TaxTMI 
TaxTMI 
2019 (10) TMI 437
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....is appeal is with regard to the transfer pricing adjustment of international transaction in respect of import of raw materials from associated enterprises (AEs) in the sum of Rs. 35,45,28,005/-. 3. The brief facts of this issue are that the assessee is engaged in manufacturing speciality chemicals, distribution of chemicals and undertaking sales promotion activities for overseas group companies wherein it earns indenting commission. 3.1. The assessee's business operations of manufacturing speciality chemicals can be divided into the following three areas: • Paint and coating materials • Packaging and building materials • Performance chemicals and biocides 3.2. The assessee has its manufacturing plant at Taloja, Mumbai and Sriperumbudur, Chennai. The Taloja plant is used for manufacturing water based emulsion polymers for the decorative paints, textiles, construction, paper coatings and leather industries, and flexible packaging adhesives. The Sriperumbudur plant manufactures acrylic emulsion polymers largely used in manufacturing paints and coatings. 3.3. The assessee filed its Return of Income ('ROI') for AY 2010-11 on 30 ....
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....the transfer pricing report applying Cost Plus Method (CPM) as the Most Appropriate Method (MAM). It was stated in the transfer pricing report submitted for AY 2010-11 that the assessee had aggregated its transactions pertaining to import of raw materials for manufacturing with the transactions of export of manufactured finished goods and benchmarking of the said transactions were done on an aggregated basis. 3.7. The gross profit margin earned by assessee for the aforesaid transaction is computed at 16.63 percent as under: Particulars Amount (INR) Net sales 458,11,94,993 Cost of sales 381,94,43,003 Gross profit 76,17,51,990 Gross profit margin (on net sales) 16.63%: 3.8 Whereas, the updated gross operating margin of the comparable companies for AY 2010-11 was arrived at 14.22 percent. The method of computation is in line with the computation of gross profit margins of the assessee as submitted in the TP Study. Sr. No. Name of company Gross Margins (Single year updated) 1 South Asian Petrochem Limited (Merged with Dhunseri Petrochem & Tea Limited) 19.90% 2 Apar Industries Limited 7.53% 3 Axel Polymers Limited 2....
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....) D 23.87% ALP Profit E=C*D 32,42,07,580/- ALP Cost F=C-E 1,03,40,14,374 Adjustment G=A-F 37,49,29,562 3.15. The ld. TPO did not disturb the arm's length determination of any of the other international transactions undertaken by the assessee as detailed above including export of finished goods. 3.16. Before the ld. DRP the assessee filed objections on the following issues. a. Transfer pricing adjustment on account of international transaction on import of raw materials from AEs amounting to Rs. 37,49,29,562/- b. Disregarding the economic analysis undertaken by the assessee using the CPM for determination of ALP c. Rejecting the companies adopted as comparable by the assessee for benchmarking its international transactions without providing any cogent reasons for the same. d. Considering the comparables engaged in different products and activities vis-a-vis the assessee as comparables for arriving at the comparables margin. e. Erroneous calculation of the margins of certain comparables adopted by the ld. TPO. 3.17. The assessee submitted additional evidences for application of Controllable Uncontr....
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.... is considered for some of the transactions, the adjustment would still persist to the extent of Rs. 1,29,19,187 (i.e. value of imports where the purchase price is higher than market price) and hence, this further supports the adjustment made by the TPO under TNMM. 3.21. The ld. DRP upheld the action of the ld. TPO/AO in rejecting assessee's comparable companies and applying TNMM using ld. TPO's set of comparables. However, the ld. DRP directed the ld. AO to rectify arithmetic mean of the comparable companies considered by the ld.TPO at operating margin (on operating revenue) of 22.37% and reduced the adjustment to Rs. 35,45,28,005/-. 3.22. Thus, the ld. DRP upheld the action of the learned AO in rejecting CPM and applying TNMM as the MAM. Also, the ld. DRP rejected alternate submission of the assessee to apply CUP method based on ICIS prices, merely because there was some positive adjustment, without using aggregated approach. 4. Aggrieved, the assessee is in appeal before us. 5. The ld. AR filed additional evidences before us in respect of following aspects / transactions:- A. JUSTIFICATION OF LOSSES ON NET LEVEL The ld. AR argued that the primary reason....
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....proach should be adopted and no cherry picking could be done thereon by considering only those days where the prices of the assessee are adverse. The additional evidences in this regard giving comparative workings are enclosed in page 1051 of the paper book filed by the assessee. The ld. AR vehemently argued that the ld. DRP had accepted the fact of fluctuating prices both upwards as well as downwards for the same product during the year. The ld. DRP stated that difference in ALP by CUP method and by taking cherry picking of the transactions resulted in addition of Rs. 1.29 Crores. The ld. AR reiterated his contentions that if portfolio approach is followed by the revenue, then there will only be loss of Rs. 7.80 Crores and accordingly, there would be no need to make any adjustment to ALP thereon. In this regard, he also vehemently argued that the ld. DRP having accepted the fact of fluctuating prices of the product and having worked out the ALP adjustment to the tune of Rs. 1.29 Crores thereon, ought not to have sustained the addition of Rs. 35.45 Crores. C. USE OF SEGMENTAL DATA OF COMPANIES IF TNMM IS APPLIED ON WITHOUT PREJUDICE BASIS The ld. AR also filed additional g....
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....spute would come to rest to real adjustment, if any, pursuant to such verification by the ld. TPO. The ld. AR again reiterated the fact that CPM was rejected by the ld. TPO only on the ground that assessee during the year had incurred loss from manufacturing business. The reason for the said loss was stated to be primarily on account of lower sales realization from supply of finished goods to a third party customer i.e., Asian Paints Ltd. and the same was not on account of import of raw materials from its AEs. The ld. AR placed on record the additional evidence to support this statement in page 1046 of the paper book. The ld. AR also stated that the assessee identified business opportunity in the South India market and intended to set up the ground level plan at Sriperumbudur for emulsions to cater its customer base in paints and other applications, accordingly, the assessee and Asian Paints Ltd., entered into a Memorandum of Understanding for supply of binders. Evidences in this regard were filed as additional evidence vide pages 1048 and 1049 of the paper book. Under the terms of the MOU, the assessee sold binders to Asian Paints Ltd., during the three year period from 2007....
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....in 161 TTJ 213 wherein acceptability of prices from TIPS Data Base was engaged and it was also held that in any event what TIPS software does is to collect the data, compile the same in easy to refer format and make it available to the end user of such data online (www.TIPSaxim.com) or on electrical media, but this data nonetheless, is public data maintained by the Customs department at various ports. It was also held by the Delhi Tribunal that the ld. TPO was in error in rejecting the information, inputs received from the TIPS software and the data base made available by the said entity. 5.4. The ld. AR with regard to his statement of adopting portfolio approach in CUP method by using TIPS Data Base, placed reliance on the decision of this Tribunal in the case of Boskalis International Dredging C.V vs. DDIT reported in 67 SOT 118. The ld. AR also submitted that this decision of Mumbai Tribunal in the case of Boskalis International Dredging C.V, supra had been upheld by the Hon'ble Jurisdictional High Court which is reported in TS-1310-HC-2018 (MUM). The ld. AR also submitted that in the recently released OECD final deliverables on the Base Erosion and Profit Shifting (BEPS), Ac....
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....considered. He argued that no evidences were produced by the assessee to show that the prices were initiated on combined basis for both import as well as export. 5.9. With regard to adoption of CUP as MAM using TIPS Data Base, the ld. DR argued that the data base in TIPS software is only Customs Department data maintained for determining the levy of duty and the same cannot be used for benchmarking international transactions carried out by the assessee. He further argued that even if the TIPS Data Base is to be accepted, the data on the relevant date of transaction is to be compared. He vehemently opposed the acceptance of bundled approach carried out by the assessee. 5.10. With regard to acceptability of TIPS software by the ld. TPO in A.Y.2014-15, the ld. DR argued that the same was just used by the ld. TPO for his own purposes and has been taken by the ld. TPO for A.Y.2014-15 cannot be applied for A.Y.2010-11 i.e. year under appeal. The ld. DR vehemently opposed for admission of additional evidences filed by the assessee for usage of TIPS Data Base which covers 94.69% of the total import transactions from AEs, and opposed for remanding the same for verification to the f....
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....ltimately the purpose of TP analysis is to benchmark the international transactions carried out by the assessee with AEs with comparable cases using any one of the prescribed methods. When the CUP method using ICIS software covers 68% of the total transactions that too being a direct method and a traditional transaction method, the ld. DRP ought to have accepted the same. Before us, we find that assessee by way of additional evidences had produced comparable data using TIPS Data Base which covers even more higher percentage of total value of import transactions from the AEs. We hold that CUP is a direct method. We find that assessee has raised additional grounds of appeal for adoption of CUP to be MAM which we are inclined to accept in the facts of the instant case. We find that assessee had also filed additional evidences before us by producing data from TIPS Data Base maintained by the Customs Department, for the purpose of comparability of the prices of import transactions carried out by the assessee vis-à-vis comparable prices on the relevant date or nearer to the date of transactions. This according to the ld. AR covers 94.69% of the total value of import transaction fr....
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....ssessment proceedings, the assessee was directed to produce the details of 11 sundry creditors aggregating to Rs. 1,96,694/- which were duly produced by the assessee. The assessee furnished the movement in the aforesaid sundry creditors in respect of five parties. The ld. AO observed that in respect of remaining sundry creditors there were no movement at all in closing balance and accordingly concluded that those sundry creditors are no longer payable by the assessee and those liabilities had ceased to exist. Accordingly, the ld. AO brought the same to tax by applying provisions of Section 41(1) of the Act in the sum of Rs. 1,24,008/-. 7.1. The assessee pleaded before the ld. DRP that those sundry creditors were continued to be shown as liabilities in its balance sheet and those liabilities has not ceased to exist so as to warrant invocation of provisions of Section 41(1) of the Act. It was also submitted that the concerned creditors had not waived their right to receive money from the assessee and the assessee had not written back those liabilities to its income. Accordingly, it was pleaded that there is neither unilateral nor bilateral cessation of liability. The ld. DRP howev....
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....a break-up of net foreign exchange loss adopted in the profit and loss account in the sum of Rs. 4,52,69,267/- as under:- a) Net exchange loss on cancellation of forward contracts - Rs. 26,13,86,459/- b) Exchange loss realized (other than Cancellation of forward contracts) Rs. 12,66,14,800/- c) Exchange gain and realized (other Than cancellation of forward contracts) (Rs. 34,27,21,993/-) Net Foreign exchange loss adopted to P & L Account (a+b+c) Rs. 4,52,79,266/- 8.2. Out of the above, the ld. AO asked the assessee to furnish the detailed note and description of exchange fluctuation loss of Rs. 26,13,86,459/- incurred due to foreign exchange fluctuation of cancellation of forward contracts alone. In response to the same, the assessee submitted that the losses incurred on cancellation of forward contracts were related to import / export transaction regarding to trading of goods. The assessee further submitted that it is not in the business of hedging forward contracts. The ld. AO further observed that the assessee failed to demonstrate that the forward contracts were entered into in relation to its business. The ld. AO further observed t....
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....ing that the foreign exchange fluctuation loss on cancellation of forward contract had arose only in respect of trading transactions. These documents are enclosed in pages 1013 and 1014 of the paper book. We also find that the ld. AR had placed a certificate from Standard Chartered Bank confirming the same which is enclosed in page 1055 of the paper book. The ld. AR also placed on record the RBI guidelines permitting opening of forward contract which are enclosed in page 1020 of the paper book. The ld. AR fairly stated that since these documents were admittedly not submitted before the lower authorities, he stated that let it be examined by the ld. AO, and in case if the forward contracts were entered by the assessee for these trading transactions and, if on examination that is found to be correct, then the assessee may be granted deduction pursuant to its verification by the ld. AO. The ld. AR also gave the entire details of various forward contracts entered into by the assessee with Citi Bank and Standard Chartered Bank which are enclosed in pages 760-780 of the paper book. The ld. DR vehemently opposed that the additional evidences submitted by the assessee before the Tribunal s....
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....aggregating to Rs. 21,43,13,273/The assessee further submitted that most of the parties involved therein were duly paid / settled in the subsequent years. The ld. CIT(A) called for a remand report from the ld. AO. In the remand proceedings, the ld. AO after verification of additional evidences observed that the details submitted by the assessee are found to be untenable as assessee had simply filed list of alleged creditors that the assessee could not establish the identity and creditworthiness of the parties involved and failed to substantiate the genuineness of the transactions. The ld. DRP on considering the party wise details submitted by the assessee before it and the remand report of the ld. AO again directed the ld. AO to verify whether the creditors have been settled subsequently. Further the ld. DRP also directed that where amounts are still outstanding at the time of issue of direction, the addition may be retained unless the assessee gives full address of the party and establish the identity thereon. Pursuant to the directions of the ld. DRP, the assessee vide letter dated 24/12/2014 submitted before the ld. AO the following details to establish the identity and creditwo....
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.... 15,78,97,121/- which covers 80% of the total amount thereon. (iv) Assessee submitted that in order to establish identity of the parties, addresses and PAN details were provided for major parties b) The assessee also submitted a statement showing details of movement of parties having closing balance of more than Rs. 1 Crore as on 31/03/2010 i.e. opening balance as on 01/04/2009, purchases made from the parties during the year, payments made during the year to those parties, closing balance as on 31/03/2010 and the date of payment / credit in the bank statement to prove that the closing balance has been subsequently paid by the assessee. This statement is enclosed in page 1039 of the additional evidence filed before us in the paper book. With these documents on record, the ld. AR pleaded that assessee had duly proved the identity of those parties and also their creditworthiness and further pleaded that these parties are having regular business transactions with the assessee and prayed for deletion of addition made u/s.68 of the Act. We find lot of force in the alternative argument made by the ld. AR that purchases made from the aforesaid parties involved were accep....
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....s and its related business nexus thereon. The assessee further submitted that, in any case, the adhoc disallowance made by the ld. AO at 20% of total legal and professional fees cannot be sustained. However, the ld. DRP upheld the addition made by the ld. AO for want of documentary evidences. 10.2. Aggrieved, the assessee is in appeal before us. 10.3. We have heard the rival submissions. We find that the assessee had also submitted additional evidences in pages 988 to 1012 of the paper book and pages 1040 to 1042 of the paper book giving various details of legal and professional fees paid to various parties together with their PAN and nature of services rendered by them. These evidences require factual examination of the ld. AO and hence, in the interest of natural justice and fair play, we deem it fit to remand this issue to the file of the ld. AO for denovo adjudication in the light of various additional evidences submitted by the assessee which are admitted herein and decide the issue in accordance with law. The assessee is at liberty to furnish further evidences, if any in support of its contentions. Accordingly, the ground No.13 raised by the assessee is allowed for stat....
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....ase. We also find that these documents requires to be factually examined by the ld. AO, hence we deem it fit and appropriate in the interest of justice and fair play to remand this issue to the file of the ld. AO for adjudication in the light of additional evidences filed hereinabove and in the light of decision of Hon'ble Jurisdictional High Court HDFC Bank and Reliance Utilities and Power Ltd supra. The assessee is at a liberty to furnish further evidences, if any, in support of its contentions. Accordingly, the revised grounds 14 & 15 raised by the assessee are allowed for statistical purposes. 11.2. In the result, appeal of the assessee in ITA No.2199/Mum/2015 for A.Y.2010-11 is partly allowed for statistical purposes. ITA No. 6577/Mum/2018 A.Y.2014-15 12. The ground Nos. 1 & 2 raised by the assessee for the A.Y.2014-15 are general in nature and do not require any specific adjudication. 13. The grounds 3-14 raised by the assessee are with regard to ALP adjustment made in respect of import of raw materials from AEs and export of finished goods to AEs. 13.1. During the year under consideration, the assessee had imported raw materials amounting to Rs. 182,91,48,671/....
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.... of the ld. TPO. 13.4. Aggrieved the assessee is in appeal before us. Before us the assessee filed an additional evidence furnishing the revised TIPS analysis under CUP method using TIPS data base, wherein, the assessee was able to provide the comparable data to 98.25% of the total transaction of import of raw materials as against 80% computed by the ld. TPO in its order. The assessee pleaded that once the portfolio approach is considered using TIPS Data Base under CUP method, there would be no need to make any adjustment to ALP. The ld. DR vehemently opposed to the non-admission of these additional evidences as was done by him for A.Y.2010-11 and reiterated the findings of the lower authorities. 13.5. We have heard rival submissions and perused the materials available on record. At the outset, we find that this issue of adjustment to ALP in respect of import of raw materials is similar to that adjudicated by us in A.Y.2010-11 supra wherein we have remanded the issue to the file of the ld. TPO with certain directions. The said decision would apply with equal force for this assessment year also except with variance in figures. We also find that for this assessment year i.e.....