TaxTMI 
TaxTMI 
2021 (8) TMI 1361
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....ic Mfg Co., Ltd, Japan. It was incorporated in India on August 21, 2012 under the Indian Companies Act, 1956 to carry on the business of manufacturing of electrical components for two wheelers and trading of power system products. During the year under consideration, the assessee was engaged in the trading of power system products & electrical components for two wheelers. The assessee was in the process of setting up a manufacturing facility at Bangalore for manufacture of electrical components like Capacitor Discharge Ignitor (CDI) along with Regulator Rectifiers for two wheelers. A Return of Income in respect of AY 2014-15 was filed by the assessee on November 26, 2014 declaring a total loss of Rs.3,58,98,221/-. During the relevant year, the Assessee had entered into the following international transactions with its AEs; Table 1- List of International Transactions Sl.No Nature of International Transaction Amount in (INR) MAM Used 1 Purchase of Consumables 77,189 Cost Plus Method 2 Purchase of Raw Materials 1,69,25,073 Cost Plus Method 3 Purchase of Stock-intrade 86,01,64,421 Cost Plus Method 4 Purchase of Capital assets ....
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....O compared the prices at which stock-in-trade were purchased by SIPL with the prices at which they were sold to third parties and considered the differential gross margins for application of CUPM. Those gross margins were applied on the sale prices of SIPL to arrive at the Arm's Length Price (ALP') of purchase of stock- in-trade effectively using Resale Price Method (RPM) while claiming to have applied the CUPM. Upon comparison of such ALP determined by the Ld TPO with the purchase price of SIPL, the TPO computed an adjustment of INR 21,61,37,271/- to the value of international transaction of purchase of stock-in-trade. 6. The Assessee in a letter dated 3.6.2017 submitted before the TPO that it had chosen the foreign AE as a tested party because it was least complex (amongst the parties to the transaction), reliable and accurate date was available for comparison and available data can be used with minimal adjustments. 7. The Transfer Pricing Officer to whom a reference was made by the Assessing Officer (AO) u/s.92CA of the Act, rejected the Transfer Pricing analysis of the Assessee for the following reasons: "Based on the functional analysis mentioned above, ....
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....action. 9. The TPO accepted in paragraph 9.2.1 of her order that in CUP method margin at 10% on sales to third parties cannot be assumed. The TPO however got the details of purchase price of each item of the international transaction of purchase of stock in trade from AE and the price at which the Assessee sold each of the items to third parties. Thereafter the TPO computed ALP of the international transaction of purchase of stock in trade as follows: "9.2.3 Determination of ALP: 9.2.3.1 Method :CUP as MAM 9.2.3.2 Data: Current year data F.Y 2013-14. 9.2.3.3 The average price of the purchase and sale were taken to benchmark the transaction. Few products were purchased at lower than sales made to the third parties. Taxpayer has submitted comparison chart for 3 products i.e. Filter Sub Noice, Unit Assy Generator Control, Unit Comp Inverter. The average gross margin on these products is considered same as taxpayer calculated, where as in other 2 products i.e Reg rect com & Unit Assy Spark-3 lowest purchase price is considered to arrive the average margin. 9.2.3.4 Average margin is calculation as follows: S.No. Product Description ....
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....rice of the assessee; (v) not accepting the purchase price at ALP when the very same purchases were held to be not influenced by the relationship existing between the assessee and AE by the Special Valuation Branch of Customs. Detailed submissions were made from page-1 to 75 of Form No. 35A besides submissions dated 4.7.2018 copy of which are at pages 483 to 517 of assessee's paper book. The argument of the assessee on application of CUP method by the TPO was that CUPM compares the price charged' property transferred in a controlled transaction to the price charged for property transferred in a comparable uncontrolled transaction in comparable circumstances. But, the TPO has selected various margins as stated in para 9.2.3.4 of the TP Order to benchmark the sales of the Assessee, based on which, the TPO is expecting the purchases of the Assessee to be at such prices which would fetch upon sale the .margins sated in the said paragraph. Thus the TPO erred in adopting the margins under CUPM fundamentally in violation of the CUPM as there were neither internal comparable nor external comparable in case of SIPL. The Assessee drew attention of the DRP to Rule 10B(1)(a) of the Income ....
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....m an independent enterprise in a similar market (Internal CUP-1) 2. The AE i.e. Shindengen Japan or another member of the group sells similar stock-in-trade, in similar quantities and under similar terms to an independent enterprise in a similar market (Internal CUP-2). 3. An independent enterprise sells/buys same products, in similar quantities and under similar terms to another independent enterprise in a similar market (External CUP) The Assessee reiterated submission that , a) Internal CUP is not Available: The Assessee has not purchased similar goods from an independent party. Furthermore, Shindengen Japan has not sold similar goods to an independent party. Since, these goods have specifically been manufactured by the Shindengen Japan for Assessee. Accordingly, there was no such internal comparable was available to invoke the CUP. b) External CUP is not Available: The products identical to those supplied by Shindengen Japan do not exist, as they are manufactured based on the specific requirements of only one customer of the assessee. Hence, there is no uncontrolled external comparable with which the prices charged in the international tra....
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....this regard. It was argued that adoption of CUP method was contrary to the relevant statutory provisions and therefore the claim of the Assessee in its TP study that the price paid to the AE is at Arm's length should be accepted. He also made reference to several decisions in this regard. The submissions made in this regard were that the methodology adopted by the TPO was flawed in as much as the TPO collected complete list of products purchased by the Assessee from AE and sold to third parties. The Average price for purchase and sale were taken to benchmark the same. The gross margin arrived with these respective products was considered to calculate the arm's length price in this purchase transaction. In other words, the TPO has compared the assessee's own purchases with its sales. The TPO calculates percentage of gross margin for each component and after reducing the Purchase price by the gross profit margin so calculated, to arrive at the so-called arm's length price of the purchases from the AE. 15. It was submitted that the methodology adopted by the TPO is a distorted version of RPM, though without bringing any comparable on record. A comparison of purchase pri....
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....as absolutely contrary to the very basic and fundamental requirement of the provisions of Chapter X as well as rule JOB; when the most essential requirement ofa comparable being uncontrolled transaction was not satisfied, then the method adopted by the assessee cannot be accepted...... " 16. The learned counsel for the Assessee submitted that the method adopted by the TPO flouts the principle that the two methods cannot be combined for determining the ALP of purchases from AE. In this regard reference was made to decision in the case of Sony Ericsson Mobile Communications India (2015) 374 ITR 118 (Del.) the Delhi High Court observed: "(vii) When the Assessing Officer/Transfer Pricing Officer rejects the method adopted by the assessee, he is entitled to select the most appropriate method, and undertake a comparability analysis. Selection of the method and comparables should be as per the command and directive of the Act and Rules and justified by giving reasons." Reference was also made to decision in the case of L. G. Electronics India (2013) 22 1TR (Trib) (Del. SB) wherein it was held: "(xxix) Sub-section (1) of section 92C provides that the arm's lengt....
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....ted that the DRP apart from reproducing Grounds of Objections and the TPO's order, the DRP passes a laconic and non speaking order upholding the TPO's order. The DRP has totally ignored and failed to consider the assessee's detailed ground-wise submissions filed on 31.1.2018. No cogent reason whatever have been given for not considering or for rejecting the assessee's objections. It was submitted that an order has to be a reasoned or speaking order. The failure to give reasons could lead to a very justifiable complaint that there was a breach of natural justice. Reasons if given would substitute objectivity for subjectivity. (Maruti Udyog Ltd. Vs. ITAT (2000) 244 ITR 303 Delhi.) 18. The learned DR relied on the order of the DRP. We have carefully considered the rival submissions and are of the view that the issue needs to be remanded to the DRP for consideration afresh as the DRP as a first appellate authority has not given any findings on the factual and legal submissions made by the assessee before it. Since the order of the DRP is completely non-speaking order, we cannot on that basis uphold the claim of the assessee that the price paid in the international tr....
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....ion" and a method and "which provides the most reliable measure of arm's length price of the international transaction" Under rule 10C(2)(c), "the availability, coverage and reliability of data necessary for application of the method" is one of the crucial factors determining suitability of a method of determination of arm's length price in a particular fact situation. Similarly, it is also important to determine whether accurate adjustments can be made for the differences between the international transactions and the comparable uncontrolled transactions, and unless such adjustments can be made the related method cannot be said to be most appropriate method. Determination of ALP on the basis of facts and circumstances and as per the requirements of the relevant statutory provision is mandatory and cannot be accepted owing to default. We therefore set aside the order of the AO/TPO on the issue and the directions of the DRP on the issue and remand the issue to the DRP for passing a speaking order after meeting the specific objections raised by the Assessee. The relevant grounds of appeal being Gr.No.1 to 12 are accordingly treated as allowed for statistical purpose. 20. In ground....
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....E Technologies (supra) and in terms of the said judgment the chargeability of the sum paid in the hands of the recipient has to be gone into. If the payments were mere reimbursement, then there would not no income chargeable in the hands of the recipient and hence no requirement of deduction of tax at source. Since this exercise is required to be carried out by the DRP, we deem it proper to remit this issue also to the DRP. 22. The assessee raised an additional ground of appeal which reads thus: "In the facts and circumstances of the case, the Ld. Assessing Officer erred in law in computing total income of Rs.21,82,19,160/- without adjusting the declared loss of Rs.3,59,98,221/-." 23. The reasons for raising the additional ground of appeal are that vide order dt. 16.10.2018 the AO while giving effect to the Directions u/s 144C of the DRP dt. 28.9.2018 determined the total income of Rs. 21,82,19,160/- and raised tax demand 11,46,26,360/-. The assessee had filed return on 26.11.2014 declaring loss of Rs. 3,58,98,221/-. This factual position is admitted by the AO in the very first paragraph of the Impugned Assessment Order. However, the declared loss has not been adjust....