TMI Blog2019 (3) TMI 1028X X X X Extracts X X X X X X X X Extracts X X X X ..... rtunity of hearing. Assessee is directed to produce before ld AO/ TPO quotations which it would like to rely upon, prove them to be authentic, genuine, comparable with the terms and conditions of international transaction especially with respect to quantity and geographies and adjustment with respect to FOB value. Assessee shall also produce the benchmarking methodology before the ld AO/ TPO.AO/ TPO is directed to examine the same, and if found in accordance with law, then test the benchmarking made by assessee and compute ALP. In case AO is not satisfied with the same, before doing so ld AO/ TPO will give adequate opportunity of hearing to the assessee to prove its case, Then he may decide issue on merits in accordance with law applying any other appropriate method including TNMM. Adjustment to the international transaction of ‘provision of business support services’ - comparable selection - applied the ‘Cost plus Method’ taking 5% margin - HELD THAT:- Merely based on some judicial precedents in case of some other assesses, comparables can neither be included nor excluded. It will lead to strange situations, where one comparable excluded in one case, would always be exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. In view of this, we direct the learned Assessing Officer to examine the details submitted and test it on the grounds of allowability of bad debts according to Section 36 (2) Computation of amount of set off of brought forward losses and unabsorbed depreciation of earlier years - HELD THAT:- We direct the assessee to produce the correct details of the amount of unabsorbed depreciation and amount of brought forward losses to be set off against the income with proper evidences which may be verified by the learned assessing officer and if found correct, the assessee should be granted the benefit of the same - ITA No. 1827 & 1847/Del/2015 - - - Dated:- 15-3-2019 - SHRI AMIT SHUKLA, JUDICIAL MEMBER And SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER Assessee by: Shri Aseem Chawla, Adv Revenue by: Shri H. K. Chaudhary, CIT DR ORDER PER PRASHANT MAHARISHI, A. M. 1. These are the two appeals filed by the assessee for assessment year 2009 10 and 2010 11. 2. First, we take up the appeal for Assessment Year 2009-10. Assessee s appeal is against Order of The Asst Commissioner of Income Tax, circle 13 (1), New Delhi (The Learned Assessing Officer) pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f some organization/ websites for some part of trading transaction, AO rejected them statsing that these are merely estimates and quotes and not actual transactions. In business support service segment, Ld. Transfer Pricing Officer was of the opinion that assessee in fact has used Transactional Net Margin Method instead of CPM method as it has taken the total cost base for comparability analysis. Hence, he adopted TNMM while determining Arm s-Length Price of the international transaction in business support service segment also. 6. The Learned Transfer Pricing Officer issued the show cause notice, which was replied by assessee. The learned Transfer Pricing Officer determined shortfall of ₹ 19530369/ with respect to the business support services rendered by the taxpayer and ₹ 499296226/-With respect to benchmarking of the trading segment, where the assessee has adopted the CUP method, adopting Transactional Net Margin Method selecting four comparables, adopting profit level indicator of Operating Profit By Operating Revenue (OP/OR). Therefore, the Ld Transfer Pricing Officer, in nutshell, proposed an adjustment of ₹ 19530369/ in business support service segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the appellant for the purposes of determination of the Arm s length Price ( ALP ), in respect of provision of business support services to its Associated Enterprises ( AE s ). 2.1. That on the facts of the case and in law, Ld. TPO has erred in disregarding the search process conducted by the appellant for the purposes of computation of the ALP under CPM in respect of provision of business support services. 2.2. That on the facts of the case and in law, Hon ble DRP/ Ld. AO has grossly erred in sustaining that companies chosen as comparables by the Ld. TPO while benchmarking net profit are suitable comparables, without taking into consideration the economic activity, size of business, nature and class of international transactions. 2.3. That on the facts of the case and in law, Hon ble DRP/ Ld. AO has erred in not rectifying the search filters selected erroneously by the Ld. TPO for application of TNMM. 2.3.1. That the Ld. TPO has not appropriately carried out the functional, asset and risk analysis ( FAR ) in respect of the comparable companies selected while applying TNMM. 3. That on the facts and circumstances of the case and in law, Hon ble DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... published quotes with freight charges. He further stated that Polymerupdate.com provides real-time international news and prices for all polymers, petrochemicals and solvents on a daily bases, providing daily market intelligence across the countries. Learned Authorised Representative submitted that Learned Transfer Pricing Officer has rejected comparable suggesting that the data furnished by the assessee is merely based on estimates and rumors and not on the basis of the actual transactions undertaken . He stated that the learned Transfer Pricing Officer also failed to consider the internal CUP in the form of similar transactions undertaken with the unrelated parties. He submitted that learned Transfer Pricing Officer failed to consider the pricing methodology of Polymerupdate.Com and ICIS publication. He further referred to the pricing methodology placed at page Nos. 760 to 763 of the paper book. The learned Authorised Representative submitted that coordinate bench in assessee s own case for the Assessment Year 2007-08 and Assessment Year 2008-09 has dealt with the similar issue and held that CUP method is the most appropriate method in these trading transactions. 11. With r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r AY 2006-07, the coordinate bench in ITA No. 5722/Del/2010 = 2014-TII-62-ITAT-DEL-TP has held relying on several Tribunal decisions that the CUP is the most appropriate method in case of trading transactions and internal CUP has been held to be more appropriate than external CUP data for comparability analysis. Before the coordinate bench the international transaction were sale of traded goods and purchases of traded goods as it is in the present year before us also. The Hon'ble Bench has held as under:- 4. We have heard the rival submissions and perused the relevant material on record. It is observed that the foremost point of difference between the assessee and the Revenue is the application of the most appropriate method and then the selection of comparables under TNMM. Whereas the assessee adopted CUP as the most appropriate method, the Revenue rejected it and insisted on the application of TNMM. The viewpoint canvassed by the Revenue in such rejection is that the necessary details required for the application of CUP method were not forthcoming from the assessee's side. Several Benches of the Tribunal has held that CUP is the most appropriate method in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal in Evalueser Co. Pvt. Ltd. Vs Income-tax Officer (2014) 134 ITD 546 (Delhi) has restored the matter to the file of DRP for passing a detailed order when the objections of the assessee were not dealt with. The ld. AR contended that the assessee has full details to satisfy the authorities below as regards the application of CUP method and hence the matter should be restored to the file of TPO instead of DRP, who had also failed to appreciate the contentions made before him. We can observe from the order of the TPO as well that though detailed submissions were filed before him, but those have not been appropriately considered while proposing the addition of ₹ 7.23 crores. The ld. DR, though relied on the impugned order but suggested that if the matter was to be sent back then it should go to the TPO instead of DRP. Considering the entire conspectus of the case, we are of the considered opinion that the ends of justice would meet adequately if the impugned order is set aside and the matter is restored to the file of TPO. We order accordingly. However, we do not approve, in principle, the contention of the ld. AR that quotations etc. or the price as per some publications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been examined at all with respect to their authenticity. They have been simply rejected relying on Rule 10D(3) of the Income Tax Rules. On the issue before the Hon'ble Gujarat High Court in case of CIT Vs. Adani Wilmar Ltd. was not on unacceptability of quotations but TPO only objected with respect to the geographical location of the transactions and the quotations. Therefore, even before the Hon'ble Gujarat High court the quotations were accepted as external CUPs. The Hon'ble Gujarat High Court has held as under:- 3. Questions B to D pertain to computation of Arms Length Price. The Transfer Pricing Officer (hereinafter referred to as 'the TPO') adopted Comparable Uncontrolled Prices (CUP) method. In the process, the assessee had presented two sets of prices claiming them to be comparable. One set of transactions relied on by the assessee was supplied by Malaysian Palm Oil Board (hereinafter referred to as 'the MPOB'). Simultaneously, the assessee also relied on the quotations by one Oil World, an organisation based in Germany. The assessee adopted the average of two sets of prices and claimed that the price variance between the assessee's tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustified in taking the international transaction at arm length. Therefore, no adjustment u/s.92(c) was required as all the prices at which the purchase have been made less than 5% of the arithmetical mean. Besides the above, I also find that the appellant has entered into contract with AE on long term basis for continuous supply of constant quality to ensure continuity in production into continuous plant which is also an important factor for considering the ALP and due weightage is required to be given while comparing the rates given by MPOB. Even the average price paid by the appellant is lower than average price on the basis of rates of MPOB. Therefore, in view of these facts, circumstances and the legal position the AO/TPO were not justified in making the adjustment to the purchase price and, accordingly, the addition on account of adjustment of the price is hereby deleted. Accordingly, this ground is decided in favour of the appellant. 5. The matter was carried in appeal before the Tribunal by the Revenue. The Tribunal confirmed the view of the CIT (Appeals) and, hence, this appeal. 6. Having heard the learned counsel for the parties we notice that the determinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions. Quite apart from the observations of the CIT (Appeals) and Tribunal being to the contrary, these were not the objections of the TPO. We would, therefore, focus on the grounds on which the TPO desired to reject such price quotations. 15. We would also draw support for use of 'Quoted Prices' , if they are authentic for comparability analysis in CUP method from OECD BEPS Action Plan also. For this we refer to the release of new guidance on cross border commodity transactions by OECD on its Base Erosion and Profit Shifting (BEPS) plan actions 8 and 10, 2015 Final Reports, wherein there is an addition to Chapter II of the Transfer Pricing Guidelines relating to commodity transactions [ Extracted from OECD publication Aligning Transfer pricing Outcomes with value creation OECD 2015] as under:- The following paragraphs are added to Chapter II of the Transfer Pricing Guidelines, immediately following paragraph 2.16. 2.16A Subject to the guidance in paragraph 2.2 for selecting the most appropriate transfer pricing method in the circumstances of a particular case , the CUP method would generally be an appropriate transfer pricing method for establishing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transportation, insurance, and foreign currency terms. For some commodities, certain economically relevant characteristics (e.g. prompt delivery) may lead to a premium or a discount. If the quoted price is used as a reference for determining the arm's length price or price range, the standardised contracts which stipulate specifications on the basis of which commodities are traded on the exchange and which result in a quoted price for the commodity may be relevant. Where there are differences between the conditions of the controlled transaction and the conditions of the uncontrolled transactions or the conditions determining the quoted price for the commodity that materially affect the price of the commodity transactions being examined, reasonably accurate adjustments should be made to ensure that the economically relevant characteristics of the transactions are comparable. Contributions made in the form of functions performed, assets used and risks assumed by other entities in the supply chain should be compensated in accordance with the guidance provided in these Guidelines. 2.16D In order to assist tax administrations in conducting an informed examination of the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the evidence available to the tax administration; this may be the date of shipment as evidenced by the bill of lading or equivalent document depending on the means of transport. This would mean that the price for the commodities being transacted would be determined by reference to the average quoted price on the shipment date, subject to any appropriate comparability adjustments based on the information available to the tax administration. It would be important to permit resolution of cases of double taxation arising from application of the deemed pricing date through access to the mutual agreement procedure under the applicable Treaty. [underline supplied by us] 16. Therefore respectfully following the decision of Hon'ble Gujarat High Court and drawing support from OECD BEPS Action Plan, we are of the view that even the 'quoted prices' which is authentic may be acceptable as per Rule 10D(3) of the Income Tax Rules for comparability analysis. 17. The ld AR has also submitted that now the 'sixth method' has been prescribed by the board as per Rule 10D (1)(f) and which is held to be retrospective with effect from when transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fact situation. There is clearly no bar on its applicability just because a method specified in rule 10B, even if indirect method like TNMM, can also be applied to the same. Quite to the contrary, as noted by the coordinate benches in the cases of ACIT Vs. MSS India Pvt Ltd (supra), direct methods, such as CUP and the 'other method' under rule 10B which, as we will see in a short while, is only a variant of the CUP method, have an inherent edge over indirect methods, such as TNMM, and, therefore, as long as it is possible to do so, a direct method of ascertaining the arm's length method should be applied. In the case of Serdia Pharmaceuticals Pvt Ltd Vs ACIT (44 SOT 391) = 2011-TII-02-ITAT-MUM-TP , a coordinate bench of the Tribunal has observed that, .even as the transfer pricing legislation does not provide for an order of preference of methods of determining ALP, such an order of preference being drawn up is an integral, though somewhat subliminal, part of the process of determining the ALP and that whenever a direct method of ascertaining arm's length price can be used, it should be preferred over an indirect method. In view of these discussions, method und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect Hon'ble Supreme Court has observed that This (the foregoing analysis) exactly is the justification to treat procedural provisions as retrospective . Their Lordships then further observed that, In Government of India Ors. v. Indian Tobacco Association (2005) 7 SCC 396 = 2005- TIOL-109-SC-CUS the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation and that The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay v. State of Maharashtra Ors. (2006) 6 SCC 286. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. Their Lordships also noted that this retrospectively being attached to benefit the persons, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee shall also produce the benchmarking methodology before the ld AO/ TPO. b. The ld AO/ TPO is directed to examine the same, and if found in accordance with law, then test the benchmarking made by assessee and compute ALP. In case AO is not satisfied with the same, before doing so ld AO/ TPO will give adequate opportunity of hearing to the assessee to prove its case, . Then he may decide issue on merits in accordance with law applying any other appropriate method including TNMM. c. Ld AO shall pass draft order after incorporating any adjustment proposed by TPO to give opportunity to assessee for filing objections before DRP, if assessee wishes to do so. Then pass necessary orders in pursuance to this order after direction of ld DRP, if any. 16. Accordingly ground no 3 4 of the appeal is allowed with above directions. 17. Now, we come to ground No. 5 of the appeal of the assessee where the learned Transfer Pricing Officer has proposed adjustment to the international transaction of provision of business support services of ₹ 10731404/ is under challenge. The assessee has entered into international transaction of provision of business support services amountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excluded from the comparability analysis in case of this assessee also. 20. The learned Departmental Representative vehemently objected to the argument of the learned Authorised Representative and submitted that the functions performed by the assessee are comparable with the functions performed by the comparable companies selected by the learned Transfer Pricing Officer. He referred to page number 1107 of the paper book wherein the functions performed by the assessee are mentioned as a. identification of potential customers, b. market research, c. communication of the same to its Associated Enterprise and d. Other support services. He further stated that the assets employed for the above functions by the assessee are only personnel and the administrative cost. He further referred to the risk assumed by the assessee shown to be minimal. He therefore submitted that on reading the above functions, it cannot be said that the comparable selected by the learned Transfer Pricing Officer are performing different functions then functions stated by the assessee. He further referred to page Nos. 539 to 554 of the paper book of the assessee to state that the learned Trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Risks NRTIPL AEs Credit Risk This risk arises on account of bad debts taking place or delay in receipt of payments from customers. NRTIPL provides support services to its AEs. Therefore, the credit risk associated with this transaction is minimal. AEs are not exposed to credit risk with respect to this transaction. - Foreign Exchange Risk This risk relates to the impact on profits arising due to differences in the currencies used by the contracting parties. NRTIPL receives service fees in foreign currency. Therefore, the Company is exposed to foreign exchange risk. AE s generally transact in US$, therefore, not exposed to foreign currency risk. Manpower Risk Any company which employs technical personnel is faced with this risk. NRTIPL primarily utilizes its man power in rendering support services to its AEs. AEs are not exposed to manpower risk with respect to Therefore, NRTIPL is exposed to the risk of losing its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d representative. Merely based on some judicial precedents in case of some other assesses, comparables can neither be included nor excluded. It will lead to strange situations, where one comparable excluded in one case, would always be excluded universally in all other cases. Approach of decided on inclusion or exclusion of comparables based on judicial precedents, on one day will leave assessee as well as revenue with zero comparables. One day this approach will make the comparability analysis redundant and unworkable. Therefore, paramount is Functions performed by assessee to be compared with that of comparables for comparability analysis. In view of above facts, it is apparent that without first analyzing the functions performed by the assessee for this business segment, the assessee has compared the margins/profit level indicator of those comparables with the assessee s own PLI. This is not acceptable as it amounts to putting the cart before the horse. In view of this, we set aside the whole issue back to the file of the learned Transfer Pricing Officer with the following direction to the assessee and ld TPO:- a. to first capture the functions performed by the assessee for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and hence reduced from the computation of the total income. It was further held that the provision of doubtful debt debited in the profit and loss account is only INR 169106575/ which has been added back by the assessee already in the computation of the total income. Therefore, it was held that it is not a case of any provision for doubtful/bad debts debited in the profit and loss account and claimed as an allowable expenditure. The learned DRP also referred to the profit and loss account of the assessee and stated that assessee has only debited a sum of INR 9359406/ which is not provision but actual bad debts written off. As the issue has not been examined by the learned assessing officer in the draft assessment proceedings the dispute resolution panel directed the learned assessing officer to allow the above amount after verifying that they meet the requirement of the provisions of section 36 (2) of the act. It was further directed that learned AO is not supposed to go into the justification of treating the same as bad or not by the assessee. 26. However, in the assessment order passed by the assessing officer in pursuance of the direction of the learned Dispute Resolution P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Assessing Officer did not look into the details submitted by the assessee. It was also not known to us whether the Assessing Officer has issued any letter to the assessee to explain the above claim. In view of this, we direct the learned Assessing Officer to examine the details submitted by the assessee at page Nos. 93 to 95 of the paper book and test it on the grounds of allowability of bad debts according to Section 36 (2) of the Income Tax Act, 1961 and then allow the same if found in accordance with the law. Accordingly, ground No. 6 of the appeal of the assessee is allowed with above direction. 30. Ground number 7, 8, 9 and 10 are general in nature and therefore they are dismissed. 31. Accordingly, appeal filed by the assessee for assessment year 2009 10. In ITA No. 1827/Del/2014 is partly allowed for statistical purposes. 32. Now we come to appeal of the assessee for assessment year 2010 11. The brief facts show that assessee filed its return of income declaring loss of INR 20602874 on 13/10/2010. During the course of assessment proceedings, it was noted by the learned assessing officer, that assessee has entered into 12 types of international transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reduced the brought forward losses and unabsorbed depreciation amounting to INR 36747130. Consequently the total loss was determined at INR 322321156/ . The assessee filed its objection before the learned dispute resolution panel who passed direction under section 144C (5) of the act on 14/11/2014. Consequent to the above direction, the learned assessing officer passed order under section 143 (3) read with section 144C (13) of the income tax act, 1961 on 20/1/2015 at a loss of INR 3 22321156/ . Such order was passed, as the learned dispute resolution panel did not give any relief to the assessee. Against that, order assessee is in appeal before us. 34. Ground number 1 of the appeal is general in the nature and it in fact supports the ground number 2 of the appeal of the assessee where an adjustment on account of determination of arm s-length price of the international transaction of the assessee of INR 10982272/ is made. In view of our adjudication especially on ground number 2, the above ground number 1 becomes general in nature and hence it is dismissed. 35. The ground number 2 of the appeal is with respect to the order of the learned AO/TPO in sustaining the application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentative submitted before us, the same arguments and stated that in fact, the assessee should have been granted the correct brought forward losses and unabsorbed depreciation. 41. The learned departmental representative also submitted that the assessee should provide the correct calculation of the brought forward losses and unabsorbed depreciation allowable to the assessee based on the past assessment record of the assessee and based on that the learned AO may verify the same. 42. We have carefully considered the rival contentions and found that the assessee has disputed the carry forward of brought forward losses as well as unabsorbed depreciation to be set off against the current income returned by the assessee. In view of this, we direct the assessee to produce the correct details of the amount of unabsorbed depreciation and amount of brought forward losses to be set off against the income with proper evidences which may be verified by the learned assessing officer and if found correct, the assessee should be granted the benefit of the same . ld AO is directed accordingly. In view of this ground, number 5 of the appeal is allowed with above direction. 43. Ground nu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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