AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (11) TMI 1190
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....nder Chapter-X of the Act." 3. The assessee, through the above additional ground, has called in question the validity of the final assessment order on the raison d'etre that the order u/s.92CA(3), eventually culminating in to the final assessment order, came to be passed by the Addl. Commissioner of Income-tax, Pune, who is not competent to pass such an order. The same being legal ground not requiring any fresh examination of facts, is admitted for hearing in the light of the judgment of Hon'ble Supreme Court in National Thermal Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC). 4. Now we espouse the additional ground for consideration on merits. The factual panorama is that the order u/s.92CA(3) of the Act was passed by the Addl. Commissioner of Income-tax (TP)-1, Pune, in the capacity of the Transfer Pricing Officer of the assessee. The crux of the arguments made by the ld. AR on this issue is that a transfer pricing order, at the material time, could have been passed by the Joint Commissioner of Income-tax (JCIT) or Deputy Commissioner of Income-tax (DCIT) or Assistant Commissioner of Income-tax (ACIT). Since the impugned order u/s. 92CA(3) of the Act came to be passed by th....
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.... Commissioner or Deputy Commissioner or Assistant Commissioner, authorised by the Board to perform all or any of the functions of an Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons.". 6. The case of the assessee is that since the definition of the Transfer Pricing Officer has no reference to the Additional CIT, which position is further fortified by the fact that at the material time only the JCIT and below were competent to be nominated so, the order passed in the case of the assessee by the Additional CIT is bad in law. The first and the foremost thing which comes out of the definition of the Transfer Pricing Officer, as has been rightly stated by the ld. AR as well, that the same is exclusive and hence cannot be stretched by implication. Going by the mandate of the definition, in so far as we are concerned, it is vivid that the reference is to Joint Commissioner and not the Additional Commissioner of Income tax. Though the argument of the assessee looks attractive at the first flush, but loses its shine on an in-depth scrutiny. 7. Section 116 of the Act defines the term `Income-tax authorities' and opens by stating that : `Ther....
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....r is that both the authorities, namely, JCIT and Addtl. CIT can act as TPO and there is no statutory proscription in the Addtl. CIT acting as TPO in the facts and circumstances of the case. As the impugned order has been passed by the Addtl. CIT on 28-01-2014, which obviously is after the insertion of the definition of 'Joint Commissioner' given in section 2(28C), we hold that no infirmity can be found in his passing the order u/s.92CA(3). Ergo, the additional ground raised on behalf of the assessee is jettisoned. 9. Ground Nos. 2 to 6 and 8 challenge the making of transfer pricing addition amounting to Rs. 3,83,29,479/-. 10. Succinctly, the factual matrix of the grounds is that the assessee is an Indian company, being as Associated Enterprise (AE) of Eaton Corporation, USA, which is a global technology leader in electrical components and systems for power, quality, distribution and control etc. The assessee filed its return declaring total loss of Rs. 5,06,03,760 reporting certain international transactions in Form No.3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions. The assessee re....
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....ted Enterprises as tested parties and certain foreign companies as comparable. When the TPO required the assessee to produce the Financials of the tested parties and also of the companies chosen as comparable, the assessee failed to do so and relied only on some certificate from AE. Such certificate cannot obviously be a substitute of the Annual accounts of the AEs on the basis of which the benchmarking can be done. Not only the financials of the two AEs, namely, Eaton, Poland and Eaton, Brazil were not made available to the TPO, even the data of foreign companies chosen as comparable was incomplete and unverifiable. 12. At this stage, it is useful to note that unlike normal provisions where the onus is on the AO to prove that apparent is not real and there is an understatement of income, under the transfer pricing provisions, the onus is on the assessee to prove that the apparent is real and there is no understatement of income on account of international transactions. This can be done only by showing that the profit etc. earned by it from the international transactions is at the same level as would have arisen in an independent situation between uncontrolled parties. Since the e....
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....ure of purchase ... of tangible .... property.....'. The methodology for computation of arm's length price of an international transaction has been set out in section 92C(1) of the Act to be as per any of the prescribed methods, including the TNM method. The assessee adopted this as the most appropriate method, which was not disturbed by the TPO. The mechanism for determining the ALP under the TNM method has been enshrined in clause (e) of rule 10B(1), which runs as under : '(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the....
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....e hands of the assessee having regard to the difference between the rates of profit A and profit B. The rate of profit of comparable cases (profit B) may be computed from internally or externally comparable cases, depending upon the FAR analysis and the facts and circumstances of each case. Thus the calculation of `profit B' may undergo change with the varying set of comparable cases. However, insofar as calculation of `profit A' is concerned, the same has to necessarily result in the hands of the assessee-enterprise (Indian entity) only from the transaction between two or more associated enterprises, as is the mandate of section 92 read with section 92B in juxtaposition to rule 10B. The natural corollary which, ergo, follows is that under no situation can the calculation of 'profit A' be substituted with anything other than the profit realized or earned by the assessee-enterprise from the international transaction. So, under the TNM method, it is the net profit margin realized by the Indian assessee-enterprise from the transaction with its foreign/AE, which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian....
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..... 200/-. Position of Operating profit/Sales of the foreign/AE and the assessee/Indian enterprise will be as under : - Foreign/Associated enterprise Assessee/Indian enterprise Purchases 140 Sales to AE 200 Purchases from AE 200 Sales 300 Operating expenses 20 Operating expenses 40 Operating Profit 40 Operating Profit 60 Total 200 200 Total 300 300 Operating profit to sales of Foreign/A.E. - 20% Operating profit to sales of assessee/Indian enterprise-20% It can be seen from the above that OP/Sales of the assessee is 20%, which is at ALP, when seen in the light of the OP/Sales of the Indian comparables. B. Non arm's length situation Now if goods with arm's length price of Rs. 200/- are actually transferred by the Foreign/associated enterprise at Rs. 208/- to the assessee/Indian enterprise with a view to reduce the incidence of tax in India, the changed position of Operating profit/Sales of the foreign/AE and the assessee/Indian enterprise in the above example will be as under : - Average Operating profit/Sales of Foreign comparables - 20% Average Operating profit/Sales of Indian comparables - 2....
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....the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to in the manner as prescribed. Thus, it is overt that the obligation under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly determined as stipulated. The contention, that the foreign/AEs be considered as a tested parties for determining the ALP of the international transaction, having no statutory sanction, is sans merit and hence jettisoned. Similar view of not accepting foreign/AE as a tested party has recently been taken by the Pune Benches of the Tribunal vide its order dated 24-04- 2019 in Bekaert Industries Private Limited Vs DCIT (ITA No.146/PUN/2014). Thus, we are of the considered opinion that no infirmity can be found in the view canvassed by the authorities below in rejecting foreign/Associated Enterprises as tested parties. 19. Once we come to the conclusion that the international transaction of import raw material was not correctly benchmarked by the assessee and the TPO was justified in rejecting such ....
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....ed,.... are likely to materially affect the .... profit arising, such transactions in the open market' or a : `reasonably accurate adjustments can be made to eliminate the material effects of such differences'. On a conjoint reading of sub-rules (2) and (3) of Rule 10B, it is manifested that geographical location is an important factor to be judged for determining the comparability with an uncontrolled transaction. It implies that if the international transaction is at a particular geographical location and the comparable transaction is at a different geographical location, then the impact of such geographical difference must be removed before making any effective comparison. When we read sub-rule (3) of Rule 10B, it becomes explicitly clear that if the impact of different geographical locations etc. cannot be creased out, then comparability itself is eclipsed. 22. Turning to the facts of the instant case, it is seen that the assessee has a manufacturing facility in India. The internal comparables which the assessee is seeking to rely upon are not those of exports made in the US or Brazil, where the exports have been made to the AEs, but the sales made in India itself. Since the s....
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.... during the course of hearing but subsequently not pressed was that the capacity adjustment ought to have been granted in the hands of the assessee and not the comparables. Such a contention has rightly been not pressed in view of the clear mandate given in rule 10B(1)(e) as reproduced hereinabove. Sub-clause (i) of rule 10B(1)(e) in the process of determination of the ALP under the TNMM talks of the computation of net operating profit margin realized by the assessee from an international transaction. Subclause (ii) is the computation of net operating profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction. This refers to determining the operating profit margin of comparables with the same base as that of the assessee. Subclause (iii) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above, 'is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, ..... which could materially affect the amount of net profit margin in the open market.' It is this adjusted net profit margin of the unrelated transactions or of t....
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.... Supreme Court in DIT (IT) Vs. Morgan Stanley & Company (2007) 292 ITR 416 (SC), in which it has been held that the : `TNMM apportions the total operating profit arising from the transaction on the basis of sales, costs, assets, etc.'. Hence, it is evident that the term "Net Profit" or the "Operating net Profit" as used in Rule 10B(1)(e) is to be read as "Operating Profit". No specific definition of the term Operating Profit has been given in the I.T. Rules, 1962. In common parlance, the expression `operating profit' means profit from business operations, that is, operational revenue minus operating costs. Operating costs are the costs which are incurred in relation to the operations of a business. So, all the costs which facilitate the operation of a business are operating costs. Like raw material and labour costs, there can be no production of goods without the use of machinery or other related assets. One cannot contemplate manufacture of goods without the use of assets for fetching sales revenue, which is the starting point for calculating the amount of operating profit. In fact, it is the user of the assets which results into production and the resultant operating revenue. Dep....
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....is Rs. 71,77,79,275/-. Break-up of such cost is given under the specific heads. The total cost qua export to AEs Rs. 16,71,88,299/-. The total cost qua domestic sales is Rs. 52,09,69,353/- and total cost qua trading activities is Rs. 2,96,21,623/-. Total of the above three items comes to Rs. 71,77,79,275/-, which has been adopted by the TPO on page 24 of his order for computing the transfer pricing adjustment of Rs. 3.83 crore and odd. Thus it can be seen that the total cost pertaining to AE transactions is only Rs. 16,71,88,299/- and not Rs. 71,77,79,275/-. 30. It is uncontroverted, as is also apparent from the TPO's order, that the transfer pricing adjustment has been made by considering total costs incurred by the assessee in respect of transactions both with the AEs and also the non-AEs. Under the TNMM, the process is simple in initially finding out the operating profit margin of the assessee and then the average adjusted operating profit margin of comparables. Such adjusted profit margin of the comparables constitutes the benchmark margin, which is then compared with the operating profit margin from the assessee's international transactions, which only comprise of transaction....
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....with respect to the international transaction of Import of fixed assets. 34. The assessee reported an international transaction, inter alia, of Purchase of fixed assets with transacted value of Rs. 1,40,92,538/- No method was employed for benchmarking this international transaction. On being called upon to explain the reasons for not benchmarking the transaction, the assessee submitted that the purchase of fixed assets was at fair market price and hence at ALP in accordance with the comparable Uncontrolled Price method (CUP). The TPO required the assessee to furnish supporting documents for import of fixed assets from AEs. The assessee submitted a Chartered Engineer's Certificate in support of purchases of Rs. 11,86,038/- along with supporting invoices. The assessee also furnished invoices worth Rs. 24,14,450/-. In all, the assessee could produce invoices for purchase of fixed assets amounting to Rs. 36,00,488/-. In the absence of production of any documentary evidence in support of the purchase of fixed assets for the remaining sum of Rs. 1,04,92,049/-, the TPO proposed a transfer pricing adjustment for the said sum. The assessee remained unsuccessful before the DRP, against whic....