TaxTMI 
TaxTMI 
2020 (12) TMI 49
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....s bad in law, contrary to the facts and circumstances of the case and liable to be quashed. 2. That on the facts and circumstances of the case, the learned Dispute Resolution Panel ('the learned Panel') and the learned AO erred in upholding the approach of the learned TPO and the consequent adjustment of INR 31,07,79,932/- made to the transfer price of the Appellant's international transactions with Associated Enterprises ('AEs'). 3. That the learned AO and the learned Panel erred both in facts and in law in confirming the action of the learned TPO of making an adjustment to the transfer price of the Appellant holding that the international transactions do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act') and in doing so, grossly erred in: 3.1. Rejecting the TP documentation maintained by the Appellant and the comparability analysis undertaken therein by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962, ('the Rules'); 3.2. Rejecting the Comparable Uncontrolled Price method ('CUP') as the most appropriate method,....
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....more grounds as under : 4. That the learned AO / learned TPO erred in not conducting a contemporaneous search and relying on the search conducted during the previous year, i.e. Financial Year 2009-10. The learned Panel erred in upholding the action of the learned AO/learned TPO; 5. Ground for CPLM as the most appropriate method. 5.1. Without prejudice to ground No.3, the learned AO/ learned TPO ought to apply Cost Plus Method ("CPM"), which was applied by the learned AO/learned TPO during the previous year i.e. Financial Year 2009-10 and also accepted by the Hon'ble Bench for the referred financial year. 5.2. While applying CPM, the Appellant pleads to exclude the following extraordinary expenses incurred by the Appellant while computing the gross profit margin of the Appellant and the comparable companies so as to eliminate the effect of differences in the operating costs incurred by the Appellant vis-a-vis comparable : Stores & consumables Depreciation 5.3. The Appellant craves to plead this Hon'ble Tribunal to consider foreign exchange gain as operating in nature while computing the gross profit margin of the Appella....
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....transactions with it‟s AE as under:- Nature of transaction Amount (in rupees) Purchase of raw materials 44,02,69,760 Sale of finished goods 35,41,46,007 79,44,15,767 3.1. The taxpayer carried out the economic analysis and bench marked both the transactions under the CUP method relating to the purchases/sales. The taxpayer stated that the company has purchased the raw material from its AEs for the purpose of its manufacturing activity. The AEs have undertaken corresponding back to back purchase of the same raw materials from third party suppliers. Thus, viewed that the prices paid by the taxpayer for purchase of raw material from its AEs are not higher than that of by the AEs to third party suppliers, hence, held that the prices paid by the taxpayer to its AEs for purchases are at Arms Length Price(ALP). With regard to sale of finished goods, the tax payer stated that the average monthly price charged by the tax payer to its AEs and non AEs is comparable. The price charged to AEs is equal to or more than non AEs. Based on an analysis undertaken by the company in its report called "operational and financial review - F.Y. 2011" the company ha....
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.....3. The TPO has arrived at arithmetic mean of comparables at 6.78% i.e. OP/OC and issued a show cause calling for objections from the assessee for rejection of CUP method and for adopting TNMM as most appropriate method. In response to the notice issued by the TPO, the assessee filed objections reiterating that CUP as the most appropriate method for purchase of raw material, since the assessee has purchased the raw materials from third party vendors without adding expenses or profit. The prices paid by the assessee were equal to the price paid by the AE from their parties was in uncontrolled and independent conditions, therefore the assessee contended that there is no reason to disturb the CUP as most appropriate method for purchases. With regard to sales, the assessee submitted that sales price charged by the taxpayer to AE is equal to or more than the prices charged to third party sales. 3.4. The TPO has considered the submissions made by the assessee and viewed that CUP is applicable in situations when a price is charged for product or a service. The comparison of prices charged for the product in a controlled transaction to prices charged for the same products in a comparabl....
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....CUP as most appropriate method and viewed that TNMM as the most appropriate method for sale. The AO worked out the arithmetic mean at 6.78% of the third party comparables as discussed earlier in para 3.2 of this order. As the operating profit on operating cost admitted by the assessee is at (-) 26.42%, made the adjustments of Rs. 15,97,13,166/- in respect of sales, Rs. 14,91,84,370/- in respect of purchases. Thus, proposed for adjustment of Rs. 30,88,97,536/- u/sec. 92CA(3) of the Act. 4. On receipt of the Transfer Pricing Order, the Assessing Officer issued draft assessment order and the assessee filed objections before the Ld.Dispute Resolution Panel (DRP). The assessee objected for adopting the TNMM as most appropriate method and the DRP rejected the contention of the assessee and upheld the order of the TPO in adopting TNMM as most appropriate method. The assessee objected for considering the earlier year data instead of using contemporaneous data for bench marking and the ld. DRP rejected the assessee‟s objection stating that as per Rule 10B(4) financial data relating to the financial year in which international transactions were undertaken has to be used as per Incom....
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....m‟s length. Ld.AR argued that law does not place any restriction on purchases made for AE on back to back basis. Since the purchase are made by the AE from the third parties and sold to the assessee on back to back basis there is uncontrolled transactions hence, argued that there is no reason to reject the TP study made by the assessee hence, requested to accept the CUP as MAM. The assessee further submitted that it has annexed some invoices relating to purchases made from AE and third party vendors to demonstrate that the purchases were made back to back basis and at ALP. The assessee furnished purchase bills from the AE. From the said purchase bills, we find that the AE has sold 6048 kg of material to the assessee @ Rs. 7.40 per kg vide bill dated 01/04/2010 which was purchased from Invista Singapore Fibres Pvt. Ltd. @ 7.40 per kg. Similarly, the tax payer also has enclosed some more invoices relating to purchases made by the tax payer from AE on back to back basis on various dates. With regard to Saravana Spinning Mills, the assessee has enclosed invoice at page No.8 which demonstrated that it had purchased raw material @ 3.88 per kg which was sold directly to AE on 08/....
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....ny specific objection or defect in the TP study conducted by the assessee. Hence, no reason to reject the CUP as most appropriate method and accordingly argued that the order of the ld.DRP/TPO/ may be set aside and adopt the CUP as most appropriate method both for purchases and sales. 6. Per contra, ld.DR argued that except assessee stating that the AE supplied the material on back to back basis there were no third party transactions for comparing purchases made by the assessee from its AE. Since no external comparables are available, ld.DR argued that the TPO rightly rejected the assessee‟s contention and argued that TNMM is most appropriate method in the facts and circumstances. Similarly with regard to sales, ld.DR submitted that there were no comparable transactions for taking CUP as most appropriate method. For adopting CUP as most appropriate method, the geographical location, the date of transactions with related and unrelated parties and the rates quoted are required and in the instant case, no such information is available, hence, argued that the TPO rightly rejected the CUP as most appropriated method adopted by the taxpayer. According to the ld.DR, TNMM as most ....
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....AE is more or equal to the uncontrolled transactions, the assessee viewed that no adjustments are required and the sale and purchases are at arms length price. The TPO rejected the assessee‟s contention and held that TNMM is most appropriate method both for purchases and sales and accordingly proposed for adjustment of Rs. 30,88,97,536/- which is representing shortfall in adjustment in sales of Rs. 15,97,13,166/- and excess paid in purchases to the extent of Rs. 14,91,84,370/-. Though the assessee has objected the proposed adjustments before the DRP, it could not succeed, hence, the assessee has approached the Tribunal. 8.2. The AO has rejected the transfer pricing document, the analysis made by the assessee on the reason that the assessee has made analysis based on report titled "Ocean India - Operational and Financial Review -FY2011 which is internal document and the same was not made available to the TPO. The Ld.TPO further observed that in page No.4 of the TPO order that the tax payer did not furnish the copy of the report relied upon by the assessee and stated to have enclosed Annexure ‟A‟ which was not placed before the TPO. The assessee invited our....
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.... AE on back to back basis without adding any profit or expenditure. The AO did not bring any other material to show that the material purchased by the assessee from its AE was at higher cost, than the material available from third party vendors. Therefore, it is observed that the taxpayer has demonstrated the purchase made by the assessee from its AE are at arms length price. The assessee placed reliance on the guidance note on transfer pricing issued by Institute of Chartered Accountants of India. In para No.5.26, the Institute viewed that internal CUP is preferred method over external CUP. For the sake of convenience, we extract para No.5.26 of guidelines of Institute of Chartered Accountants of India in page No.40 of the Form 35A placed before DRP. "C. Internal CUP preferred over external CUP "5.26 It is important to note that the transactions entered into by associated enterprises with unrelated Party ("internal comparables") would provide more reliable and accurate data as compared to transactions by and between third parties ("external comparables"). OECD's Guidelines on Transfer Pricing recognize the fact that external comparables are difficult to ob....
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....arge of manipulating the accounts is not justified. Having considered these matters, we find that OECD guidelines, reproduced in paragraph no. 4.6 (supra), mention that net margin of the tax payer from the controlled transactions should be established with reference to net margin which the same taxpayer earns in comparable uncontrolled transactions. Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise may serve as a guide. Thus, these guidelines suggest preference for internal comparables and reference has to be made to the results of independent enterprises only when former course of action is not possible. The ld. counsel has also relied on the decision of UCB India Pvt. Ltd. (supra), a copy of which has been placed before us. In this case, the assessee wanted to support the value of controlled transactions by comparing with external comparables. However, it appears that the same could have been compared by having recourse to internal comparables of the parent company, for which the data was not furnished on the ground that the two companies are separate entities. The Tribunal did not find favour w....
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.... also an Associate Enterprise. Here, admittedly, M/s Intel Semiconductor Limited was not an Associate Enterprise of assessee or its Associate Enterprise in Singapore. Therefore, we cannot say that the price at which M/s-Intel Semiconductor Limited sold to Redington Distribution Pvt. Lid., Singapore, was not at arm's length price. In our opinion, when Redington Distribution Pvt. Ltd. sold the items to assessee at very same price at which it had purchased from M/s Intel Semiconductor limited, there cannot be any question of under pricing or over pricing. We are, therefore, of the opinion that the adjustment carried out by the lower authorities, based on list price, on the purchase of 1250 Pentium IV processors from Associate Enterprise was not called for. Such adjustment, therefore, stands deleted." 8.5. From the above facts and law, it is observed that the assessee had purchased the raw material from its AE and the AE has supplied the raw material to the tax payer on back to back basis without marking up for any costs or expenses or profit. The AE has made purchases from third party vendor which is uncontrolled transaction and the supplies made by the AE to the taxpayer are c....
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....aced by the assessee is incorrect or the price charged to the AE is lesser than the third party buyers. i.e. uncontrolled transaction. Though the AO has adopted the TNMM as the most appropriate method, instead of taking the contemporaneous data, the AO has adopted the earlier years data which is incorrect. The AO did not allow the adjustments sought by the assessee such as start up, unutilised capacity, risk, working capital adjustments etc. The DRP also has not considered the adjustments sought by the assessee and no proper reasoning was given both by DRP or TPO to reject the contention of the assessee with regard to objections of earlier years data, adjustments for working capital, unutilised capacity, start up company etc. In the circumstances, approach of the DRP as well as the TPO in adopting the TNMM as most appropriate method is incorrect. In the instant case, sufficient data and information is available to show that the sale price charged by the assessee to its AE is comparable and internal comparables are available which were placed by the assessee before the TPO as well as the DRP. No valid reason was assigned for rejecting the method adopted by the assessee. The AO si....
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....r opinion, the assessee has discharged the burden casted upon him to show that it has not shifted profits to AE, therefore it is the duty of the TPO to establish that the assessee has shifted profits to AE. In this case, without giving any reason simply suggested TP adjustment by the TPO. We find that TPO is not correct. Thus, we find that the ld.CIT(A) has considered the facts and directed the Assessing Officer to delete the addition. We find no reason to interfere with the order passed by the ld. CIT(A). Thus, this ground of appeal raised by the Revenue is dismissed." 9.1. The assessee also relied on the following decisions which support the assessee‟s case : (i) M/s Essar Steel Pvt. Ltd -ITA No. 3727/MUM/2011 - (Shri RC Sharma & Shri VP Rao) 10. We have considered rival contentions and gone through the orders of the authorities below. A clear finding has been recorded by the CIT(A) to the effect that assessee has already considered all the 8 transactions with its AE in totality by aggregating the same whereas the TPO picked up two transactions where the price charge was less than the average market price. Rule 10(A)(a) defines a transaction to....