AI Drafter 
TaxTMI 
TaxTMI 
2023 (10) TMI 697
X X X X Extracts X X X X
X X X X Extracts X X X X
....pellant on 29 October 2018 passed by the Deputy Commissioner of Income-tax, 15(3)(1), Mumbai u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 Act"), pursuant to the directions dated 24 September 2018 by Dispute Resolution Panel. Mumbai ("DRP") u/s 144C(5) of the Act and read with order dated 27 October 2017 issued by Transfer Pricing Officer ("TPO") u/s 92CA(3) of the Act, is bad in law and void ab-initio 2. General Ground 2.1. That on the facts and circumstances of the case and in law, the learned AO/ DRP/ TPO have erred in making an upward adjustment of Rs. 11,29,97,681/- to the total income of the Appellant by holding that transactions of purchase of trading equipments etc. and payment for services by the Appellant to its Associated Enterprise ("AE") is not at arm's length. 2.2. The learned AO/DRP/TPO failed to appreciate that the MoD, is the Government of India with stringent controls over its procurements coupled with a rigorous system of purchasing, thus enjoys superior commercial leverage against its vendors such as the Appellant precluding any possibility of excessive profits. On the other hand the Russian Federation, being re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the learned AO/ DRP/TPO for benchmarking 5.1. The learned AO/ DRP/ TPO has erred in cherry picking the comparable companies for benchmarking the international transaction of the Appellant. 5.2. The learned AO/ DRP/ TPO erred in selecting comparable companies which are functionally different from the functional profile of the Appellant. Further, that the companies chosen by the learned AO/ DRP/ TPO for benchmarking differ significantly from the Appellant in terms of nature of business, scale, composition, nature of clientele and peculiar nature of the contracts rendering those companies inappropriate for benchmarking with the Appellant. 5.3. The learned AO/ DRP/ TPO also erred in selecting companies which are having incomparably high turnover, related party transactions and different financial year ending etc. during the year under consideration. 5.4. The learned AO/ DRP/ TPO erred in rejecting the Transfer Pricing Documentation without stating reason as required under Section 93(C)(3), merely on premise that financials of AE were not provided. 5.5. The learned AO DRP/ TPO erred in not considering detailed rebuttals filed against the comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d limited risk assumed as it is merely acting as a facilitator/distributor of goods of spare parts between associated enterprises and Ministry of defense India. As as per TPSR, all comparables were rejected, the transaction was stated between tow government entities where prices are negotiated between them, it states that International Transaction of Purchases of equipments spares and service fees is at Arm's Length. 05. The Ld. Transfer Pricing Officer held that the assessee is mere distributor of product, he adopted the transactions net margin method [TNMM] as the most appropriate method and determined the arm's length price of import of stores considering the gross profit as the PLI. The PLI was determined after considering liquidated damages expenses and forex loss as operating expenses at -4.06%. As assessee has disclosed the grass margin of 7.60%, the learned TPO substantially computed it at a lower figure for the reason that foreign currency fluctuation loss of Rs. 11.84 crore suffered by the assessee during the year was considered to be an operating item. The assessee considered it to be non-operating expenditure. The TPO selected 26 comparables whose PLI was 21.12% and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Ld. Dispute resolution panel. The direction was passed on 24.09.2018. The learned dispute resolution panel held that a. resale price method is the most appropriate method instead of transactional net margin method adopted by the TPO. b. However, comparable selected by the learned transfer pricing officer were considered, TPO was directed to exclude 11 comparable companies which were found to be engaged in service segment, but accepted the filters adopted by the TPO. c. The learned DRP deleted the adjustment proposed by the TPO on account of international transaction towards import of service. 09. on the basis of directions, the ALP adjustment of Rs. 13,81,82,259/- was scaled down to Rs. 11,29,97,681/-. With respect to the disallowance of ARI mismatch was confirmed to Rs. 7,51,252/-. 010. Accordingly, final assessment order was passed on 20.12.2017 determining income at Rs. 5,55,84,393/- .Assessee aggrieved with the same is an appeal before us. 011. Ground no. 1 general and nature and ground no. 7 initiating penalty proceedings is premature. Therefore, those are dismissed. Ground no. 4 challenging the violation of the principle of natural justice....
X X X X Extracts X X X X
X X X X Extracts X X X X
....omparables. He therefore submitted that when resale price method is accepted as the most appropriate method, only gross profit requires to be computed and compared. He therefore submitted that foreign exchange fluctuation loss as well as liquidated damages are required to be excluded from PLI. g. Even otherwise he submitted that comparable taken by the learned TPO are dealing in different set of machineries and none of them is engaged in trading of defense equipments. Further assessee is only dealing in spare parts and not even the machineries, even if, the defense equipments are also considered to be the broader part of machinery segment. He referred to the OECD guideline at paragraph number 2.29 and 2.34 for principles of identification of comparables. h. He further submitted that the learned transfer-pricing officer himself has considered some of the companies to be incompatible with the appellant while completing assessment of immediately preceding year. He made a reference to page number 125 of the paper book where different set of companies were selected which if those are selected for the current year results into the average margin of 2.04% which was less ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... justified by adopting other method. l. To justify the other method, he submitted that that prices are negotiated by the Ministry of Defense and associated enterprises. Last traded price is the fair market price mutually agreed between two independent parties, therefore such last traded price of similar items can be considered as comparable price. He therefore submitted that for benchmarking the international transaction of the assessee, the 'other method' should be adopted as the most appropriate method. m. He referred to 15 comparables selected by the learned TPO and submitted a chart stating that all these 15 comparables cannot be used for comparability of this international transaction as none of the company is engaged in the business of supply of equipments to the Ministry of Defence and also spare parts and services. He submitted that as assessee is supplying the goods to the Ministry of Defence the cost structure, the functions, the risk are different than all these 15 entities. n. In the result is submitted that the transfer pricing adjustment measures to be deleted. 013. The learned CIT DR vehemently supported the order of the learned AO and t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of normal gross profit margin accruing to the enterprises and further reduced by the expenses of purchases. The functional differences are also required to be adjusted which could have materially affected the amount of gross profit margin. As per transfer pricing study report the transaction of the import shows that pursuant to the agreement entered into by the associated enterprises and assessee, equipments are supplied with a predetermined condition that the end-user for all those equipment shall always be Ministry of defence. Each independent transaction entered into between assessee and the associated enterprise is governed by supplement contracts which are concluded on the basis of the contract/purchase order with the Ministry of defence signed after due negotiation based on the last purchase price or the estimated price on record is with the Ministry of Defence. The assessee imports spares for military equipments from assessee only if the same is ordered by the Indian Navy as per the approval from the Ministry of Defence Enterprises approved by the Ministry of defence which forms the basis of the pricing. In this circumstances the functions of the assessee are very limited ....