards provision for warranty at Rs. 1,16,01,982/-. The AO observed that actual payment towards expenses on this count was only Rs. 35,12,000/-. He, therefore, made disallowance for the remaining amount of Rs. 80,89,982/-, which came to be deleted in the first appeal. 30. Both the sides are fairly agreeable that the facts and circumstances of this ground are similar to those of earlier years. The Tribunal has discussed this aspect in para no. 15 onwards of its order for the A.Y. 2003-04 and restored the matter to the file of the AO holding, inter alia, that the provision for warranty should be allowed at 0.4% of net sales and further no deduction should be allowed for actual expenses. As the facts are similar, we direct the AO to follow the same course of directions to the extent applicable for the year under consideration. 31. The assessee has raised the following two additional grounds : "1. Claim of Education Cess : The Appellant prays that the liab....