TaxTMI 
TaxTMI 
2021 (3) TMI 270
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....he assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the tribunal for the first time, so long as the relevant facts are on record in respect of that item". Answering the question posed before it in affirmative, their Lordships held that on the facts found by the authorities below, if a question of law arises (though not raised before the authorities) which has bearing on the tax liability of the assessee, the Tribunal has jurisdiction to examine the same. 4. Having gone through the subject matter of the additional grounds taken by the assessee, it is discernible that they raise pure questions of law. We, therefore, admit the same. 5. The first assail by the assessee in its Memorandum of appeal is to the transfer pricing adjustment of Rs. 4,28,63,019/- made by the AO in Distribution activity, described as ESAS (Engine ....
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....addressed to the AO, worked out the amount of transfer pricing adjustment at Rs. 4.28 crore with seven comparables and their fresh mean adjusted profit margin at 6.96%. The assessee is before the Tribunal urging, inter alia, that Prior period commission income ought to have been included in the operating revenues of the assessee. 7. We have heard both the sides and gone through the relevant material on record. It is seen that the international transactions under the Distribution division comprise of Purchases from Associated Enterprises, which were sold to non-AEs; Receipt of Commission on sale of the AEs' products in India; Receipt of income on rendering Global procurement services; and Income from rendition of warranty services. Here again, the dispute is chiefly qua the Receipt of commission on sales amounting to Rs. 13,83,56,599/-, which is further restricted to a sum of Rs. 5.65 crore included in the above amount, that was designated as 'Prior period income' in the annual accounts of the assessee. This amount was taken by the assessee as a part of the operating revenue but excluded by the TPO. The transaction of depiction of `Prior period commission income' of Rs. 5.65 crore ....
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....al contentions, it would be apt to take note of the prescription of Rule 10B(1)(e) of the Income-tax Rules, 1962 governing the ALP determination under the TNMM as under : " (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction or a specified domestic 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 or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the n....
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....iod of continuation of the international transaction and not the year in which it gets completed. Thus, it is manifest that the criterion for qualifying as operating revenue/costs and then entering into the ALP determination is the scope of the international transaction and not the per se year of completion of the international transaction. If a transaction commences and completes in a single year, then there can be no question of including the prior period expense or incomes in the ALP determination. If, however, various steps of an international transaction of rendering service breach one accounting year, then it becomes incumbent to consider all the operating revenue/costs spreading over more than one year for determining its ALP at the time of completion of the transaction. In such a case, when the international transaction gets concluded in year two, then the costs/revenue of the international transaction from year one also qualify for consideration in determining the ALP even though characterized as `Prior period costs/revenue'. A method of accounting employed by an assessee for computing total income needs to be harmoniously aligned, modified and fine-tuned for the limited p....
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.... will be paid in the currency of the final contract and will be due within thirty days after receipt of customer payments...'. 11. On going through the above extracted clauses from the Agreement, it becomes ostensibly clear that the scope of the international transaction of rendering marketing services broadly commences with the doing of background work for sale as a step one, followed by actual sale as a step two and ending with the realization of the invoice value by the AE from the Indian customers as a step three. It is only on the completion of the step three that the international transaction of rendering marketing support services comes to an end resulting into accrual of income therefrom and the consequential ALP determination. Thus all the operating costs/revenue pertaining to the above broad activities running into three steps leading to the international transaction of rendering marketing support services are to be considered for determining its ALP under rule 10B(1)(e). To put it differently, only the costs/revenue which are either anterior to the step one or exterior to the step three need to be ignored. 12. The assessee received credit notes worth Rs. 5.65 crore for....
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....ccrued inasmuch as the transaction itself is incomplete. But the commission income in such second scenario will be included in the operating revenues because the transaction of rendering marketing services is over and the resultant income has accrued. This exercise needs to be done by the AO/TPO. 15. Once we are obliged to include the above referred commission in the revenue base, that was characterized by the assessee as `Prior period income', the sequitur is that in the same way all the operating costs - direct or indirect; close or remote - in relation to such international transaction incurred in earlier years should also be included in the cost base for determining the ALP of the transaction in the current year. The obvious reason is that all the operating costs/revenue in relation to the international transaction need to be considered at the time of determining the ALP of the international transaction. It is clear from the details of Rs. 5.65 crore given by the assessee that it carried out the above referred first two steps of rendering marketing support services in the earlier years, which is evidenced from the fact that the invoices were raised by the AEs in preceding year....
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.... given by the DRP. 19. The assessee has raised an additional ground urging that the transfer pricing adjustment should be restricted to the international transaction alone. Such an additional ground has been admitted above. 20. Section 92 is the first section of the Chapter-X containing special provisions relating to avoidance of tax. Sub-section (1) of section 92 provides that: `Any income arising from an international transaction shall be computed having regard to the arm's length price'. Thus it is graphically clear that the ALP and the consequential transfer pricing adjustment are contemplated only in respect of the international transactions and not the entity level transactions. The TPO, in the instant case computed transfer pricing adjustment in respect of entity level transactions. We direct to restrict it to the AE transactions under consideration and not the entity level transactions. 21. To sum up, we set aside the impugned order on ALP determination of the international transactions of the `Distribution activity' and restore the matter to the file of the AO/TPO for a fresh determination of the ALP in accordance with our above observations/directions. Needless to say,....