TaxTMI 
TaxTMI 
2024 (12) TMI 627
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Rs. 40,46,74,637/- u/s 92CA of the Income-tax Act, 1961, made by the Transfer Pricing Officer/ Assessing Officer, by upholding the CUP method adopted by the assessee ignoring the fact that the TPO had applied TNMM method which has been upheld by the ITAT in the assessee's case for A.Y.2005-06, A.Y.2006-07 and Α.Υ.2007-08" A.Y.2011-12 Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the adjustment of Rs. 10,87,40,644/-(10,90,79,024 -3,38,380) out of Rs. 10,90,79,024/- u/s 92CA of the Income-tax Act, 1961, made by the Transfer Pricing Officer/ Assessing Officer, by upholding the CUP method adopted by the assessee ignoring the fact that the TPO had applied TNMM method which has been upheld by the ITAT in the assessee's case for A.Y.2005-06, A.Y.2006-07 and A.Y.2007-08" 3. At the outset ld. Counsel for the assessee Shri Vispi T Patel submitted that this issue now stands covered by the decision of ITAT in assessee's own case right from A.Y.2005-06 to 2009-10 and for A.Y.2012-13. He further submitted that ITAT order for A.Y.2005-06 and 2006-07 have also been confirmed by the Hon'ble High Court in revenue's ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or the Assessment Year 2008-09 and 2009-10 were disposed off by the Tribunal vide common order, dated 08/04/2021 passed in ITA No. 7738/Mum/2012 & 4771/Mum/2015, Cross Objection Nos. 234/ Mum/2014 & 149/Mum /2015 [Reported in [2021] 127 taxmann.com 21 (Mumbai Trib.)) holding as under: 5 The learned AR supported the adoption of CUP method by submitting that this method has been accepted in earlier as well as subsequent Assessment. Further, the benchmarking analysis carried out by the company was in accordance with provisions of Section 92C(1) read with rule 108(1)(a) and having regards to benefit of tolerance range as available under second proviso to Section 92C(2) of the Act. It was also submitted that since the assessee was in possession of valid internal as well as external CUP, the said methodology was most appropriate method to benchmark the transactions. 6. However, the Ld.AR was confronted with Tribunal order for AYS 2005-06 to 2007-08 which upheld the application of TNMM to benchmark these transactions. In that eventuality. Ld.AR alternatively assailed the benchmarking done by Ld. TPO using TNMM method. It was submitted that the adjustments, if any. was to be restricted....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the TP Regulation ALP of a transaction could vary year to year depending upon economic conditions and comparability of the provisions, that CUP rates, applied by the assessee, were not exactly identifiable, that the same commodity was transacted at different rates in MTA, that assessee was not able to provide the resale margin of the crude oil sold in the local market, that soyabean meal was sold at a different rate as compared to the export to the AEs. 8. During the appellate proceedings, the FAA directed the TPO to submit a remand report. The TPO issued a show cause notice and proposed operating profit margin of Rs. 2.92 crores to be applied on the operating income of Rs. 806.56 crores as against assessee's operating loss of Rs. 56.01 crores. After considering the submission of the assessee, the TPO re-worked the operating margin of comparable companies@ 2.63%. After making adjustment to the operating expenses (unutilized capacity and non operating expenses) of the assessee, the operating loss was reduced to Rs. 29.54 crore. Accordingly, the mean operating margin of the comparables, i.e. 2.36% was applied to the operating income of Rs. 809.54 crore resulting in arms length....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the total expenditure, that he had considered the optimum capacity at 60% and not 100% that he had arrived at abnormal expense of 50% of total expenses by the assessee as against 70%. The FAA allowed Rs. 3.81 crores under the head power and fuel, repairs and maintenance of building plant and machinery to the extent of 5/7th of the expenses and observed that the loss would be reduced by Rs. 2.72 crore. The FAA allowed Rs. 5.46 crore under the heads salary and wages(5/7th of the expenses) further reducing the loss by Rs. 3.90 crore. Deferred Revenue expenditure of Rs. 1.05 crore was also allowed, increasing the loss by the same amount. The FAA re-worked the segment account to determine the ALP and arrived at the conclusion that there was a difference of Rs. 43.07 crore to the operating cost of the assessee. He observed that if the difference was to be allocated on import of goods from AEs, as done by the TPO, the adjustment would lead to an overall reduction of 31.15% to the import price of goods from the AEs. It was further observed by the FAA that while making adjustment to ALP of export vis-a- vis MTA the TPO had applied arithmetic mean of operating margin on cost on uncontrolle....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ating expenses of the assessee as per (B) above 8,33,51,92,616 Difference to be adjusted towards international transactions of import of goods from AEs assessee (F-B) assessee (G) (3,55,45,017) International transactions of goods imported from AEs - (H) 138,28,94,614 Arms length price of international transactions of goods imported from AEs assessee (H-G) assessee - (I) 134,73,49,597 On the basis of above adjustment, the import price of goods was determined at Rs. 3.55 Crore as against Rs. 48.65 Crores determined by the TPO. As a result, the assessee got a relief of Rs. 45.09 Crores. 9. Before us, the DR relied upon the order of the TPO. The AR argued that the assessee had acquired DALDA brand from HLL, that the said acquisition would take some years to fructify, that the assessee had to be extra ordinary costs in that regard, that it had to incur significant start-up costs to establish the newly acquired brands in the initial years of acquisition, it was not able to fully utilise its manufacturing capacity, that there was extraordinary unutilised capacity, that it had calculated revised margin of 20 comparables selected by the TPO and had arrived at the arithmetic mean ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sen Krupp Industries India Pvt. Ltd. (supra) "We find that in terms of chapter X of the Act, the determination of the consideration is to be done only with regard to income arising from international transactions on determination of ALP. The adjustment which is mandated is only in respect of international transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE. The adjustment is beyond the scope and ambit of chapter X of the Act. We find that while reworking the adjustment, the FAA had taken the margin at the rate of 2.36%. We find that the assessee had not filed any application before the FAA pointing out the apparent mistake in adopting the revised margin i.e. adopting the rate of 2.36% instead of rate of 1.07%. Considering these facts, we are of the opinion that matter should be restored back to the file of the AO/TPO t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is directed to verify the computations made by the assessee and decide accordingly. The benefit of tolerance range of +5%, as provided in law, would be available to the assessee. Consequently, the revenue's ground, to that extent, stands allowed which would render assessee's cross-objection (Emphasis Supplied) 8. From the perusal of the aforesaid order, it is seen that the Tribunal has decided this issue on a very different ground. The Tribunal instead of going on the issue, whether CUP is valid MAM qua this transaction of import of oil or not, albeit has gone on alternative plea that even if TNMM is accepted is applied as done by the by the TPO on his set of comparables, then he cannot make adjustment on the entire segment of manufacturing activities, instead adjustment should be restricted to international transaction. It was held that TPO is not justified in making adjustment to the entire segment of manufacturing activity and it was accordingly restricted to the international transaction of import of oil only even if TNMM is held to be as Most Appropriate Method is applied then TP adjustment should be restricted to international transaction only and benefit of tolera....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r in view of the Tribunal. The appeal is dismissed." 9.1 Exactly similar matter has been decided in Income Tax Appeal No.445 of 2017 also by Hon'ble Bombay High Court in order dated 03/06/2019. 10. Thus, once this issue has been settled from the stage of Hon'ble High Court holding that TPO cannot make adjustment to the entire segment of manufacturing activity and only to the extent of international transactions, which is also in conformity with the earlier judgments of Hon'ble Bombay High Court in the case of CIT vs. Tara Jewels Exports Pvt. Ltd reported in 381 ITR 404 and CIT vs. Alstom Projects India Ltd. reported in 394 ITR 141, then consistent with the view, we hold that adjustment should be made only on international transaction. Further, as per law, assessee should be given benefit of proviso to Section 92C (2) of +/-5%. And if that is so, then no adjustment is left to be made then, transaction is at arm's length. For the sake of ready reference, the working of +/-5% range for A.Y.2010-11 and 2011-12 is reproduced hereunder:- Analysis of 5% range for AY 2010-11 (Actual Calculation) Particulars Amount in INR Operating Income as per TP Ord....