TaxTMI 
TaxTMI 
2020 (12) TMI 49
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....t 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, as applied by the Appellant in its transfer pricing documentation for both the purchase and sales transactions; 3.3. Disregardi....
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.... 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 Appellant and the comparable companies under the CPM method; 6. Without prejudice to the ground 3 and 4 above, even if the Transactional Net Margin Method (TNMM) is to be applied as the most appropriate method, the Appellant humbly prays before th....
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....he 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 has supported the sale price received by the assessee from its AEs are not lower than the sale price received in similar transactions with third party customers, therefore, viewed that the transactions are at ALP and accordingly submitted that no adjustments are required on account of international transact....
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.... 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 comparable uncontrolled transaction is carried out. The TPO viewed that internal CUP is the price that the taxpayer has paid in a comparable uncontrolled transaction with an independent party when compared to the price paid in a controlled transaction. External CUP is a price paid in between third parties when compared to the price of a controlled transaction. Thus, the TPO viewed that the price paid by the ....
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....chases. 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 Income Tax Rules, unless it is established that the use of data of the earlier financial years will result in adverse results. The Ld.DRP viewed that in the instant case, the assessee failed to establish the same. The Ld.DRP placed reliance on the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. Vs. DCIT (ITA No. 417/2014) and accordingly rejecte....
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....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 08/08/2010 and shipped to the taxpayer. Ld.AR further argued that except stating that there was no uncontrolled transaction from third party no other reason or defect was pointed out by the TPO/AO and all the conditions for adopting internal CUP is satisfied by the assessee, thus, argued that purchases made by the assessee are at arm‟s length and there is no reason to reject the contention of the taxpayer to adopt....
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....y 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 appropriate method, hence, argued that no interference is called for in the order of the Ld.DRP/AO and requested to uphold the order of the AO/DRP and dismiss the appeal of the assessee. 7. Responding to the argument of the ld.DR, the ld.AR submitted that all the details are made available to the TPO to demonstrate that CUP as most appropriate method. Ld.AR alternatively submitted that in the immediate preceding assessmen....
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....id 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 attention to paper book page No.111 a copy of letter addressed to the TPO dated 14/03/2014 wherein Transfer Pricing Study was enclosed in page No.147, copy of Appendix E, titled as Ocean India - Operational and Financial Review - FY 2011 was furnished. Further the TPO rejected the transfer pricing document for the reason that the taxpayer did not furnish the supported documents in respect of CUP analysis for purchase of raw material. He....
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....icing 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 obtain and, also, it may be incomplete and difficult to interpret. Hence for those reasons, internal comparables are preferred to external comparables." 8.3. The assessee relied on the decision of Destination of World (Sub Continental) Private Limited, wherein, the coordinate Bench of ITAT, "B‟ Delhi in I.T.A.No.5534/2010 held that internal CUP is valid under all methods. For the sake of clarity and convenience we extract relevant part of the order of....
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....y 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 with this line of argument, which indirectly leads to a conclusion that internal comparables should be preferred to external comparables. Further, in the case of Birlasoft (India) Ltd. (supra), it has been clearly held that the assessee was justified in undertaking internal comparison on stand alone basis by placing on record working of operative profit margin from international transactions with AEs and transactions with uncontrolled parties undertaken in similar functional and econo....
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....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 controlled transaction. The price charged by the AE to the taxpayer is less or equal to the uncontrolled transaction. This fact was also demonstrated by the assessee in respect of purchases made from Saravana Spinning Mills by the assessee through the AE. The AO has not demonstrated that the price charged in controlled transaction is more than the uncontrolled transaction with any proof or evidence. The TPO also did not bring any material to show that the internal CUP is not acceptable or any restrictions are p....
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....d 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 simply brushed aside the internal report with regard to sale price, without bringing any evidence to show that the sale price charged to the AE is incorrect. When the assessee has given complete documentation to the TPO / DRP, the burden shifts on AO/TPO to establish that the method adopted by the assessee is faulty. On sales to support their contention to accept the CUP as MAM, the assessee relied on the decision of this Tribunal in the case of CCL Products (India) Ltd. in I.T.A. No.433/Viz/2019 dated 07.01.2020. For....
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....d 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 include a number of closely linked transaction. In case they are closely linked then they can be aggregated for determining the ALP. We found that assessee has exported hot rolled coils to its AE between 30-6-2005 to 10-3-2006, the price has been determined from the website whose data is not subject to challenge. The product remains the same and the source from which the average price has been taken remains the same. Accordingly, it is a fit case for aggregation. We found that if the average price is adopted for all the 8 transactions, then the....