TaxTMI 
TaxTMI 
2025 (2) TMI 1339
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..... 35,76,46,432/- on account of international transaction of purchase and sale of goods and services entered into with AEs is not in accordance with law. 2.1. That the DRP/NFAC/AO/TPO erred on facts and in law in adopting an approach of determining the arm's length price of international transaction based on the operating revenue and operating cost amount of Consolidated Financial Statements of the assessee instead of Standalone Financial Statements, which is not in consonance with the transfer pricing provisions prescribed under the Act. 2.2. That the DRP/NFAC/AO/TPO erred on facts and in law in adopting an approach of determining the arm's length price of international transaction by aggregating associated enterprises ('AE') transactions and non-AE transactions which is not in accordance with the provisions of the Indian transfer pricing regulations. 2.3. That the DRP/NFAC/AO/TPO erred on facts and in law in benchmarking international transactions by comparing Assessee's entity level margin arrived at by aggregating AE transactions and non-AE transactions with the margin of companies not comparable with the Assessee company. ....
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....more scientific and on the basis of approach widely accepted internationally to benchmark the transaction of provision of corporate guarantee 3.5. That the DRP/NFAC/AO/TPO erred on facts and in law in not appreciating that the benchmarking analysis based on interest saving approach for determining arm's length rate of corporate guarantee fee has been accepted in earlier year in Assessee's own case 3.6. That the DRP/NFAC/AO/TPO erred on facts and in law in carrying out his arbitrary analysis of impugned guarantee fee without providing any reason for rejection of the Assessee's benchmarking analysis 3.7. That the DRP/NFAC/AO/TPO erred on facts and in law in computing the impugned guarantee commission on the upper cap of guaranteed amount (i.e. maximum value of guarantee) rather than on outstanding amount of underlying loan 4. That the DRP/NFAC/AO/TPO erred on facts and in law in making the upward transfer pricing on secondary adjustment of Rs. 16,95,145/- on account of corporate guarantee provided to AE is not in accordance with law. 5. That the DRP/NFAC/AO/TPO erred on facts and in law in making the upward transfer pricing adj....
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....actual period of delay in realization. 6. That the AO/NFAC erred on facts and in law in not allowing the set- off of brought forward loss/unabsorbed depreciation of Rs. 40,96,76,896 while computing the total income. 7. That the AO/NFAC erred in facts and in law in incorrectly levying interest under section 234A and 234B of the Act. 8. That the AO erred on facts and in law in initiating penalty proceedings under section 270A read with section 274 of the Act for the alleged under-reporting of income. The Appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal." Brief facts of the case are as under: 2. The assessee is a company, and filed its return of income for year under consideration on 22/01/2021, declaring total income at rupees nil. The income declared under section 115JB of the Act, was also at nil. Subsequently, the case was selected for scrutiny and notice under section 143(2) along with 142(1) of the act was issued. In response to statutory notices, the representative....
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.... Sale of Soap Noodles TNMM-Internal 8.83 8 Green Planet Industries LLC Sale of Fatty Alcohols TNMM-Internal 0.17 Total (B) 576.53 C International Transaction on Availing of Sales Support Services 1 VVF Singapore Pte Ltd Payment of Sales Commission CUP Internal 6.16 Total (C) 6.16 Grand Total (A+B+C) 1,796.30 2.3. The Ld.TPO noted that the assessee used transactional net margin method (herein after referred to as TNMM) as the most appropriate method by considering Indonesian AE as the tested party. Assessee used net cost plus marked up (herein after refer to as NCP) as profit level indicator (herein after refer to as PLI). It was noted that the assessee compared the NCP derived by Indonesian AE with arithmetic mean of 3 year weighted average NCP earned by 7 broadly comparable independent companies, engaged in similar activities as that of the Indonesia AE. The assessee thus bench marked its transactions based on internal TNMM. 2.4. The Ld.TPO treated all the above transactions to be closely linked and was of the opinion that they cannot be bench marked separately. The Ld.TPO also rejected....
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.... Aggrieved by the draft assessment order, the filed objections before DRP. 4. DRP upheld the action of aggregating international transactions by the Ld.TPO. The DRP also upheld comparables selected by the Ld.TPO, without analyzing the functional similarities. 4.1. The corporate guarantee commission attributed by the Ld.TPO, was also upheld by the DRP by relying on explanation to sub section (2) of 92B that defines what an international transaction is. Similarly, the secondary adjustment of corporate guarantees though the assessee various submissions, the adjustment were upheld by the DRP. 4.2. The DRP also upheld the rate of tax that applied to compute the notional interest on outstanding receivables by the Ld.TPO. 5. On receipt of the DRP direction, the Ld.AO passed the impugned order by making additions in hand of the assessee at Rs. 40,96,76,896/-. Aggrieved by the order of the Ld.AO, the assessee is in appeal before this Tribunal. 6. The Ld.AR submitted that Ground No.1 is general in nature and therefore do not require any adjudication. 6.1. He also submitted that Ground No. 3.2 is not pressed at the instructions of the assessee. Accordingly Ground No.....
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.... taxmann.com 425.(Chennai - Trib.). 3. Hon'ble Chennai Bench of ITAT in case of ACIT v Coastal Energy (P) Ltd [2015] 64 taxmann.com 425.(Chennai - Trib.). 4. JCB India Ltd. vs. Deputy Commissioner of Income Tax [(2016) 46 CCH 0366 Del Trib)," 7.3. On the contrary, the Ld.DR submitted that the assessee did not provide the allocation between AE and non-AE in segments. He also submitted that, segmental account provided by the assessee was not audited and therefore deserves to be rejected. The Ld.DR submitted that, assesses was in the activity of purchase of raw material from AE and sale of manufactured or own products to AE, and hence there was no need to separately bench mark the transactions, as they were closely linked to each other. He thus supported the action of the Ld.DRP/TPO for the adjustment made by aggregating all the international transactions at entity level. We have perused the submissions advance by both sides in the light of records placed before us. 8. It is noted that the assessee entered into following transactions with its AE's. It is submitted that, following table demonstrates factual summary of function, MAM and benchmarking method....
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....PM, PSM, TNMM, and OSM were not considered appropriate as the Most Appropriate Method (MAM) for benchmarking. Since the Appellant had also paid commission to independent thirdparty agents for similar services, the CUP method was determined to be the MAM. The transaction was benchmarked by comparing the commission rate paid to third-party agents. 8.1. It is noted that, the assessee purchases raw materials from its AE's. It is noted that these transaction of purchase of raw materials are with different characteristics involving different AE's. We find that the assessee entered into various transactions with its AEs during the year. The Assessee adopted the MAM applicable for each type of transaction separately, as listed hereinabove. The Ld.TPO rejected the ALP determined by the assessee and the MAM adopted by the assessee for each of the transaction and instead adopt aggregation method as under: In order to aggregate only Purchase of raw materials, there must be similarity in various factors. 8.2. Further it is noted that there are Non AE transaction undertaken by the assessee that is aggregated with the international transactions with AE's, for determining arms length pric....
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....trolled transactions that cannot be appropriately compared on an aggregate basis with those of an independent enterprise. Similarly, when analyzing the transactions between the independent enterprises to the extent they are needed, profits attributable to transactions that are not similar to the controlled transactions under examination should be excluded from the comparison. Finally, when profit margins of an independent enterprise are used, the profits attributable to the transactions of the independent enterprise must not be distorted by controlled transactions of that enterprise." 8.5. The OECD Guidelines emphasis that two or more transactions can be said to be linked with each other when such transaction emanate from a common source being an order or a contract or an agreement or an arrangement and the characteristic and terms of the transactions substantially flows from the said common source. As observed by coordinate bench of this Tribunal in case of Boskalis International Dredging International CV vs. DDIT reported in (2014) 47 taxmann.com 150, to examine whether number of transactions are closely linked in order to aggregate them, one has to verify whether, one transac....
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....d the respective AE's, before aggregating the transactions. 8.8. It is not in dispute by the authorities that, the assessee also undertakes contract manufacturing of third party consumer products and sell such products under its own brand to domestic as well as international markets. These activities carried out by the assessee under the contract manufacturing business has to be considered independently. 8.9. From the paper book filed before this Tribunal, we note that, the assessee furnished allocation keys in the transfer pricing study report between AE's and non-AE's. It is also submitted that direct expenses are maintained for the soap Noodles segment. Further, the cost production is calculated by bifurcating AE and non-AE segment. It is also noted that, expenses like sales promotion etc., has was not allocated to AE's sales, as assessee do not incur such expenses toward the sales made to AE. It was submitted that, based on a scientific allocation, the segmental reports were prepared and the Ld.TPO without pointing out any fault, rejected the same without assigning proper reasons. We therefore direct the Ld.AO/TPO to determine the ALP by aggregating the various transac....
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....the method and comparability analysis for determining the arm's- length price of the international transaction. Both the parties have placed before us judicial precedent that foreign AE can be taken as a tested party, but all the decisions have held the tested party only could be the party on which the transfer pricing methods can be applied in the most reliable manner and for which most reliable comparables can be found. 8.14. There is nothing on record placed by the assessee to analyse whether the assessee or the foreign AE is least complex. Therefore, in view of above discussion, we restore the issue back to the file of the Ld.TPO, with a direction to the assessee to substantiate arm's-length price of the transaction of trading segment by showing sufficient data about the foreign AE as a tested party. The Ld.TPO may examine that the tested party selected by the assessee gives a reliable method and computation of arm's-length price or not. Thereafter, after giving assessee an opportunity of hearing, determine the arm's-length price of the international transaction of trading segment. In respect of selection of comparable by the Ld.TPO at entity level bench m....
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.... liability that does not effects profits, income, losses Ld.AO or assets of the assessee either immediately or in the future he placed reliance on the provisions of section 92B and submitted that this characteristic essential for transactions to qualify international transaction. The Ld.AR also submitted that in A.Y 2018-19 the Ld.AO itself accepted corporate guarantee adjustment at 0.5% in assesses own case. 9.3. The Ld.AR submitted that in any event bank rated cannot be considered for bench marking corporate guarantee fee as held that Hon'ble Bombay High Court. "CIT v Everest Kento Cylinders Ltd [2015] 58 taxmann.com 254 and Glenmark Pharmaceuticals Ltd vs ACIT [2014] 43 taxmann.com 191" 9.4. On the contrary, the Ld.DR submitted that whether the corporate guarantee is invoked or not the assessee provides guarantee to its AE's. It amounts to be international transaction and determination of arms length price is necessary. He placed reliance on amendment by way of insertion of sub clause (c) to sub section 1 of section 92B, that clearly defines what an international transaction is. He thus submitted that, providing corporate guarantee is a financial obligation to the....
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....usted rates of return, where an associated enterprise is entitled to such return. 9.7. The guideline as per the report now forms part of Chapter 1 and Chapter VI of the OECD TPG(accurate delineation of the transaction) from 2022, which stipulates that, accurate delineation of financial transactions requires an analysis of the factors affecting the performance of businesses in the industry sector in which the MNE group operates. It further stipulates that commercial or financial relations between the parties and the conditions and economically relevant circumstances attaching to those relations should be identified. Similar to the analysis of any controlled transaction, this includes an examination of the contractual terms of the transaction, the functions performed, assets used, and risks assumed, the characteristics of the financial instruments, the economic circumstances of the parties and of the market, and the business strategies pursued by the parties. 9.8. In our view, the above analysis needs to be carried out by the authorities in order to determine the rate attributable to the corporate guarantee provided by the assessee to its subsidiary AE. We accordingly remit the....
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....s in which more than 200 days have been exceeded in realization of payments in case of third parties. Once on such delayed payments with third party no interest has been charged, then to work out the notional interest in case of delayed payment by the AE is also not called for. The comparison in such a case has to be made with controlled and uncontrolled transactions and once there is no such factor present in the uncontrolled transaction then the same cannot be taken as a bench mark for the controlled transaction. Moreover, we agree with the contention of learned counsel that in the case of AE the volume of sale is very huge as compared to volume of sale in case of third party and such delay in realization of payment should not be adversely viewed on the basis of average working of days. The average days of delay in payment as worked out by the TPO is also inappropriate as number of sale transactions with AE is far more than the non AE and will result in improper working of average days. On these facts of the case, we do not find any reason for making any kind of upward adjustment on account of differences in period for realization of payments in respect of sales made to AE as wel....
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....s been carried out by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. 11.6. The Ld.DR referring to the decision relied by Ld.AR referred to in preceding paras, submitted that the above decision of Hon'ble Bombay High Court was not brought to the notice of the coordinate bench of this Tribunal as well as Hon'ble High Court. We have perused the submissions advanced by both sides in light of records placed before us. 12. We agree with the arguments advanced by the Ld.DR on this issue that, once any debt arising during the course of business is an international transaction. Any delay in the realization of such debt is liable to be visited with the transfer pricing adjustment on account of interest income short charged or uncharged. Hon'ble Bombay High Court in the case....
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....ct on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per the agreement. The amendment made by the Finance Act, 2012 in terms of insertion of Explanation to section 92B with retrospective effect from 1-4-2002 by considering 'any other debt arising during the course of business' as a separate international transaction, impliedly disapproves the view canvassed by the DRP in obliterating the determination of the ALP of the separate international transaction of interest on allowing the working capital adjustment in the international transaction of rendering of services. Both the transactions are separate and distinct from each other. Whereas the international transaction of rendering services contemplates comparison of the price charged for rendering services by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter o....