TaxTMI 
TaxTMI 
2019 (6) TMI 1486
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....ried out by the assessee and the Most Appropriate Method (MAM) followed thereon are as under:- Summary of International Transactions as reported in Form No. 3CEB Sr. No. Nature of Transaction Amount (Rs.) Method 1 Import of materials 77,28,43,438 TNMM - Mfg. 2 Export of goods 20,76,21,540 3 Payment of royalty 2,83,03,595 4 Receipt of indenting commission 1,02,39,075 5 Payment of export commission 4,67,343 6 Reimbursement of expenses 1,29,37,145 7 Receipt of fee from research services 2,37,95,236 TNMM- R&D 8 Recovery of expenses 8,72,529 At Cost 2.1. The assessee had adopted Transactional Net Margin Method (TNMM in short) and submitted two separate benchmarking in the transfer pricing study report as below:- Search List of International Transactions Assessee's Margin Comparables Margin No. of Comparables Order of ld TPO Manufacturing (OP/OI) SL. No. 1 to 6 on Page 1 of order of ld TPO 3.00% (after adjustments for extra-ordinary/ non-recurring expenses) 4.75% (3 years weighted average) 32 Pages 3 & 4 R&D (OP/OC) SL. No. 7 on Page 1 of order of l....
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....ilization (Rasai Plant) 935 0 3 Shutdown Cost (Rasai Plant) 53 0 4 Abnormal Forex Loss 829 829 5 Premium amortised on forward contract 76 0 6 Professional charges for search of new MD 58 0 2.7. The ld. TPO recomputed the margin of assessee as -0.56% after granting partial economic adjustments and after aggregating R&D income with Manufacturing income as under:- Total Income 63120 Total Expenditure 64668 Net Profit before Interest and Tax -1548 Add: Economic / Functional Adjustments Stock Write Down 363 Abnormal Forex Loss 829 ------ 1192 Adjusted Operating Profit -356 Adjusted Net Profit Margin (OP / OI) % -0.56% 2.8. The ld TPO made an adjustment to ALP of Rs. 4578.73 lacs on an overall basis instead of restricting the adjustment only to international transactions of assessee as under:- Particulars Amount in Lacs Operating Income 63120 Adjusted PBIT -356 OP / OI (%) - 0.56% Arm's Length OP / OI % 6.69% Arm's Length OP 4222.73 Variation 4578.73 Transfer Price (Cost side transactions) 8016.1....
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....te account of transactions of 3 different units, the segmental profitability after auditing can present a reliable picture of the assessee's profit. The ld DRP also observed that the assessee's total turnover was Rs. 625 crores, whereas the international transactions are only to the extent of Rs. 77 crores of import and Rs. 20 crores of export. The ld DRP categorically observed that under the TP provision, it is the profit from the international transaction that has to be considered for determining the ALP and not the entity level profits. The ld DRP observed that for this reason also, the segmental audited profitability of the assessee deserves to be considered. 3.2. The Ld DRP after due analysis of segment statement then proceeded to accept the audited segmental accounts of assessee by adopting Internal TNMM. The ld DRP accordingly gave the directions to the ld TPO to benchmark the AE segment of each unit with the Non-AE segment. However, an exception was made for Rasai unit since its Non-AE segment operations was considered as contract manufacturing by ld DRP. The summary of the said directions are as below:- Unit AE Margin Non-AE Margin Total Margin (AE+Non....
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....ity statement submitted by the assessee before the ld DRP ought not to have been considered by the ld DRP. Moreover, we find that the Indian Transfer Pricing regulations do not require the need for audited segmentals. We find that the reliance in this regard has been rightly placed on the co-ordinate bench decision of Chennai Tribunal in the caes of 3i Infotech Limited reported in 35 taxmann.com 582 (Chennai Trib.) wherein it was held that there is no legal requirement that segment wise working of ALP submitted before the ld TPO should be audited by chartered accountant of assessee. Hence we hold that the segmental profitability statement submitted by the assessee duly audited, needs to be considered for benchmarking the international transactions of the assessee with its AE. We find that the reliance has been rightly placed on the decision of Third Member of Mumbai Tribunal in the case of Technimont ICB India (P.) Ltd reported in [2012] 138 ITD 23 (Mumbai) (TM) wherein it was held that the internal comparability should be given preference over external comparability. We find that the ld DRP erred in giving directions by comparing the total margin (AE+ Non-AE) of Navi Mumbai and Lo....
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....d transactions. 12. In fact, the entire scheme of determining ALP of an international transaction is based on making comparison with certain comparable uncontrolled transactions. It is more glaring from the command of Rule 10B given in all the methods which have been prescribed u/s 92C(1) for determining ALP. The first method is 'comparable uncontrolled price method'. Procedure for determining ALP under this method is given in Rule 10B(a). As the very name of the method itself suggests that the price charged or paid for the property 'in a comparable uncontrolled transaction' is identified. Such price in a comparable uncontrolled transaction is adjusted on account of differences, if any. The consequential price is taken as benchmark for considering the assessee's international transactions with its AEs. The second method is 'resale price method'. The procedure for determining price under this method is given in Rule 10B(b). Under this method, the price at which property purchased or services obtained by the enterprise from an AE is resold or are provided to 'an unrelated enterprise' is identified. This method also compares the gross profi....
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....ncontrolled transaction, by no sheer logic a comparable controlled transaction can be employed for the purposes of making comparison. There is no warrant for diluting the prescription given by the statute or rules when such prescription itself serves the ends of justice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AEs so that the profit likely to arise from such transactions is not under-reported vis-a-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment.....
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....hat in both such situations, the value of transaction between the associated enterprises is tailor-made to suit the overall interest of the multinational company. It does not represent the transaction at its true value. In the first situation, the receipt from the transaction recorded in India will be lower and its ALP will be higher. In the second situation, the receipt from the transaction recorded in India will be higher but the benchmark price will be lower. Whereas the first situation will necessitate the making of an addition on account of transfer pricing adjustment in the hands of Indian company, the second situation will not permit any deduction in the declared income of the such Indian concern to that extent. It is so because if the ALP is higher than the value of the transaction recorded in the books of account, it requires making addition on account of transfer pricing adjustment. However, in the opposite situation, there is no mandate for reducing the income. In such a second situation, the receipt from the transaction recorded shall be considered at ALP, notwithstanding the fact that it is at exaggerated figure when compared with a comparable uncontrolled transaction.....
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....IT v. BP India Services (P.)Ltd. [2011] 133 ITD 255 / 48 SOT 253 / 15 taxmann.com 125 (Mum) in which it has been held that controlled transactions cannot be considered for determining ALP in other transactions. Per contra, the ld. DR has relied on a solitary decision rendered by the Mumbai bench of the tribunal in NGC Network (India) (P.) Ltd. (supra) to buttress his contention that a controlled transaction can also be considered for benchmarking. I do not propose to embark upon these cases separately for discussion, I clarify that my decision in the foregoing paras is founded on the interpretation of the relevant bare provisions of the Act and Rules, without taking any assistance from decisions cited by the rival parties on the point, which differ in their conclusion as stated by the ld. Representatives before me. 19. For the foregoing reasons I agree with the view expressed by the learned AM. The Registry of the Tribunal is directed to place this matter before the division bench for passing an order in accordance with majority view. 5.1. We find that the ld AR before us also placed reliance on the decision of co-ordinate bench of this Tribunal in the case of M/s SNC L....
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....n the circumstance of the case and in law, the Tribunal has erred in directing the AO to compute the TP Adjustment proportionate to AE turnover, whereas the assessee has applied TNMM at entity level and therefore, adjustment would have to be computed at entity level. The law does not provide for a pro-rata adjustment when TNMM is applied at entity level ? It was held by Hon'ble Bombay High Court as under:- 3. Re. Question (a):- (i) It is an agreed position between the parties that the issue raised herein stands concluded against the Revenue by the following decisions of this Court:- (i) CIT v/s M/s Raitlal Becharlal & Sons (Income Tax Appeal No. 1906 of 2013) rendered on 24th November, 2015; (ii) CIT v/s Goldstar Jewellery Design (P) Ltd., (Income Tax Appeal No. 2237 of 2013) rendered on 4th February, 2016 ; (iii) CIT v/s Alstom Projects India Ltd., (Income Tax Appeal No. 362 of 2014) rendered on 14th September, 2016 ; and (iv) CIT v/s M/s. Bhansali & Co., (Income Tax Appeal No. 1066 of 2014) rendered on 9th December, 2016. (ii) Besides the aforesaid decisions of this Court, the issue also stands covered by the....
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....he tested party and the comparable is to be evaluated under same conditions. We hold that the ld TPO having allowed the same in Non-AE segment to the tune of Rs. 363 lacs, ought not to have taken a divergent stand in respect of AE segment in the sum of Rs. 846 lacs. Accordingly, we direct the ld TPO to allow the same as an economic adjustment while computing the margins of the AE segment for the purpose of comparability. 5.3.1.2. Capacity Underutilization (Rasai Plant) of Rs. 935 lacs and Shutdown Cost (Rasai Plant) of Rs. 53 lacs: It is not in dispute that the Rasai plant was closed down for a period of 4 months from November 2008 to February 2009 due to lack of demand and pile up of excess inventories. This fact is evident from the Excise Register placed on record. This is evident from the manufacturing details provided by the assessee for the financial years 2007-08 and 2008-09 enclosed in page 253 of the paper book. This resulted in underutilization of capacity in Rasai plant to 42% during the year and consequent shutdown cost. This is part of operational cost and hence allowance should be granted to the assessee as an economic adjustment. We direct the ld TPO accordingly....
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....ee be given reasonable opportunity of being heard. Accordingly, the Additional Grounds 1.1. and 1.2. raised by the assessee are allowed for statistical purposes. 7. We find that the assessee had also raised further additional grounds vide Additional Grounds 2.1. to 2.3. with regard to disallowance of expenditure u/s 14A of the Act while computing the book profits u/s 115JB of the Act. During the course of hearing before us, the ld AR submitted that due to smallness of the amount involved in this issue, the same is not pressed. The same is reckoned as a statement from the Bar. Accordingly, these additional grounds are dismissed as not pressed. 8. The Additional Ground No. 3.1. is general in nature and does not require any specific adjudication. 9. We are now left with Ground No. 2 in Revenue's appeal in ITA No. 1307/Mum/2014 , wherein the revenue had challenged the action of the ld DRP in deleting the addition of Rs. 30,22,002/- made on account of capital expenditure on scientific research centre. 9.1. The brief facts of this issue are that the assessee had in-house R&D Unit recognized / approved by Department of Scientific and Industrial Research (DSIR). The said approv....
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....f Coromandel International Ltd vs Addl CIT in ITA No. 101/Hyd/2012 dated 28.8.2014 is directly on this impugned issue wherein it was held that :- "7. We have considered the arguments of the parties and perused the materials on record as well as the orders of the Revenue authorities. We have also carefully applied our mind to the decisions relied upon by the parties. It is a fact on record that out of the total deduction of Rs. 4,73,31,953/- claimed by the assessee towards R&D expenditure on capital field, DSIR in its approval in form No. 3CL allowed the claim to the extent of Rs. 4,71,08,743 and in the process disallowing the amount of Rs. 2,23,215/-. Whereas the entire revenue expenditure of Rs. 1,31,87,576/- was not approved by DSIR. It is the contention of the learned AR that approval of DSIR as envisaged u/s 35(2AB) is only confined to deduction claimed under that section. Such approval is neither necessary to decide whether expenditure is in the nature of revenue or capital nor it is relevant for considering assessee's claim under any other provisions of the Act. We find force in the contention of the learned AR. On a reading of the provision contained u/s 35 as a....
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.... of any personal expenditure as no such allegation has been made. Therefore, the remaining criteria to consider the allowability is only the thing to be seen is that whether the expenditure is incurred by the assessee is capital in nature. So as it relates to capital expenditure of Rs. 44.41 lakhs, the assessee itself has claimed the said expenditure as being capital in nature. Therefore, there is no dispute with regard to that. So as it relates to expenses of Rs. 19.57 lakhs on salary and wages the same cannot be considered to be expenditure of being capital in nature as the said salary and wages are paid to the manpower deployed for carrying out the R&D activity which is part and parcel of the business of the assessee. 29. Now coming to the expenses of Rs. 611.78 lakhs relating to materials/consumables/spares, it is not the case of the AO that the said material was not consumed in the R&D process and some part thereof was remaining in the closing stock. Therefore, these expenditure incurred on material used for lab trials cannot in any manner be considered as expenditure being in the nature of capital. The next item is "other expenditure directly related to R&D". With re....
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....an claim the deduction u/s 35(1)(iv). In this context we refer to the decision of Hon'ble Madras High Court in case of Tube Investments of India Ltd. Vs. CIT (supra) wherein it is held a under: "Sec. 35 of the Act deals with expenditure on scientific research. Section 35(1)(iv) refers to expenditure of a capital nature on scientific research related to the business carried on by the assessee. Sec. 35(2B) refers to expenditure, other than capital expenditure incurred on the acquisition of any land or building or construction of any building, on scientific research undertaken under a programme approved in that behalf by the prescribed authority, having regard to the social, economic and industrial need of India. It is only such expenditure as is incurred on a programme which has been approved by the authority prescribed under s. 35(2B), which can be claimed as deduction under that provision. The capital expenditure on the acquisition of land or building whether acquired or constructed cannot be claimed under s. 35(2B). The benefit of s. 35 (1)(iv) can be availed by the assessee in respect of expenditure of a capital nature on scientific research if that research is relat....