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2015 (8) TMI 6 - ITAT HYDERABAD

2015 (8) TMI 6 - ITAT HYDERABAD - [2015] 40 ITR (Trib) 737 (ITAT [Hyd]) - TP adjustments - selection of tested party in determination of Armís Length Price (ALP) - Held that:- Profitability of the selected Comparable companies in domestic market may vary with the profit margins available abroad, particularly in the USA market. DRP also rejected the method solely on the reason that AE was not selected as tested party. Therefore, keeping in mind the submissions made by the Ld. Counsel, the issue o .....

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assessee for statistical purposes. - I.T.A. No. 775/HYD/2014 - Dated:- 27-5-2015 - SHRI SAKTIJIT DEY AND SHRI INTURI RAMA RAO, JJ. For The Assessee : Shri J.J. Varun, AR For The Revenue : Smt. K. Kamakshi, CIT-DR ORDER PER INTURI RAMA RAO, A.M. : This appeal by Assessee is directed against the Order of the Assessing Officer (AO) passed u/s. 143(3) r.w.s. 92CA(3) consequent to the directions of the Dispute Resolution Panel (DRP) u/s. 144C(5) of the Income Tax Act, 1961 (Act). 2. Briefly stated, .....

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12,71,70,274/- vide Draft Order dated 31-01-2014 by making the following adjustments : i. Transfer pricing adjustment u/s.92CA Rs. 8,86,12,580 ii. Belated payment of Provident Fund Rs. 1,81,191 iii. Belated payment of Employees State Insurance Rs. 4,58,162 iv Disallowance of GDR expenses u/s.35D Rs. 17,60,140 v. Disallowance of deduction u/s.10B Rs. 3,33,94,883 4. The assessee raised various objections before the DRP and the DRP considered the objections and passed the order dt. 27-11-2013, wher .....

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making adjustments to the transfer pricing of its international transaction with AE. 2. The TPO erred in selection of the tested party for determination of ALP. 3. The TPO erred in rejecting Resale Price Method (RPM) which was selected by the assessee as the most appropriate method to determine arm's length price for transactions entered with its AE. 4. The DRP in para 6.2 of their order erred in rejecting the submissions made with respect to grounds 1, 2 & 3 above, which consequently l .....

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elected by the assessee are functionally different. The TPO erred in conducting a fresh search to identify suitable comparables for comparison under TNMM. 6. The DRP in paras 7.2, 7.3 & 7.4 of their order erred in rejecting the submissions made with respect to ground 5 above, which consequently led to no relief being granted by the Assessing Officer in Final Assessment order u/s. 143(3) dated 31.01.2014. 7. Without prejudice to Ground.5, the TPO erred in applying the following filters in sel .....

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e Assessing Officer in Final Assessment u/s. 143(3) dated 31.01.2014. 9. The Assessing Officer erred in initiating penalty proceedings u/s. 271(1)(c) at the time of finalization of order of Assessment. 10. For the above and / or any other additional grounds that may be submitted at the time of hearing of the appeal, the appellant prays before the Hon'ble Tribunal that the above addition be deleted and necessary order be passed". 5. The assessee has raised 10 grounds in its appeal. Groun .....

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of transactions Paid/Received A.E. Amount (in INR) Method applied 1. Export of finished goods Received Granules USA Inc. 83,06,28,503 RPM 2. Purchase of raw materials Paid Hubei Granules Biocause Pharmaceu ticals Co. Ltd., China 20,76,29,307 CUP 3. Interest received on loan Received Granules USA Inc. 4,18,316 CUP 1,03,86,76,126 7. In the T.P. study assessee had furnished profitability analysis in respect of domestic sales and sales to AE and non-AE under export segment for FY. 2008-09. Assessee .....

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tional transactions with the AE were compared by searching the data based in the website and six comparables were picked from the business of marketing and distribution using the multiple year data. Assessee arrived at weighted average gross profit margin of these companies computed at ranges from 3.07% to 29.23%. The gross profit margin of AE was worked out to 5.13% and concluded that international transaction with the AE were at arm s length. 8. The TPO held that transfer pricing study of the .....

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M, the assessee carried out an independent analysis by applying Transactional Net Margin Method (TNMM) as the most appropriate method for analyzing the sale transactions. This TP study was rejected by the TPO. The TPO had used only the current year data on Prowess and Capitaline Plus databases for searching the comparables and selected 8 comparables, the arithmetic mean PLI (OP/OC) of which comes to 21.01% as against the PLI of the taxpayer at 9.35% which is outside the arm's length range of .....

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ertakes to maintain the quality standards and specifications as per the requirements of the AE. In the TP study, the tested party was the associated enterprise in USA. The assessee exported the finished goods to AE in USA for a sum of ₹ 83.06 Crores and for the TP study purpose, the entity in USA was selected and the taxpayer submitted before the AO and DRP that it had the least complex transactions and ALP can be determined accurately by adopting the RPM and selected 6 comparables from th .....

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er applying certain filters i.e., companies having net foreign exchange revenue over 60% and turnover filter between ₹ 190 Crore to ₹ 440 Crores and companies having related party transactions less than 25% and selectged 2 companies (Nueland Labs and Vinathi Organics) as comparables. The TPO found the search process conducted by the assessee defective and carried out an independent analysis by applying TNMM as the MAM for analyzing the sale transactions by using Powess and Capitaline .....

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ng different financial year ending (i.e., not March 31, 2009) or data of the company does not fall within 12 month period i.e., 1-4-08 to 31-3-2009 after rejected; vi. Companies that are functionally different from that of taxpayer, after giving valid reasons, were excluded; 13. With regard to TNMM method, to determine the ALP for transaction entered by assessee with its AE, it was submitted before Hon'ble DRP that the TPO was not justified in rejecting the comparables selected by the assess .....

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sector and the dispute is in respect of the quantum. It was noted that the assessee adopted the sales range of ₹ 190 Crores to ₹ 440 Crore whereas the TPO adopted ₹ 250 Crores to ₹ 380 Crores. Since the assessee's turnover is ₹ 315.93 Crores and the assessee had not given any reasons as to why it had adopted such wide range of turnover, the TPO's selection of companies which have similar scale of operation is nearer to the turnover of the assessee and more a .....

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assessee's argument that some of the comparables selected by the TPO were functionally dissimilar had been considered. The panel noted that the TPO had given the profile of the comparables selected and also noted that the companies Natco Pharma Ltd., Venus Remedies Ltd., Hitkal Ltd., had been held to be functionally similar to the assessee-company in the AY. 2008-09 and the DRP had endorsed/considered the view of the TPO. Accordingly, the panel upheld the selection of these three companies .....

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ver filter applied. Therefore, the panel rejected the objection. Aggrieved with the order of DRP, the assessee had come up with the present appeal. 17. It was submitted before us by the Ld. AR that the issue may be restored to the file of AO for fresh determination of ALP by following the RPM, since, for earlier years, it was held by this Hon'ble Tribunal that RPM is the most appropriate method for determining the ALP and the issue was restored to the file of AO. Ld CIT-DR had no serious obj .....

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rs. The co-ordinate bench of this Hon'ble Tribunal held in ITA No. 1793/Hyd/2012 (AY. 2008-09) in para 11 of its order held as under: "10.….……………… 11. We have considered the rival contentions and examined the issue. Since we have already considered above that A.E. should be selected as tested party, it is nothing but natural that the T.P. study should be undertaken by Resale Price Method only, as A.E. is only undertaking the distribution .....

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