TMI Blog2019 (4) TMI 1786X X X X Extracts X X X X X X X X Extracts X X X X ..... rables chosen by the assessee qua each of the seven foreign/AEs. It is trite that if an assessee has chosen a comparable, onus is on him to prove that the said company is comparable to the international transaction. We find that the assessee chose certain foreign companies as comparable, but on being called upon by the TPO, failed to lead any evidence to show that they were comparable. Ergo, we accord our imprimatur to the view canvassed by the lower authorities on this issue. Non granting appropriate adjustment on account of higher depreciation claimed by it vis- -vis the comparables - HELD THAT:- DRP has recorded a categorical finding that the assessee could not lead any evidence showing difference in the rates of depreciation charged by it vis- -vis the comparables. Per contra, the ld. AR has placed on record a chart showing difference in the rates of depreciation charged by the assessee and comparables. We find that the authorities below did not have any occasion to consider this chart as the same has been placed before us for the first time. Ends of justice would meet adequately, if we set aside the impugned order to this extent and send the matter back to the file of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of the DRP for applying the Resale Price Method (RPM) for benchmarking the international transaction - HELD THAT:- The assessee admittedly imported steel cord from its AEs and sold the same to the non-AEs without any value addition or further processing. The Resale price method, as the name itself suggests, is preferably used when the goods are `resold . The mechanism for the computation of the ALP under this method is based on this foundation. In our considered opinion, the RPM is the most appropriate method for determining the ALP in case of distribution of goods. In other words, if the goods purchased are sold as such without any further processing or value addition, then the RPM is the most appropriate method. Our view is fortified by the judgment of the Hon ble Jurisdictional High Court in CIT Vs. L oreal India Pvt. Ltd. [ 2015 (2) TMI 407 - BOMBAY HIGH COURT] . We, therefore, countenance the impugned order on this score and hold that the RPM is the most appropriate method for benchmarking the international transaction. Addition by application of the RPM - AR fairly pointed that similar issue was raised in its appeal before the Tribunal for a preceding year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the seven tested parties selected by the assessee, which it did not on the premise that such documents were in respective regional language. Further, the assessee itself demonstrated that these foreign/AEs were engaged in many activities other than supply of material to the assessee, as was the international transaction under consideration before the TPO. The Officer refused to accept seven foreign/AEs collectively as tested party along with foreign comparables so declared by the assessee on the ground that the assessee failed to furnish Functions, Assets and Risks (FAR) analysis in respect of the tested parties and the comparables with any reliable supporting evidence. The TPO also rejected the Cost Plus method applied by the assessee as the most appropriate method. He treated the Transactional Net Margin Method (TNMM) as the most appropriate method. After considering certain comparables in consultation with the assessee, the TPO went on to recommend a transfer pricing adjustment of ₹ 15,35,50,429/- in this international transaction. The assessee challenged the draft order, incorporating the Transfer Pricing adjustment proposed by the TPO, before the Dispute R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mean 'a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase of tangible . property..... . The methodology for computation of arm's length price of an international transaction has been set out in section 92C(1) of the Act to be as per any of the prescribed methods, including the TNM method. The TPO adopted this method as the most appropriate method, which is not disputed. Sub-section (3) of section 92C provides that : 'Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that--(a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2) ; or.............., the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him'. Rule 10B of the Income-tax Rules, 1962, dealing with the determination of arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een used to denote the foreign/AE, being the other related party to the international transaction. It is so borne out from rule 10B(1)(b)(i) under the Resale price method, which provides that : `the price at which property purchased . by the enterprise from an associated enterprise is resold is identified . As this method is usually applied in the hands of the party purchasing the goods and then reselling it, there remains no doubt that the term `enterprise has been used for the Indian assessee purchasing the goods for resale and the term `associated enterprise has been used for a seller foreign/AE. Coming back to the TNM method, rule 10B(1)(e)(i) provides that the net profit margin `realised by the enterprise from an international transaction entered into ` with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base, which is then compared with the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. The modus operandi of determining the ALP of an international transaction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the ALP of the international transaction. If foreign AE has, in fact, charged more, then its profit rate will shoot up and the corresponding profit of the Indian enterprise will be squeezed. In that scenario, a comparison of the profit rate of the foreign/AE will run contrary to the mandate of the provisions. Whereas, we were required to determine if the profit charged by the foreign AE is not more than that charged by uncontrolled comparables by seeing the profit rate of the Indian enterprise, we will end up doing a futile exercise of rather viewing the profit rate of the foreign/AE, if such foreign/AE is taken as a tested party for the purposes of comparison with the profit rate of the comparables. Suppose the foreign/AE has charged more, then its profit rate will turn out to be higher, which when compared with the lower rate of profit margin of foreign comparables, will show the transaction at ALP, calling for no transfer pricing adjustment. This exercise is not only off the mark, but also runs counter to the rule and spirit of the transfer pricing provisions. 9. Our point of view can be better appreciated with the help of a simple illustration of an Indian ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchases 140 Sales 208 to AE Purchases 208 from AE Sales 300 Operating 20 expenses Operating 40 expenses Operating 48 Profit Operating 42 Profit Total 208 208 Total 300 300 Operating profit to sales of Foreign/A.E. 23% Operating profit to sales of assessee/Indian enterprise 14% 10. It can be seen from the above that because of showing higher transfer price in the hands of the assessee/Indian enterprise, OP/Sales of the assessee/Indian enterprise has come down to 14%, which in arm s length situation should have been 20%. If we apply TNM method by taking the assessee as a tested party, it would call ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E as a tested party, has been taken in umpteen number of cases, including the Mumbai Bench of the Tribunal in Onward Technology Ltd. Vs. DCIT (2013) 36 CCH 46 (Mumbai) holding that Foreign/ Associated Enterprise cannot be a tested party. The Miscellaneous Application filed against this order also came to be dismissed in M.A. No.203/Mum/13 vide order dated 17-01-2005. Similar view has been taken in Aurionpro Solutions Ltd. Vs. ACIT (TS-75-ITAT- 2013 (Mum)-TP) - (2013) 27 ITR (Trib) 276 (Mumbai). In the light of the foregoing discussion, we are of the considered opinion that no exception can be taken to the view canvassed by the authorities below in rejecting foreign/Associated Enterprises as a tested parties. 13. Notwithstanding the above legal position, even if we presume for a moment on a hypothetical basis that the stand of the assessee of having foreign/AEs as a tested party is correct, the assessee still cannot be said to have successfully established the particulars of the so called seven foreign/AEs simultaneously as tested party. Not only the assessee failed to furnish the basic information of the foreign/AEs, such as, Annual Reports and Financial statem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argins is warranted. 17. Schedule XIV to the Companies Act provides for rates of depreciation on various assets under different blocks, both on written down value method and straight line method. We appreciate that sub-clause (iii) of Rule 10B(e) provides that the net profit margin realized by a comparable company, determined as per subclause (ii) above, is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. It is this adjusted net profit margin of the comparable companies, as determined under subclause (iii), which is used for the purpose of making comparison with the net profit margin realized by the assessee from its international transaction as per sub-clause (i). 18. There can be no dispute on the principle that calculation of Operating profit as envisaged under Rule 10B(1)(e) embraces cumulative effect of all the items of income and expenses which are of operating nature. Ordinarily, there can be no question of considering each item of such operating expenses or income in isolat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f higher or lower amount of individual items of expenses or incomes. Merely because the amount of depreciation of one enterprise is more or less than the other, can never be a ground for seeking adjustment. Such higher amount of depreciation may be due to large scale of the company and host of other factors. By considering percentage of operating profit margin under the TNMM of the assessee as well as comparables, the higher or lower volume of two companies becomes immaterial and so is the quantum of depreciation. The nitty-gritty of the matter is that no adjustment can be allowed simply for the reason that one company has charged higher amount of depreciation vis-a-vis its comparable companies. Not only no adjustment on this score is permissible, the assessee cannot also seek an exclusion or inclusion of a company on the ground that the ratio of its depreciation to total expenses or sales etc. is more or less in comparison with comparables. It is so for the reason that such higher percentage of depreciation to total expenses is marginalized by the lower percentage of repairs and other incidental costs of the assets and vice versa . 19. However, the position may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the comparable companies on their assets shall be recomputed under straight line method alone as per the rates at which the assessee has provided depreciation. To clarify, if the comparables have charged depreciation at a higher rate in comparison with the assessee on some of its assets, then suitable reduction should be made in the amount of their depreciation and if the comparable companies have charged depreciation at a lower rate in comparison with the assessee, then suitable increase should be made to their amount of depreciation. We, therefore, sum up our conclusion on this aspect of the matter by holding that if the assessee as well as the comparable companies are using the SLM and there is some difference in the rates of depreciation charged by them vis- -vis the assessee, then suitable adjustment should be made to the profits of the comparables. We order accordingly. 21. Now we turn to first ground of the Revenue s appeal by which the decision of the AO in restricting the transfer pricing adjustment only to the international transactions and not to the entity level, based on the direction of the DRP, has been challenged. 22. Briefly state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action. 25. The factual matrix of this issue is that the assessee reported an international transaction of Import of trading steel cord with transacted value of ₹ 7,93,19,045/-. The RPM was applied by the assessee for demonstrating that this transaction was at ALP. The TPO refused to accept the application of the RPM as the most appropriate method. He invoked the TNMM in respect of this international transaction and accordingly proposed transfer pricing adjustment of ₹ 76,68,310/-. The AO made addition for such a sum in the draft order. When the matter travelled to the DRP, it approved the application of RPM and ordered to delete the addition because the gross margin of trading segment was within 5% of the safe harbour range. 26. Having heard the rival submissions and perused the relevant material on record, it is seen that the issue raised on this score is two-fold. First is the application of most appropriate method and the second is the deletion of addition on merits. We espouse the first issue. The assessee admittedly imported steel cord from its AEs and sold the same to the non-AEs without any value addition or further processing. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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