TMI Blog2014 (4) TMI 816X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided u/s 139(5) - both the TPO and DRP erred in not considered the same, the AO is directed to consider the revised return as a valid return – Decided in favour of Assessee. Validity of AO’s adjustment – Suo-moto adjustment ignored - Whether adjustment made by the AO ignoring suo-moto adjustment made by the Assessee is correct or not – Held that:- Relying upon Haworth (India) P. Ltd. Versus Deputy Commissioner of Income-tax [2013 (8) TMI 421 - ITAT DELHI] - the TPO/DRP are not correct in not considering suo-moto adjustments made by Assessee - For arriving at the profit margins realized by the enterprise, suo-moto adjustment has to be taken into account in arriving at the difference to be added so as to make the 'net profit realised' to arrive at the arm's length price in relation to the international transaction as provided under 10B(e)(v) - The AO is directed to consider suo-moto adjustment made by Assessee accordingly – Decided in favour of Assessee. Adoption of operating cost - Whether operating cost adopted by TPO is correct or not – Held that:- Without considering the objections of Assessee, TPO determined the operating cost based on the proportionate cost on the rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of compressor manufacturing whereas adjustments were done in the segmented results of supply of components (to the compressors) - selection of comparables by TPO suffers from these basic deficiencies, the matter required re-examination – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Disallowance of depreciation – Held that:- If proper analysis was made there would not be any difference from the price paid to the price determined, as demonstrated before the TPO both on the basis of the third party quotations which are considered as internal CUP and the VG Bouw Certificates as external CUP - Under both the workings Assessee is able to justify the price paid - assessee justified the price paid by way of a certificate which can be considered as external CUP - TPO/DRP did not rely on any other certificate and in the absence of any contrary information, price paid by Assessee, which was lesser than the value mentioned in the certificate can be accepted as such- decided in favour of Assessee. - ITA No. 1686/Hyd/2010 - - - Dated:- 13-11-2013 - B. RAMAKOTAIAH AND SAKTIJIT DEY, JJ. For the Appellant : Kanchan Kaushal an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions with its AEs: 1. purchase of fixed assets; 2. Purchase of components, tools, spares and accessories; 3. Sale of software tools, compressor, parts of compressors, compressor sub-assembly and components; 4. Software Engineering services; 5. Interest on ECB Loan; and 6. Reimbursement of expenses. As per the Transfer Pricing (TP) Documentation prepared by Assessee, it was submitted that all the above international transactions have met the arm's length standard as prescribed in the Indian Transfer Pricing Regulations contained in Section 92, 92A through 92F of the IT Act, 1961 read with Rules 10A to 10E of IT Rules, 1962, except the transactions in relation to sale of compressor sub-assembly components and purchase of some components in the EOU Unit at Balanagar. Accordingly, Assessee has offered Rs. 28,269,298/- as a suo-moto transfer pricing adjustment in its (revised) return of income for AY 2006-07 to meet the arm's length standard. Assessee filed its original return of income for the AY 2006-07 on October 28, 2006 declaring the total loss of Rs. 37,29,58,707/-. The return of income was subsequently revised on 29-11-2006 u/s 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e next objection of the learned counsel is with reference to the addition made after arriving at the PLI taking comparables. Reserving his submissions on the comparables, it was submitted that Assessee itself has made suo-moto adjustments at the time of filing return along with TP report and this adjustment of Rs. 2,82,69,298/-made by Assessee suo-moto was ignored and made the addition at a higher amount. It was his contention that if suo-moto adjustment is considered, the adjustment so arrived at by the TPO is within the (+) or (-) 5% threshold limit so, no further adjustment was called for. It was submitted that Assessee filed return originally within time without any TP report and consequent to the report prepared, Assessee felt that suo-moto adjustment of Rs. 2,82,69,298/- was required and accordingly return was filed within time allowed u/s 139(5) of the Act stating as revised return. The learned TPO ignoring the fact that reference was made on the same return along with report enclosed to the return, came to the conclusion that Assessee cannot file revised return on the reason that there is no omission or wrong statement, therefore, the revised return was ignored and suo-moto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudication on the basis of comparables will arise only if the suo-moto adjustment made by Assessee was ignored. If it is taken into consideration the adjustment proposed by the TPO on the basis of PLI at 10.16% is within the (+)/(-) 5% threshold limit provided under the Act. 8. Referring to the other issue of denial of depreciation, it was submitted that Assessee has purchased machinery from its AE, the details of which are as under: Name of the Associate Enterprise Amount in Rs. Custom duty paid (Rs.) Countervailing Duty (Rs.) Tecumseh Products Company 15,31,19,135 1,78,32,005 9,56,334 Fasco Australia PT. Ltd. 47,25,420 - 11,69,938 Total 15,78,44,555 1,78,32,005 21,26,271 Computation of the disallowance of deprecation by AO Particulars Amount (Rs.) Total value of fixed assets purchased = B 15,78,44,555 Depreciation Rate = C 15% Amount of Depreciation = D=B*C 2,36,76,683 It was submitted that TPO wrongly assumed that machinery has no value, whereas Assessee has paid customs duty and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oring suo-moto adjustment made by the Assessee is correct or not ? (C) Whether operating cost adopted by TPO is correct or not (D) Whether the comparables selected by the TPO is correct (E) Whether (+)/(-) 5% threshold limit available under the Act can be invoked in this case. (F) Determination of value of imported machinery by the TPO thereby denying depreciation. These issues are considered in detail and decided as under: (A) whether Assessee's return filed along with TP report is to be considered or not ? As briefly stated, Assessee filed return of income on 28th October, 2006 declaring loss of Rs. 37,29,58,707/- without TP report for the assessment year under consideration. Subsequently after the international transactions were analysed and on the basis of transfer pricing documentation prepared by the consultant, Assessee realized that some of the transactions require suo-moto adjustment. Accordingly, Assessee made adjustment of Rs. 2,82,69,298/- thereby revising total loss to Rs. 34,46,89,409/-. This indicates that there is a reduction of loss in the ultimate claim made by Assessee. We were surprised about the finding by the TPO and DRP for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by which, (i) the net profit margin realised by the enterprise from [an international transaction or a specified domestic 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; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between [the international transaction or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length price in relation to the international transaction as provided under 10B(e)(v). The AO is directed to consider suo-moto adjustment made by Assessee accordingly. (C) Whether operating cost adopted by TPO is correct or not While calculating the net profit margin from the international transaction on sub-assembly and components supplied to the TPC USA, the AO has considered the operating cost at Rs. 22.82 crores. This he has arrived at on the basis of the proportionate turnover ignoring the segmental reports prepared by Assessee. In fact, the sale of sub-assembly and components are only 5% of the turnover of Assessee and these sub-assembly and components are manufactured at 100% EOU established for this purposes at Balanagar. As per the provisions of the Act, this 100% EOU is maintaining separate books of account as Assessee is also eligible for deduction u/s 10A/10B. Assessee reported 18,84,61,988/- as the cost in this unit, but resulted in a loss as per the books of account. Consequent to the TP documentation undertaken by Assessee, arm's length price of the sale price was shown at Rs. 20,00,48,439/- as against Rs. 17,17,79,141/-, which were actual sales. Since actual sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined having regard to the arm's length price." (ii) International transaction referred to above were defined in section 92B(1) is as under: "92B. Meaning of international transaction. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises." Explanation provided retrospectively there in also clarifies the expression 'international transaction'. International Transaction means a transaction between two or more AEs. This does not take into consideration adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Assessee is not correct for the reason that what the Act provides is that if the variation between ALP so determined and value at which the international transaction has been undertaken does not exceed such percentage then the price at which the International Transaction has actually been undertaken shall be deemed to be the arm's length price. (v) The subsequent amendment to proviso makes this issue very clear. The present Section 92C is as under: "92C. Computation of arm's length price (1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely : (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , (ii) the adjustment is required provided suo-moto adjustment made by Assessee is also considered while arriving at the further adjustment, if any, required. Therefore, while examining the threshold limit of (+)/(-) 5%, we are of the opinion that the actual transaction undertaken by Assessee should be the base and not revised transaction reported by making suo-moto adjustment. (vi) There is one more aspect to the contention made. As briefly stated, Assessee incurred loss in International transaction and suo-moto adjustment of Rs. 2,82,69,298 on the basis of transfer pricing documentation. This indicates that the Assessee exercised option provided u/s 92C particularly of proviso of (+) or (-) 5% threshold and did not treat the actual sale transaction as ALP. Having exercised the option and treating the different (enhanced) amount as ALP, in our view, Assessee cannot contend that the threshold of (-) or (+) 5% is available again, if TPO action results in further addition. On this reason also the claim fails. This contention of Assessee is considered as rejected. (E) Whether the comparables selected by the TPO is correct ? As mentioned above in the submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nery to the valuation officer under the IT Act. Without doing so, the TPO or the DRP has no base to determine the value at Nil and consequently denying the depreciation claim of the assessee while at the same time, the payment of custom duty and countervailing duty are considered as value of cost. Not only that, as submitted by Assessee and as seen from the Table furnished, new machinery worth US$ 500,965 was also treated as old machinery and valuation was determined at Nil. This shows non-application of mind by TPO as well as by DRP. (ii) When Assessee raised specific objections on all issues running to 67 pages, the DRP simply rejected them without even commenting about factual issues also. The purpose for which DRP is constituted gets defeated if DRP does not apply its mind and endorse the orders of the TPO without even examining the factual aspects of the submissions and judicial principles relied upon. In these circumstances, we cannot approve the action of the TPO/DRP as there is no other report by any valuation officer that can be taken as external CUP and the value as paid by Assessee can be accepted as such. further the price paid being lesser than valuation officer ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
