TMI Blog2020 (12) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... le or any restrictions are placed by the Income Tax Act to consider internal CUP as comparable. It is also undisputed fact that supplier of the material is not related party of the AE. No reason to reject the transfer pricing study of the assessee and to accept CUP as most appropriate method in respect of purchases. Accordingly, we set aside the orders of the lower authorities and direct the AO to adopt CUP as most appropriate method for purchases. Sale price charged by the assessee to its AE - In the instant case, sufficient data and information is available to show that the sale price charged by the assessee to its AE is comparable and internal comparables are available which were placed by the assessee before the TPO as well as the DRP. No valid reason was assigned for rejecting the method adopted by the assessee. The AO simply brushed aside the internal report with regard to sale price, without bringing any evidence to show that the sale price charged to the AE is incorrect. When the assessee has given complete documentation to the TPO / DRP, the burden shifts on AO/TPO to establish that the method adopted by the assessee is faulty. We observe that the sale price cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.1. Rejecting the TP documentation maintained by the Appellant and the comparability analysis undertaken therein by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962, ('the Rules'); 3.2. Rejecting the Comparable Uncontrolled Price method ('CUP') as the most appropriate method, as applied by the Appellant in its transfer pricing documentation for both the purchase and sales transactions; 3.3. Disregarding the conditions prescribed under section 92C(3) of the Act for determining the arm's length price for international transaction in relation to sale of finished goods and purchases of raw materials to/from its AEs. 3.4. Upholding the learned TPO's approach of using data which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant; 3.5. Disregarding the application of multiple year data while computing the arm's length mark up on cost/ margin on sales for the comparable companies; 3.6. Disregarding the peculiar economic conditions faced by the Assessee during assessment year 2011-12 on account of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e operating costs incurred by the Appellant vis-a-vis comparable : Stores consumables Depreciation 5.3. The Appellant craves to plead this Hon ble Tribunal to consider foreign exchange gain as operating in nature while computing the gross profit margin of the Appellant and the comparable companies under the CPM method; 6. Without prejudice to the ground 3 and 4 above, even if the Transactional Net Margin Method (TNMM) is to be applied as the most appropriate method, the Appellant humbly prays before the Hon ble Bench that the learned AO / learned TPO erred in not appreciating the reasons for losses incurred by the Appellant and also not granting the following adjustments while computing the operating mark-up on cost of the Appellant and the comparable companies Adjustment on account of abnormal business losses incurred by the Appellant due to the start-up nature of its operations and below mentioned factors be granted so as to eliminate the effect of differences in the operating costs incurred by the Appellant vis-a-vis the comparable while the learned AO / learned TGPO erred in not appreciating - Abnormal losses incurred in carrying out excessive st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer to its AEs for purchases are at Arms Length Price(ALP). With regard to sale of finished goods, the tax payer stated that the average monthly price charged by the tax payer to its AEs and non AEs is comparable. The price charged to AEs is equal to or more than non AEs. Based on an analysis undertaken by the company in its report called operational and financial review F.Y. 2011 the company has supported the sale price received by the assessee from its AEs are not lower than the sale price received in similar transactions with third party customers, therefore, viewed that the transactions are at ALP and accordingly submitted that no adjustments are required on account of international transactions entered by the assessee. The financials of the taxpayer as per the audited statement are as under:- Operating Revenue 69,43,15,068 Operating cost 98,35,91,503 Operating profit -24,92,76,435 OP/OC -26.42 OP/OR -35.90 3.2. The TPO found that the taxpayer did not furnish the suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od and for adopting TNMM as most appropriate method. In response to the notice issued by the TPO, the assessee filed objections reiterating that CUP as the most appropriate method for purchase of raw material, since the assessee has purchased the raw materials from third party vendors without adding expenses or profit. The prices paid by the assessee were equal to the price paid by the AE from their parties was in uncontrolled and independent conditions, therefore the assessee contended that there is no reason to disturb the CUP as most appropriate method for purchases. With regard to sales, the assessee submitted that sales price charged by the taxpayer to AE is equal to or more than the prices charged to third party sales. 3.4. The TPO has considered the submissions made by the assessee and viewed that CUP is applicable in situations when a price is charged for product or a service. The comparison of prices charged for the product in a controlled transaction to prices charged for the same products in a comparable uncontrolled transaction is carried out. The TPO viewed that internal CUP is the price that the taxpayer has paid in a comparable uncontrolled transaction with an ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as discussed earlier in para 3.2 of this order. As the operating profit on operating cost admitted by the assessee is at (-) 26.42%, made the adjustments of ₹ 15,97,13,166/- in respect of sales, ₹ 14,91,84,370/- in respect of purchases. Thus, proposed for adjustment of ₹ 30,88,97,536/- u/sec. 92CA(3) of the Act. 4. On receipt of the Transfer Pricing Order, the Assessing Officer issued draft assessment order and the assessee filed objections before the Ld.Dispute Resolution Panel (DRP). The assessee objected for adopting the TNMM as most appropriate method and the DRP rejected the contention of the assessee and upheld the order of the TPO in adopting TNMM as most appropriate method. The assessee objected for considering the earlier year data instead of using contemporaneous data for bench marking and the ld. DRP rejected the assessee‟s objection stating that as per Rule 10B(4) financial data relating to the financial year in which international transactions were undertaken has to be used as per Income Tax Rules, unless it is established that the use of data of the earlier financial years will result in adverse results. The Ld.DRP viewed that in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AE from the third parties and sold to the assessee on back to back basis there is uncontrolled transactions hence, argued that there is no reason to reject the TP study made by the assessee hence, requested to accept the CUP as MAM. The assessee further submitted that it has annexed some invoices relating to purchases made from AE and third party vendors to demonstrate that the purchases were made back to back basis and at ALP. The assessee furnished purchase bills from the AE. From the said purchase bills, we find that the AE has sold 6048 kg of material to the assessee @ ₹ 7.40 per kg vide bill dated 01/04/2010 which was purchased from Invista Singapore Fibres Pvt. Ltd. @ 7.40 per kg. Similarly, the tax payer also has enclosed some more invoices relating to purchases made by the tax payer from AE on back to back basis on various dates. With regard to Saravana Spinning Mills, the assessee has enclosed invoice at page No.8 which demonstrated that it had purchased raw material @ 3.88 per kg which was sold directly to AE on 08/08/2010 and shipped to the taxpayer. Ld.AR further argued that except stating that there was no uncontrolled transaction from third party no other r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly argued that the order of the ld.DRP/TPO/ may be set aside and adopt the CUP as most appropriate method both for purchases and sales. 6. Per contra, ld.DR argued that except assessee stating that the AE supplied the material on back to back basis there were no third party transactions for comparing purchases made by the assessee from its AE. Since no external comparables are available, ld.DR argued that the TPO rightly rejected the assessee‟s contention and argued that TNMM is most appropriate method in the facts and circumstances. Similarly with regard to sales, ld.DR submitted that there were no comparable transactions for taking CUP as most appropriate method. For adopting CUP as most appropriate method, the geographical location, the date of transactions with related and unrelated parties and the rates quoted are required and in the instant case, no such information is available, hence, argued that the TPO rightly rejected the CUP as most appropriated method adopted by the taxpayer. According to the ld.DR, TNMM as most appropriate method, hence, argued that no interference is called for in the order of the Ld.DRP/AO and requested to uphold the order of the AO/DRP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e at arms length price. The TPO rejected the assessee‟s contention and held that TNMM is most appropriate method both for purchases and sales and accordingly proposed for adjustment of ₹ 30,88,97,536/- which is representing shortfall in adjustment in sales of ₹ 15,97,13,166/- and excess paid in purchases to the extent of ₹ 14,91,84,370/-. Though the assessee has objected the proposed adjustments before the DRP, it could not succeed, hence, the assessee has approached the Tribunal. 8.2. The AO has rejected the transfer pricing document, the analysis made by the assessee on the reason that the assessee has made analysis based on report titled Ocean India Operational and Financial Review FY2011 which is internal document and the same was not made available to the TPO. The Ld.TPO further observed that in page No.4 of the TPO order that the tax payer did not furnish the copy of the report relied upon by the assessee and stated to have enclosed Annexure ‟A‟ which was not placed before the TPO. The assessee invited our attention to paper book page No.111 a copy of letter addressed to the TPO dated 14/03/2014 wherein Transfer Pricing Study w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material purchased by the assessee from its AE was at higher cost, than the material available from third party vendors. Therefore, it is observed that the taxpayer has demonstrated the purchase made by the assessee from its AE are at arms length price. The assessee placed reliance on the guidance note on transfer pricing issued by Institute of Chartered Accountants of India. In para No.5.26, the Institute viewed that internal CUP is preferred method over external CUP. For the sake of convenience, we extract para No.5.26 of guidelines of Institute of Chartered Accountants of India in page No.40 of the Form 35A placed before DRP. C. Internal CUP preferred over external CUP 5.26 It is important to note that the transactions entered into by associated enterprises with unrelated Party ( internal comparables ) would provide more reliable and accurate data as compared to transactions by and between third parties ( external comparables ). OECD's Guidelines on Transfer Pricing recognize the fact that external comparables are difficult to obtain and, also, it may be incomplete and difficult to interpret. Hence for those reasons, internal comparables are preferred to exter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 4.6 (supra), mention that net margin of the tax payer from the controlled transactions should be established with reference to net margin which the same taxpayer earns in comparable uncontrolled transactions. Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise may serve as a guide. Thus, these guidelines suggest preference for internal comparables and reference has to be made to the results of independent enterprises only when former course of action is not possible. The ld. counsel has also relied on the decision of UCB India Pvt. Ltd. (supra), a copy of which has been placed before us. In this case, the assessee wanted to support the value of controlled transactions by comparing with external comparables. However, it appears that the same could have been compared by having recourse to internal comparables of the parent company, for which the data was not furnished on the ground that the two companies are separate entities. The Tribunal did not find favour with this line of argument, which indirectly leads to a conclusion that internal comparables should be preferred to external comparables. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pore. Therefore, we cannot say that the price at which M/s-Intel Semiconductor Limited sold to Redington Distribution Pvt. Lid., Singapore, was not at arm's length price. In our opinion, when Redington Distribution Pvt. Ltd. sold the items to assessee at very same price at which it had purchased from M/s Intel Semiconductor limited, there cannot be any question of under pricing or over pricing. We are, therefore, of the opinion that the adjustment carried out by the lower authorities, based on list price, on the purchase of 1250 Pentium IV processors from Associate Enterprise was not called for. Such adjustment, therefore, stands deleted. 8.5. From the above facts and law, it is observed that the assessee had purchased the raw material from its AE and the AE has supplied the raw material to the tax payer on back to back basis without marking up for any costs or expenses or profit. The AE has made purchases from third party vendor which is uncontrolled transaction and the supplies made by the AE to the taxpayer are controlled transaction. The price charged by the AE to the taxpayer is less or equal to the uncontrolled transaction. This fact was also demonstrated by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TNMM as the most appropriate method, instead of taking the contemporaneous data, the AO has adopted the earlier years data which is incorrect. The AO did not allow the adjustments sought by the assessee such as start up, unutilised capacity, risk, working capital adjustments etc. The DRP also has not considered the adjustments sought by the assessee and no proper reasoning was given both by DRP or TPO to reject the contention of the assessee with regard to objections of earlier years data, adjustments for working capital, unutilised capacity, start up company etc. In the circumstances, approach of the DRP as well as the TPO in adopting the TNMM as most appropriate method is incorrect. In the instant case, sufficient data and information is available to show that the sale price charged by the assessee to its AE is comparable and internal comparables are available which were placed by the assessee before the TPO as well as the DRP. No valid reason was assigned for rejecting the method adopted by the assessee. The AO simply brushed aside the internal report with regard to sale price, without bringing any evidence to show that the sale price charged to the AE is incorrect. When ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee has shifted profits to AE. In this case, without giving any reason simply suggested TP adjustment by the TPO. We find that TPO is not correct. Thus, we find that the ld.CIT(A) has considered the facts and directed the Assessing Officer to delete the addition. We find no reason to interfere with the order passed by the ld. CIT(A). Thus, this ground of appeal raised by the Revenue is dismissed. 9.1. The assessee also relied on the following decisions which support the assessee‟s case : (i) M/s Essar Steel Pvt. Ltd -ITA No. 3727/MUM/2011 (Shri RC Sharma Shri VP Rao) 10. We have considered rival contentions and gone through the orders of the authorities below. A clear finding has been recorded by the CIT(A) to the effect that assessee has already considered all the 8 transactions with its AE in totality by aggregating the same whereas the TPO picked up two transactions where the price charge was less than the average market price. Rule 10(A)(a) defines a transaction to include a number of closely linked transaction. In case they are closely linked then they can be aggregated for determining the ALP. We found that assessee has exported hot rol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) deleting the addition. This issue of Revenue's appeal is dismissed. The Ld.AR also relied on following decisions to support his view : (i) M/s Audco India Pvt. Ltd ITA No.2642/MUM/2009 (ii) M/s Audo India Pvt. Ltd. ITA No.1829 of 2016 (iii) M/s 3M India Pvt. Ltd. (2011) 46 SOT 44 (iv) M/s Reliable Cashew Co. Ltd ITA 2237/MDS/13 (v) M/s Cheminova India Pvt. Ltd. ITA 4865/N/05 (vi) M/s iMedx Information Services Pvt. Ltd. ITA 577/H/16 As discussed in Para No.9, we observe that the sale price charged to AE is more or equal to Non AEs and the assessee has furnished the complete information before the AO/TPO. The Department has not brought on record to controvert the submission of the assessee to establish that the assessee has charged the less price than third party buyers. The assessee has relied on various decisions cited supra to support their contention with regard to CUP as MAM in respect of sales. Therefore, in the facts and circumstances of the case we, hold that CUP is most appropriate method for sales as well as purchases. We therefore, direct the AO to adopt CUP as most appropriate method and delete the additions made by the AO/TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
