TaxTMI 
TaxTMI 
2026 (6) TMI 671
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....ward adjustment of Rs 1,50,04,178/-made by the TPO by re-computing the arm's length price of the international transactions of sale of finished goods to its AEs." ii. "On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in rejecting TPO's approach of rejecting the TNMM as MAM and adopting the CUP method as the MAM which is contrary to the provisions of Rule 10C of Income Tax Rules? Iii. "On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the TNMM over the CUP method as the MAM which is contrary to the provisions of section 92C and Rule 10B & 10C of Income Tax Rules?" iv. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing following appropriate adjustments claimed by the assessee for material differences in contractual terms, underlying commercial circumstances, functions, risk, and other economic factors between assessee's transactions with AEs vis-à-vis assessee's transactions with non AEs while applying the CUP method which is contrary to the provisions of section 920 and Rule 10B & 10C of Income Tax Rules 1. Adjustment on accou....
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....ssee determined by ignoring the guidelines laid down under the Income-tax Act and Rules and thereby violating the ratio laid down by the Hon'ble Supreme Court in the case of Sap Labs India Pvt. Ltd. vs. ITO" xi. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the additional depreciation of Rs. 1,63,73,591/ without appreciating the fact that mere changing of spare parts cannot be considered as installation of "new" plant and machinery" xii. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in directing the AO to delete the addition jo Rs. 12,71,073/- made while computing book profit u/s 115JB without appreciating the fact that the assessee has claimed the said expense in its P&L account and thus has reduced its book profit." xiii. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs. 1,34,2,7327/ made on account of Capitalization of Interest on Capital Work In Progress without appreciating the fact that the assessee failed to establish that borrowed loan was not used for capital purposes." xiv. On the facts and circumstances....
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....sent case are identical to the facts of the case of the assessee in the earlier years wherein the ITAT had deleted the upward adjustment made by the TPO/AO. He, therefore, strongly supported the order of the Ld. CIT(A). 8. We have considered the rival submissions and the materials available on record. The TPO justified the adoption of the Comparable Uncontrolled Price (CUP) Method as the Most Appropriate Method (MAM) for benchmarking the assessee's international transactions, in preference to the Transactional Net Margin Method (TNMM). The principal findings of the TPO/AO are as follows: 1. Preference for CUP over TNMM o The TPO relied upon the OECD Transfer Pricing Guidelines to contend that traditional transaction methods, particularly CUP, are generally preferred over profit-based methods such as TNMM because they provide the most direct measure of whether a controlled transaction is at arm's length. o Where reliable comparable uncontrolled transactions are available, CUP is considered the most direct and reliable method for determining the Arm's Length Price (ALP). 2. Burden on the Assessee o Reliance was placed on the....
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....nd that the dispute regarding the appropriate method for benchmarking sales of finished goods was identical to the controversy adjudicated in the assessee's own cases for Assessment Years 2007-08 to 2011-12. The Ahmedabad Bench of the ITAT, in the assessee's cases for AYs 2007-08, 2008-09, 2009-10, 2010-11 and 2011- 12, had consistently held that Internal TNMM was the Most Appropriate Method (MAM) for benchmarking the transactions. The Tribunal had further held that the CUP method could not be reliably applied because of significant economic differences between transactions with Associated Enterprises (AEs) and those with non-AEs. The decision of the Tribunal for AY 2007-08 was affirmed by the Gujarat High Court, which had dismissed the Revenue's appeal. For the year under consideration, the Ld. CIT(A) found that: * the nature of transactions remained the same, * the products involved remained the same, * the Associated Enterprises remained the same, and * the assessee continued to benchmark the transactions using Internal TNMM. Since there was no material change in facts or in circumstances, the Ld. CIT(A) followed the binding pre....
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....ose. Whatever may be inherent edge of the direct methods of determining arm's length price of an international transaction over indirect methods of determining the arm's length price of international transactions, selection of the most appropriate method for determining arm's length price under the transfer pricing provisions, in a particular fact situation, is not an academic exercise which can be decided de hors the peculiar facts of that situation, and, therefore, there cannot be any straight-jacket formulas holding application of a particular method in case of a particular type of product or service. While rule 10B(1) of the Income Tax Rules 1962, provides that arm's length price in relation to an international transaction shall be determined by any of the methods, "being the most appropriate method", set out therein, Rule 10 C(1) provides the mechanism for selecting the most appropriate method "which is best suited to the facts and circumstances of each particular transaction" and "which provides the most reliable measure of arm's length price of the international transaction". Rule 10C(2) further provides that in selecting the most appropriate method as specified in rule 10C(....
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....ecessary for application of a particular method, as CUP in this case, are available, CUP method cannot be said to be most appropriate methods on the facts of this case. Let us, therefore, first examine whether sufficient inputs were indeed available. 11. At the outset, it is important to note that what has been relied upon by the TPO is Internal CUP data but then rather than taking the comparable uncontrolled price of the transaction, the TPO has compared average of intra-AE transactions and independent transactions. This approach, though in the case of application of Cost Plus Method, has been rejected by a coordinate bench of this Tribunal in the case of ACIT Vs Tara Ultimo Pvt Ltd [(2012) 143 TTJ 91 (Mum)], though the same reasoning will be equally applicable in respect of the CUP as well as the computation mechanism, in that respect, is materially similar. In this case, speaking through one of us (i.e. the Vice President), the coordinate bench had observed as follows: The way this rule works, the benchmark gross profit is to be applied on each transaction with the AEs, while, for computing the benchmark, one could take into account a series of same or similar ....
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....ining, supplied by us now. 12. It is also important to note that the TPO has justified application of internal CUP on the basis of deviations in prices at which products are sold to different AEs and, by implication, using one intra AE price to bench the other intra AE price. That is wholly incorrect. It is well settled in law that it is only an uncontrolled price which can be compared with controlled price and used for any benchmarking. This position has been well summarized in a coordinate bench decision in the case of Sabic Innovative Plastic India (P.) Ltd. v. Dy. CIT [2013] 59 SOT 138/35 taxmann.com 177 (Ahd.), and we are in considered agreement with the same. 13. When comparing the prices of products sold in intra AE transactions vis-à-vis independent transactions, it is not sufficient to compare the prices de hors the economic circumstances in which the respective AE and non AE transactions take place. This principle is beyond any doubt or controversy. In the OECD Guidelines for Multinational Enterprises and Tax Administrators, it is clearly stated that application of CUP method "requires high degree of comparability not only in the products sold and....
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....t that whatever may have been payment terms under the intra AE agreement, the payment was actually received substantially in advance. The question we must ask ourselves is that whether such substantial advance payments, which ensure availability of working capital to the assessee, can be compared with normal business transactions allowing, on the contrary, credit period to the customers. The answer is clearly in negative as the economic circumstances in which these two sets of transactions operate are substantially different. The very character of these transactions is different. 15. It is also important to bear in mind the undisputed fact that the AE had an obligation to buy at least 50% of its products and the assessee was reseller rather than an end user. These contractual terms and the difference in functions also seriously affect the comparability. The reasons given by the CIT(A) for rejecting these variations are wholly superficial and devoid of any legally sustainable merits. The variations in quantities between the AEs and the non AEs cannot be ignored either. There is no dispute that there is huge variations in quantities sold to the AEs vis-à-vis the quant....
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.... from the fact that the CIT(A) has upheld application of CUP method on the sole basis that accurate adjustments can be made to take care of variations in the intra AE and independent transactions but then one of the points made before us, in the written submissions, is that "if total adjustment of 36% claimed in those years was allowed, prices would come down to such unrealistic levels that one of the international transaction, including sales to non AEs, were made anywhere neat them". Clearly, there is no meeting ground between these diametrically opposed stands by the authorities. As regards the decision of coordinate bench in the case of Serdia Pharmaceuticals (supra), that was a case in which no dispute was raised with respect to the comparables cases except on account of quality for which suitable adjustment was allowed. This precedent, therefore, does not offer any help to the case of the revenue. 16. A lot of emphasis has been placed on the fact that the assessee on its own was using the Internal CUP method in past, and, there was, thus, no good reason to deviate from the same. It is for this main reason that the application of TNMM has been declined by the authorit....
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....not offer any help to the case of the revenue. All that has been relied upon is internal CUP and for the detailed reasons set out by the CIT(A), which meets our approval, these CUP inputs were not reliable enough. In any case, differences due to variations in FAR due to nature of trade relationship with AEs have not been accounted for and suitable adjusted. The external CUP inputs are not even referred to and relied upon by the TPO. There are no other independent comparable transactions brought to the analysis by the TPO or the learned Commissioner (DR). All these factors put together donot make out a case for application of CUP in this case. Not only that there is no justification, beyond vague generalities, for CUP in the present case and not only that that CUP method application mechanism is incorrect, we find that sufficient quantity of reliable CUP inputs are not available on the facts of this case. that In the light of these discussions, as also bearing in mind entirety of the case, we donot see legally sustainable merits in the case of the learned Commissioner (DR) and we reject his plea that on the facts and in the circumstances of this case, CUP method is required to be ap....
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....allocation key such as ration of sales quantity, sales revenue, total revenue. It was also explained that the segmental details have been reconciled with entity level audited accounts. The assessee had further submitted that "in case if in your view there are any inappropriate cost allocations, we would appreciate if you can kindly let us know which cost allocations are not appropriate and why these are not appropriate so that we can accordingly clarify and explain on those aspects". We have noted that the TPO did not have any specific comment on this request and he simply rejected the explanation of assessee as "not accepted". In appeal also, no specific adjustments were suggested to the allocations made in the segmental accounts and the discussions were confined to generalities. In these circumstances, we see no reasons to disturb the internal TNMM adopted by the assessee. 5. There are some variations in this year, such as the advance payment in this year is for 13.97 months on an average, as evident from the calculations at pages 149-150 of the paper book, and such as the fact that there have no sales of certain products to non AEs at all and yet internal CUP mechanism ....
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....t difference of opinion as to the appropriateness of one or the other method cannot be gone into in the appeal under Section 260A of the Act, 1961 by observing as under: "5. The Court is of the opinion that no substantial question of law arises. The difference of opinion between the CIT (A) and the TPO, as to the appropriateness of one or the other methods, cannot ground per se be a the for interference; appropriateness of the method unless shown to be contrary to the Rules specially Rules 10B and 10C, in the opinion of the issues that ought Court, are hardly to be gone into under Section 260A of the Income-tax 12. In the overall view of the matter, convinced that the decision of the Tribunal is correct and requires no interference and no question of law much less any substantial question of law can be said to have arisen from the impugned order of the Tribunal. In the result, these appeals fail and are hereby dismissed, with no order as to costs. 12. In view of the above facts, we do not find any infirmity with the order of Ld. CIT(A). The Revenue has not brought any material on record to point out any distinguishing feature in the facts of the case in the yea....
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....particularly, decision of Hon'ble Bombay High Court in the case of Delhi Hig Court in the case of CIT Vs. Cushitten (supra) ated (supra). Apart from the above, we find that the assessee has produced evidence in the shape of agreement between it and the AE showing that AE would charge commission at the rate of X% "Un non-AE export sales/for rendering these services. The assesses has not debited other expenditure for marketing and sales with regard sales made to non-AE. It is also pertinent to note that turnover of the assessee has increased with regard to non-AE sales a/so. Its export sales to non-AE have increased from Rs. 9 crores approx. in F.Y.2005-06 to Rs, 44.56 crores in the F. Y.2008-09 Therefore, taking into consideration the complete details, we are of the view that no adjustment been made at the recommendation of the TPO on this issue because it was not in the jurisdiction of the TPO to question requirement of services, and also ascertain rendition of services, and on these two reasoning, he cannot benchmark the ALP of these services at NIL. It is also pertinent to observe that In A.Y.2010-11, assessee has paid Rs. 160,16,780/to its AE for these services and that tran....
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....rial brought on record for the year under consideration, the earlier decisions were followed by the Ld. CIT(A). Consequently, the transfer pricing adjustments of Rs.2,10,33,968/- on account of adjustment relating to marketing services availed from the AE, was deleted. We do not find any infirmity with the order of the Ld. CIT(A) on this issue. Accordingly, the grounds taken by the Revenue are dismissed. Ground No. 11: Additional Depreciation 16. The assessee had claimed additional depreciation on plant and machinery which was examined by the AO in the course of assessment. The AO did not allow claim for addition depreciation of Rs. 1,63,73,591/- on replacement of spares and parts as such replacement did not result into any new plant and machinery. The Ld. CIT(A) had, however, allowed the claim of the assessee on the ground that the genuineness of the expenditure was not disputed. 17. The Ld. CIT-DR, submitted that the additional depreciation was admissible only in respect of new plant and machinery and not on the replacement of spares/parts of the existing machinery. Therefore, the claim of the assessee was rightly disallowed by the AO to the extent of Rs. 1,63,73,591/- wh....
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....issue relating to the deletion by the learned CIT(A) of the addition of Rs. 31,26,316/- made by the Assessing Officer on account of prior period expenses while computing book profit under section 115JB of the Act. 16. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As agreed by the learned representatives of both the sides, this issue is squarely covered in favour of the assessee inter alia by the decision of Hon'ble Karnataka High Court in the case of CIT v GMR Industries Ltd., [2020] 425 ITR 504, wherein it was held that prior period expenses charged to profit and loss account cannot be deducted from the profit of the year for the purpose of computing book profit under Section 115JB of the Act as the same does not fall within the purview of Section 115JB of the Act. To the similar effect is the decision of Mumbai Bench of this Tribunal in the case of Shivshahi Punarvasan Prakalp Ltd. Vs. ITO, (2012) 135 ITD 51 (Mumbai), wherein it was held that there is no provision for any adjustment on account of prior period expenses in Explanation-1 to Section 115JB(2) of the Act and, therefore, any addition ....
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.... the order of the Ld. CIT(A). As rightly held by him, the addition was made by the AO on mere presumption and without establishing the nexus between ECB loan and CWIP. Therefore, the order of the Ld. CIT(A) on this issue is upheld. The ground taken by the Revenue is dismissed. Ground No. 14- Disallowance u/s. 35(2AB) of the Act. 25. The AO had made disallowance of Rs. 3,76,026/- being excess deduction claimed u/s. 35(2AB) of the Act, on the basis of report of DSIR. According to the AO, since the DSIR did not allow the expenditure to this extent, the assessee was not eligible to claim the same as deduction u/s. 35(2AB) of the Act. The addition made by the AO was deleted by the Ld. CIT(A) following the decision of Co-ordinate bench of this Tribunal as well as the decision of the Hon'ble Gujarat High Court on this issue. 26. We have heard the Ld. CIT-DR and the Ld. Sr. Counsel. The provision of section 35(2AB) was amended w.e.f. 01.04.2016, whereby the quantum of eligible expenditure incurred on in-house R&D facilities was required to be quantified by DSIR. Prior to 01.04.2016, there was no such requirement for quantification of the eligible expenditure by the DSIR for claimi....
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....omparison in foreign currency value of international transaction without appreciating the fact that the price compared in foreign currency is actual value and the price determined in Indian Rupee have impact of currency conversion rate and there by the same is contrary to the provisions of Rule 10B of Income Tax Rules." vi. Whether on the facts and in the circumstances of the case and in law, the Ld. CITIA) was justified allowing the transaction of sale of TEAL chemical to Reliance Industries Ltd as comparable uncontrolled transactions for benchmarking the transaction of sale of teal chemical product by assessee to AES. vii. "Whether on the facts and in the circumstances of the case and in law, the Ld. CITIA) was justified rejecting TPO's approach of increasing the sales realization from National Titanium Dioxide Company Limited by 20% on account of volume factor for establishing the comparability under CUP which is contrary to the provisions of Rule 10C of Income Tax Rules." viii. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) was justified in deleting the adjustment of Rs. 2,10,33,968/- on account of "availing sales....
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.... hearing of appeal 29. All the grounds taken by the Revenue in this appeal, except ground no. 12, are identical to the grounds in ITA No. 2281/Ahd/2022. Therefore, the decision taken in ITA No. 2281/Ahd/2022 is applicable mutatis mutandis to this year as well. Ground No. 12 - Additional Depreciation 30. The assessee had claimed additional depreciation of Rs. 91,12,076/- on "Tanks" under the head plant and machinery which was used for storage purpose. According to the AO, the tanks did not qualify for additional depreciation as this did not result in a new plant and machinery. Further, the assessee also did not submit the complete bills and vouchers in respect of addition of Rs. 7,09,53,936/- made to Tank account. Therefore, the additional depreciation of Rs. 91,12,076/- made in respect of the Tanks was disallowed by the AO. The Ld. CIT(A) had, however, allowed the claim for additional depreciation of tanks. 31. We have heard the Ld. CIT-DR and the Ld. Sr. Counsel on this issue. Though the AO has mentioned that the assessee did not produce the complete bills and vouchers, he did not disallow the claim for depreciation on tanks rather only the claim of additional deprecia....