TMI Blog2012 (4) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... ng profit as a percentage of the total cost minus raw material cost. Benefit of ± 5% adjustment – Held that:- Such benefit cannot be considered to be a standard/universal deduction. This benefit is available only if ALP shown by the taxpayer falls within ±5% of arithmetic mean of more than one price determined by the Most Appropriate Method. As the taxpayer was not falling in above range, it was not entitled to any benefit. Secondly, the option is available only when taxpayer is computing the ALP and not when: AO /TPO is computing the ALP – Decided against the assessee. - IT Appeal NOs. 4767 (DELhi) of 2009 and 344 (delhi) of 2010 - - - Dated:- 29-3-2012 - U. B. S. Bedi And B. C. Meena, JJ. ORDER B. C. Meena, Accountant Member Both these cross appeals emanate from the order of CIT (Appeals)-XX, New Delhi dated 26.11.2009 for the assessment year 2003-04. The grounds in assessee's appeal in ITA No.344/Del/2010 read as under :- 1. The order passed by the Learned Commissioner of Income Tax (Appeals)-XX (hereinafter referred as 'CIT (A)' under section 250 of the Act is bad in law and on the facts and circumstances of the case. 2. The Learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other sources and not as business income. 04. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of hearing. 2. Ground Nos.1, 6 7 of assessee's appeal and ground nos.1 4 of revenue's appeal are general in nature and the specific issues are covered under the remaining grounds in respective appeals, hence these grounds do not require separate adjudication. In view of this, for statistical purposes, these grounds are treated as dismissed. 3. In the assessee's appeal, the ground nos.2, 3, 4 5 are related to the transfer pricing adjustment and in revenue's appeal, ground nos.2 2.1 are also related to transfer pricing. Hence, all these grounds are inter-related and inter-connected to the determination of Arms Length Price (ALP, in short). Hence, all these grounds are being considered on cumulative basis. 4. The brief facts of the case are as under :- Johnson Matthey India Private Limited, the assessee, is a Private Limited Company registered under the Companies Act, 1956. The assessee was incorporated on 16th January 1998 and 90% of its shares are held by Johnson Matthey Plc. UK (' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re concluded that the international transaction of sales to AE's was also at ALP. In the reference to the Transfer Pricing Officer (TPO) by the Assessing Officer under section 92CA (1) of the Income-tax Act, the computation of the ALP in respect of the following international transactions was made :- S.NO. Name of the AE Method Value (in Rs.) 1. Payment of Royalty TNMM 1,30,85,200 2. External Commercial Borrowings TNMM 53,32,377 3. Cessation of Liability --- 73,14,100 4. Purchase of 599.91 kgs. Of precious metal TNMM 38,72,34,757 5. Purchase of 90,616 wash coated substrates TNMM 30,56,53,787 6. Purchase of 8920 raw substrates TNMM 23,19,859 7. Sale of 36,494 unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the same assessee's income is enhanced by such amount. 5. The issue of Profit Level Indicator (PLI) had been decided by the CIT (A) as under :- 10.2.1 I have gone through the above submission of the appellant and have also perused the TPO's order, the main argument of appellant revolves around the contention that the TPO had incorrectly rejected the PLI taken by appellant and substituted the same with his own PLI. 10.2.2 PLIs are the ratios that measure relationship between profits with costs or resources. The use of particular PLI depends on number of factors, including. (a) Nature of activities of tested partly (b) The reliability of available data with respect to uncontrolled comparables (c) The extent to which the PLI a likely to produce available measure of income. 10.2.3 The selection of PLI is therefore made on the basis of its appropriateness for the transaction under review (which is determined with reference to the detailed functional analysis of the transaction) and the meaning assignable to the results obtained by its application. A PLI does not represent just an abstract absolute number with no meaning assignable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tage of Total Cost, Operating Profit as a percentage of Total Cost minus raw material cost should be considered. I have carefully considered the detailed submissions along with the explanations made by the appellant in support of this argument. 10.3.2 In this regard the appellant has tried to explain its business model and pricing arrangement with its customer. The appellant has stated that the appellant's income is based on a fixed manufacturing charge per unit (agreed and negotiated with the customer) which has no relation with the cost of raw material incurred for the manufacturing operations carried out by the appellant. Entire cost of raw material comprising of precious metals and substrates is passed on to/recovered from the ultimate customer without any mark up. In fact the appellant has no control over the cost of raw material in view of the specific arrangement with its customers. The appellant claims that as per the arrangement with its customers, the appellant has no role to play in selecting either the supplier of raw material or determining the terms of pricing of the raw material and these are determined by the customers only. The entire cost of raw mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l is to be disposed off as per the advice of Maruti Udyog Limited. It is pertinent to note that the material in question is a very expensive material and as such its price heavily influences the cost of the material which is being manufactured by the appellant. Another important feature of this material is that the prices fluctuate heavily and frequently. As such is such cases, when Maruti Udyog Limited places the purchase order for the end product, it is in Maruti Udyog Limited interest to ensure that the cost of the material is frozen otherwise it runs the risk of price variations in the end product pricing. There is a possibility that immediately after placing the order, the prices of the precisions metal may crash and this may result in a bumper price being paid to the appellant. Conversely if the prices of precisions metal are not frozen at the time of placing of the order, the appellant may end up losing huge amounts of money in the event the prices of precisions metal shoot up immediately after placing of the order. Hence in such cases, it is and an established industry practice that the two parties evolve a mechanism to ensure that neither party suffers an adverse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting entries show that the material purchased is to be treated as pass through cost. No doubt that the accounting entries are not conclusive proof for the purposes of taxation, but they do indicate the intention of the transacting parties. In this case the accounting entries clearly indicate that the cost of the material is to be treated as a value added cost and not as a pass through cost. 10.4.7 It is also worth mentioning here that not only the appellant even its AE which is also using the precision metal and manufacturing catalyst, they are also accounting the precision metal in the same manner and no where it is being treated as a pass through cost. 10.4.8 Keeping in view the above discussion, the appellant's contention that the cost of purchases of precision metal is to be treated as a pass through cost and no profit element be charged on such a cost is not acceptable. In therefore hold that the cost of purchase of precision metal is a value added cost and should be a part of the cost base for computing the profit element. 7. While pleading on behalf of the assessee, the learned AR has submitted that the revenue has accepted the position in different ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted the PLI considered by the appellant. Ld. AR pleaded that for the assessment year 2003-04, the return on capital employed was considered as the most appropriate PLI in the transfer pricing study. The TPO has stated that the assessee is a contract manufacturer. However, he rejected the PLI considered by the assessee and substituted the same with his own PLI which is OP/TC (without excluding the cost of raw material). In assessment year 2002-03, the assessee considered the return on capital employed as appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO mentioned that assessee is a contract manufacturer and also accepted the PLI considered by the assessee. In the assessment year 2004-05, the assessee considered OP/TC minus raw material cost as an appropriate PLI in the transfer pricing study. The TPO has mentioned in his order that the assessee is a contract manufacturer and also accepted the PLI considered by the assessee. Similarly, in 2005-06 and 2006-07, the OP/TC minus raw material was considered as the appropriate PLI in the transfer pricing study. The TPO mentioned that assessee is a contract manufacturer and also accepted the PLI co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. He also submitted that these principles of res judicata and estoppel by record applies to decisions of civil courts and has no application to the decisions of income-tax authorities. The tax authorities are not precluded for determination of a question in a subsequent year. Such proposition has been held by the Hon'ble Supreme Court in the case of New Jehangir Vakil Mills Co. Ltd. v. CIT - [1963] 49 ITR (SC) 137 and also in other case, namely, ITO v. Murlidhar Bhagwan Das - [1964] 52 ITR 335 (SC). He relied on the order of the CIT (A). 9. We have heard both the sides in detail. We have also considered the case laws relied upon by both the sides. In our considered view, the principle of res judicata cannot be applied in the cases where the assessments of different years are involved. The concept of transfer pricing is directly linked to the computation of income on year to year basis and it cannot be an issue which is settled once forever. Every year the transactions vary and the facts of the case also vary for calculating the taxable income. The chart submitted by the assessee which itself shows that the assessee has himself changed the method to work our appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement with the customer cannot be accepted. The assessee's claim that the assessee has no role to play in selecting either the supplier of raw material or determining the terms of pricing of the raw material and determining the customer. It is also claimed that the cost of raw material does not affect the profitability, hence it cannot be taken into account while working out the PLI as operating profit. This view of the assessee cannot be accepted. It is a fact that its raw material supplied by the AE is not exactly in the same condition which has been purchased on the instructions of customer (Maruti Udyog Limited). Further, after the manufacturing of automobile catalyst the same are not directly sold and supplied to Maruti Udyog Limited, but the same are sold/supplied to vendors of Maruti Udyog Limited. It is an undisputed fact that purchase of raw material is as per advice of Maruti Udyog Limited but the same is not supplied to assessee by AE in same form or condition. Assessee had also failed to justify its claim by way of filing agreements with vendors of Maruti Udyog Limited to whom the supply is made. In view of these facts, the purchase cost of the raw material cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... added to the cost. In our considered view, it must be a part of the cost base for computing the profit element. 11. On the issue of allowing adjustment of 5% for determining the ALP as provided in the provisions of section 92C(2) of Income-tax Act, the CIT (A) has decided the issue as under :- 12.3.1 I have gone through the above submission of the appellant, where the appellant claims the benefit of 5% as a standard deduction. The appellant claims the benefit of adjustment under proviso to Section 92C (2) which read as under:- Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. 12.3.2 It is pertinent to highlight here that the TPO did not allow any benefit, as in his view above provision was not applicable in this case. The provision would be applicable only if Arm's Length Price shown by the taxpayer falls within 5% of arithmetic mean of more than one price determined by the Most Appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipts) or more than 5% (in case of outgoings) of the arithmetical mean arm's length price (i.e. mean ALP) determined by the AO, then the transfer price declared by the taxpayer was not to be accepted and the adjustment.) was required to be made for the difference between the arm's length price determined by the AO based on the arithmetical mean of the prices (i.e. mean ALP) and the transfer price shown by the taxpayer. 12.3.6 The relaxation in transfer pricing adjustments provided by the Board's Circular No.12 dated 23.8.2001, referred to in the proceedings paragraph, was clearly intended to remove hardship to the taxpayers in whose cases the variation between the declared transfer price and the determined mean ALP was only marginal i.e. within 5% of the mean ALP. This relaxation was not intended to be provided to the taxpayers in whose cases the variation between the declared transfer price and the determined mean ALP was substantial and exceeded the permissible +5% range. Subsequently, the relaxation extended by the above Circular was, in substance, brought on the Statute by the Finance Act, 2002 by amending the proviso to section 92C(2) of the Act with retr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verlooked as claimed by the Appellant by stating the ruling of Sony India Private Limited. 12.3.10 Further, the proviso only provides a relief to the tax payer at the time of determining the ALP. The Hon'ble ITAT has observed that the TP provisions are not an exact science and this is the reason as to why the assessee has been provided the shelter of variation of 5% by the proviso. The shelter is available to ensure that the assessee need not make any changes in its transactional price if the variation w.r.t. the ALP is within a range of 5%. The proviso ensures that neither the assessee is burdened at the time of conducting the TP analysis, nor is the assessee burdened with small amounts of additions made by the revenue. However the proviso is totally silent as to what should be done if the ALP is not with the range of 5% of the transaction price. This is explained by the original circular issued by the government. In cases where the variation is in excess of 5%, no relief is to be provided to the assessee. It is for this reason that the original circular has still not been withdrawn by the department. There is no doubt that the law has been amended subsequently and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (6), similar to the one addressed before this Bench, were also very much raised and considered by the Court. Reference, in this regard, was made to Ballabhdas Mathuradas Lakhani AIR 1970 SC 1002, 1003 wherein their Lordships observed in the context of binding effect of decision of Supreme Court on the High Court that: 4 .... The decision was binding on the High Court and the High Court could not ignore it because they thought that relevant provisions were not brought to the notice of the Court. Following the aforesaid decision, the Supreme Court in Director of Settlements, AP v. M.R. Apparao observed: 7. . .. The decision in a judgment of the Supreme Court cannot be assailed on the ground that certain Aspects were; not considered the relevant provisions were not brought to the notice of the Court (See and AIR 1973 SC 794) .... 54. We do not find any merits in these submissions of Mr. Vora. Firstly, the Supreme court was dealing with the binding nature of the Supreme Court decision on the High Court, whereas we are dealing with the decision of a High court and that too of a High Court having no jurisdiction over the case arising from a different State, which though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, and when the earlier decision of the Court in Prem Nath Sharma v. State of U.P. , was pressed into service. It was found that in Prem Nath Sharma's case the applicability of Rule 72 had never been canvassed and the only question that had been canvassed was the violation of the said Rules. It is in this context, it was held by this Court in Granite's case as the question regarding applicability of Rule 72 of the Rues having not been even referred to, much less considered by Supreme Court in the earlier appeals, it cannot be said that the point is concluded by the same and no longer res Integra . This dictum will have no application to the case in hand on the question whether the judgment of this Court in Civil Appeal. No. 398 of 1972 can be held to be a law declared under Article 141. 56. In view of the above, it gets crystalised that when a provision of a statute is not considered, it cannot be said that point is concluded by the Supreme Court decision and the same was no longer res integra. These decisions, therefore, are of no help in resolving the issue. The decision of Rajasthan High Court wherein provisions of section 80I (6) were not specifically discussed n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 5% for determining the ALP. We have gone through the submissions and also the case law relied upon by him. He pointed out that the amendment made under section 92C of the Act would be applicable prospectively and not retrospectively. Whereas the learned Departmental Representative objected to the above proposition and submitted that under the proviso, no standard deduction has been provided to the assessee company. In our considered view, the tolerance band provided in the aforesaid provision is not to be taken as a standard deduction. If the arithmetic mean falls within the tolerance band, then there should not be any ALP adjustment. If it exceeds the said tolerance band, then ALP adjustment is not required to be computed after allowing the deduction at 5%. That means, actual working is to be taken for determining the ALP without giving deduction of 5%. Our view is supported by the recent decision of the Delhi Bench of the Tribunal in the case of M/s. ST Microelectronics Private Limited v. CIT (A) XX, New Delhi and others ( supra ). We also find that the issue is covered in favour of the revenue by the decision of co-ordinate Bench in the case of ADP Private Limited, Hydera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit loss account. By allowing a margin of (-) 5% for such a transaction, a taxpayer is permitted to have a credit entry which is not below 95% of the ALP so that profit from the transaction is not understated beyond the tolerance level of (-) 5%. Whenever there is an international transaction involving purchase of a product or import of services, there would be a debit entry in the profit and loss account. By allowing a margin of (+) 5% under such a transaction, a taxpayer is permitted to have a debit entry which is not above 105% of the ALP so that profit from the transaction is not understated beyond the tolerance level of (+) 5%. 11.18.3 The decision rule contained in the proviso to the sec. 92C(2) of the Act containing a tolerance band is akin to a similar decision rule of confidence interval used in the theory of statistical inference. Under that theory, a 5% level of significance would provide for a tolerance band consisting of 95% 105% of the arithmetical mean and these points are known as Critical Values . The rule is one of All or Nothing kind of a situation. If a computed value falls within the tolerance band, a favorable inference is drawn. The d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal raised by the assessee in all these three assessment years. Considering all these decisions of ITAT Benches and pleadings on both the sides, we are of the view that this tolerance band provided in the proviso is not to be construed as a standard deduction. In this case, the TPO has adopted the arithmetic mean of several comparables for taking out a PLI which would be tested with the PLI of the assessee. If that arithmetic mean falls within the range of tolerance band then there may not be any adjustment but if it exceeds then ultimate adjustment is not required to be computed after reducing the arithmetic mean by 5%. The actual working is to be taken into consideration. Considering all these facts, the appeal of the assessee is also dismissed on this ground. 15. In the ground no.2 2.1, the revenue has raised the issue regarding restricting the addition to ₹ 7,03,05,000/- instead of ₹ 8,33,86,859/- made by the Assessing Officer. 16. We have heard both the sides on the issue and we find that the CIT (A) has rightly accepted the working of the determination of ALP. When the operating profit on cost is to be taken as 16.85% which is to be earned by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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