AI Drafter 
TaxTMI 
TaxTMI 
2020 (5) TMI 630
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Method and rejecting the CPM Method used by the appellant company for the purpose of determining ALP. 3) The Hon'ble DRP-I Mumbai erred in confirming the order of the learned Transfer Pricing Officer and rejecting Non AE Comparables selected by the appellant. 4) The Hon'ble DRP-I Mumbai erred in confirming the order of the learned Transfer Pricing Officer which followed "pick and choose" out of the companies selected for TNMM. 5) The Hon'ble DRP-I Mumbai erred in Confirming the adjustments made of Rs. 1,80,00,639/- by learned Transfer Pricing Officer I (9), Mumbai however subject to certain relief. 6) The Hon'ble DRP-I Mumbai erred in not objecting to the benchmarking the International Transaction by the learned Transfer Pricing Officer of "purchase of raw materials & components" even though the assessee is not engaged in any such business but is in the business of providing engineering services. 7) The learned Assessing Officer/Transfer Pricing Officer erred in not passing an order giving effect to the directions of Hon'ble DRP-I to re-determine the mean PLI. 3. To adjudicate on these grievances, which we will take up together, only....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t consideration and has a bearing on the profit margin". The TPO then proceeded to reject the cost plus method (CPM) and proceeded to adopt transactional net margin method (TNMM) by observing as follows: 6.3 In view of the above material difference in the projects undertaken for the unrelated parties by the taxpayer and the services rendered to the AE, it is held that the benchmarking using the cost plus method (CPM) by taking the cost plus margin in the case of AE segment and non-AE segment of the taxpayer is not appropriate and is, therefore, rejected. On the facts and circumstances of the case, it is held that transactional net margin method (TNMM) is used as most appropriate method to benchmark the international transactions entered into by the assessee. 4. The TPO then proceeded to compute the arm's length price by computing OP/OC of the assessee, which was, as claimed by the assessee, was 19.17%. He then finally adopted the comparables as Alphageo India Pvt Ltd, Artefact Projects Ltd, Bengal SREI Infrastructure Development Ltd, Cethar Consulting Engineers Ltd, I Design Engineering Solutions Ltd, Kirolaskar Consultants Ltd, L&T Sargent & Lundy Ltd, L&T Valdel Engin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st appropriate method, having regard to (a) the nature and class of the international transaction ; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; and (f) the nature, extent and reliability of assumptions required to be made in application of a method. Section 92C(2) provides that it is only the most appropriate method, as referred to in section 92C(1), which can be applied for determination of arm's length price, in the prescribed manner. Rule 10B(2), which is also very relevant in the present context, provide....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cument available with him. The Assessing Officer has the powers to determine arm's length price when the arm's length price computed by the taxpayer is not on the basis of correctly applying the method of computing the arm's length, in terms of the provisions of section 92C(2), as also when the method of selecting most appropriate method of computing the arm's length price is not determined in accordance with the scheme of things envisaged under section 92C(1). Once the pre-conditions for invoking the powers under section 92C(3) are satisfied, which includes the situation in which the Assessing Officer, on the basis of material, information or document in his possession, is of the opinion that the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2) of Section 92C, "the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub sections (1) and (2) [of Section 92C]........". This provision is, however, subject to the condition, set out in proviso to Section 92C(3) to the effect that "an opportunity shall be given by the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ect method of ascertaining the ALP, he is also to demonstrate that the method proposed by him is a better method of ascertaining the ALP. - The Transfer Pricing Officer has to then put the assessee to notice about his prima facie view, take into account submissions of the assessee on his such views and then give his reasons in support of the proposition as to why the method of ascertaining arm's length price, as selected by him, is more appropriate method vis-à-vis the method adopted by him. Unless the method selected by the TPO is more appropriate a method of ascertaining the arm's length price adopted by the assessee, obviously it cannot be "most appropriate" method of ascertaining the arm's length price- as is the requirement of Section 92C(1). 9. Let us now revert to the facts of this case. The first reason for rejecting the CPM, on the facts of this case, was said to be "significant volume difference". As against transaction value of Rs. 23.06 crores with the AE, the transaction value is 12.08 crores. Undoubtedly, there is a difference in volume but when we look at the scheme of Section 92C(1) read with Rule 10C, it is clear that what really matters is "t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rofit margin". While on this aspect of matter, it is important to bear in mind that as rule 10B(2)(d) provides that comparability of a controlled transaction with uncontrolled transaction is to be judged, inter alia, in the light of conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. Quite clearly, therefore, geographical difference, by itself, does not render an independent transaction uncomparable with controlled transaction. Geographical location, by itself, is not an important factor for deciding comparability of an uncontrolled transaction, its importance lies in being one of the factors which could affect the market conditions in which respective parties operate. Unless market conditions, in which uncontrolled transactions have taken place, are materially different vis-à-vis conditions in which international transaction has taken place, and such a difference is on account of g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly, the impugned ALP adjustment of Rs. 1,80,00,639 by rejecting the CPM method adopted by the assessee and by adopted the TNMM method, for ascertaining the arm's length price, must be deleted for this short reason alone. 10. Given these findings, it is not really necessary to examine as to whether or not specific show cause notice, requiring the assessee to show cause as to why the method of ascertaining the ALP as adopted by the assessee, was issued by the TPO or not, nor is it necessary to examine the suitability of TNMM method vis-à-vis CPM method on the facts of this case. We have also noted that, in terms of the provisions of Section 144C(13), "upon receipt of the directions issued under sub-section (5) [i.e. the DRP directions], the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received". The Assessing Officer thus has only one month from the end of the month in which the DRP directions are received to co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng. It is, however, important to note that the expression "ordinarily" has been used in the said rule itself. This rule was inserted as a result of directions of Hon'ble jurisdictional High Court in the case of Shivsagar Veg Restaurant Vs ACIT [(2009) 317 ITR 433 (Bom)] wherein Their Lordships had, inter alia, directed that "We, therefore, direct the President of the Appellate Tribunal to frame and lay down the guidelines in the similar lines as are laid down by the Apex Court in the case of Anil Rai (supra) and to issue appropriate administrative directions to all the benches of the Tribunal in that behalf. We hope and trust that suitable guidelines shall be framed and issued by the President of the Appellate Tribunal within shortest reasonable time and followed strictly by all the Benches of the Tribunal. In the meanwhile (emphasis, by underlining, supplied by us now), all the revisional and appellate authorities under the Income-tax Act are directed to decide matters heard by them within a period of three months from the date case is closed for judgment". In the ruled so framed, as a result of these directions, the expression "ordinarily" has been inserted in the requirement to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....coronavirus "should be considered a case of natural calamity and FMC (i.e. force majeure clause) maybe invoked, wherever considered appropriate, following the due procedure...". The term 'force majeure' has been defined in Black's Law Dictionary, as 'an event or effect that can be neither anticipated nor controlled' When such is the position, and it is officially so notified by the Government of India and the Covid-19 epidemic has been notified as a disaster under the National Disaster Management Act, 2005, and also in the light of the discussions above, the period during which lockdown was in force can be anything but an "ordinary" period. 14. In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the soc....