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DCIT, Circle-13 (1) , New Delhi Versus Noble Resources abd Trading India Pvt. Ltd. and Noble Resources and Trading India Pvt. Versus ACIT (OSD) , CIT-V, New Delhi and ITO, Ward-13 (3) , C.R. Building, New Delhi

2016 (7) TMI 248 - ITAT DELHI

Transfer pricing adjustment - rejecting the comparable uncontrolled price (CUP) method as the most appropriate method applied by the appellant for benchmarking the international transactions entered with its AE - Held that:- The CUP is the most appropriate method to be applied for the international transactions of import and export of traded goods of the assessee. - The assessee is required to support the international transaction by authentic documents which may also include quoted prices. .....

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we set aside ground of the appeal of the assessee holding that ld AO and TPO are directed to first benchmark the international transaction of the assessee by applying the CUP method. In the event the assessee is unable to support its international transactions by that method then the international transactions of the assessee may be benchmarked by adopting other methods including the sixth method after granting assessee adequate opportunity of hearing. - ITA No. 3155/Del/2013, ITA No. 3132/Del/ .....

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grounds of appeal for the Assessment Year 2007-08:- 1. That on the facts and circumstances of the case and in law, the Hon'ble Commissioner of Income Tax (Appeals)-XX, New Delhi ("CIT(A)") has erred in sustaining the assessment of business loss amounting to ₹ 21,73,85,388/- as against returned business loss amounting to ₹ 27,17,58,649/-. 2. That on the facts of the case and in law, the Hon'ble CIT (A) has erred in sustaining the order passed by learned Assistant Co .....

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cluding that a substantial portion of the international transactions entered into by the Appellant with its AE are unjustifiable in terms of Section 92 of the Income Tax Act, 1961. 2.1.1. That on the facts of the case and in law, the Hon'ble CIT (A) has erred in stating that: "In view of the totality of the case, TPO was right in not considering some of the price quotations given by the appellant because substantial part of the international transaction would have gone unjustified under .....

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TPO has erred in stating that: "..... I am of the considered view that CUP data relied upon by the assesses is unreliable and does not represent the true comparability...." 2.3. That on the facts of the case, the Hon'ble CIT (A) has disregarded the adjustments made by the Appellant to account for the difference in the Inco terms for the purposes of carrying out comparability analysis under CUP method. 2.4. That on the facts of the case and in law, the Hon'ble CIT(A) has erred .....

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ary evidence to substantiate the same. 2.5. That on the facts of the case and in law, the Hon'ble CIT(A) has erred in holding that publications of repute, given credence in the business, available within the public domain are not sufficient to benchmark the international transactions entered into by the Appellant with its AE. 3. That on the facts and circumstances of the case, the Hon'ble CIT (A) has wrongly applied Transactional Net Margin Method ("TNMM") as the MAM for determ .....

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laim of the assessee to somehow apply CUP method is based on a covert objective of hiding the loss incurred by the assessee in a trading business which gets unmasked while using TNMM. I therefore reject the objection of the assesee in this regard and I am of the considered view that TNMM shall be the most appropriate method for benchmarking the international transaction in this case." 3.2. That on the facts of the case and in law, the Hon'ble CIT(A)/ Ld. TPO have erred in adopting the n .....

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f the case and in law, the Hon'ble CIT(A)/ Ld. TPO have not carried out proper Functional, Asset and Risk ('FAR') analysis of comparable companies selected by Ld. TPO for the purposes of application of TNMM. 3.4. That on the facts and in law, the Hon'ble CIT(A) has grossly erred in accepting 16 companies from the set of comparables furnished by Ld. TPO for application of the TNMM, despite having noted the lack of comparability in more than one instance in the set so furnished. 4. .....

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ame as manufacturing company though the financials of the company examine from the capitaline database of sales turnover is from the trading activity; 2. The ld CIT(A) has erred in law and on facts in not appreciating the facts that the Transfer Pricing Officer (TPO) has specifically mentioned in his order that the company namely M/s. Kotak Ginning and Pressing Inds Ltd has shown that more than 90% turnover is from cotton trading and hence, predominately a trading company; 3. The ld CIT(A) has e .....

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rily involved in the business of trading of bulk agro commodities involving exports of soyabean meal, seasame seed and export of iron ore and chemicals. During the year, it has also imported crude soyabean oil, coal, crude, palm oil and pulses. For A Y 2007-08, assessee company filed its return of income on 30.10.2007 declaring loss of ₹ 82975690/- and same as merged appellant company i.e. Noble Resource and Trading India Pvt. Ltd on the same date at Rs .182121130/-. Subsequently, on merge .....

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considered TNMM as the most appropriate method for benchmarking international transactions. The ld TPO also took PBT/ sales as the PLI which is (-) 13.73% in case of the assessee. Ld TPO selected 17 comparables, which are engaged in trading in agricultural crops and trade in minerals and energy sources. The international transactions and its benchmarking is as under:- Sr No Transactions of Export Nature of Transaction Amount (in INR) Most appropriate method as per TP documentation Method adopte .....

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85145/- computed arm‟s length margin @ 3.71% thereof and determined ALP at ₹ 27279079/-. Against this the margin shown by the assessee was computed applying PLI at (-) ₹ 21470326/- and proposed an adjustment of ₹ 48749405/-. The ld Assessing Officer accordingly determined total loss of ₹ 22,30,09,240/- and passed an assessment order u/s 143(3) on 22.12.2010. Against this assessee preferred appeal before ld CIT (A), who in turn upheld the order of ld. Transfer Pricin .....

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rst ground of appeal is general in nature and therefore it is dismissed. 8. The second ground of the appeal is against rejecting the comparable uncontrolled price (CUP) method as the most appropriate method applied by the appellant for benchmarking the international transactions entered with its AE. 9. The first major dispute is regarding the most appropriate method for benchmarking the international transactions. As stated above the assessee has computed the most appropriate method as CUP, howe .....

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provided by the assessee does not support for functional comparability. Further, ld TPO was also of the view that data provided by the assessee is not covered within the provisions of Rule 10D(3) of the Income Tax Rules, 1962. Hence, he rejected the CUP method. On appeal before the ld CIT(A), he confirmed the rejection of CUP method by the ld TPO holding that transactions compared should be an actual transaction and not a hypothetical or yet to be undertaken on the date of comparison. Further, .....

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ternal CUPs and internal CUPs. He further submitted that Rule 10AB which is though inserted with effect from 01.04.2012 wherein for the purpose of the benchmarking any method which takes into account the prices which has been charged or paid or would have been charged or paid for the same was similar transactions under similar circumstances shall be accepted for the sixth method u/s 92C(1)(f). He submitted that though it is effective from 01.04.2012 , applicable from AY 2012-13 it is retrospecti .....

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14] wherein Hon‟ble High Court rejected the objection of the TPO where the transactions were benchmarked relying on quotations. Hon‟ble High Court considered the provisions of Rule 10D (3)(c) of the Income Tax Rules, 1962. Therefore, his argument was that CUP method should be applied for these transactions and for comparability analysis, the quotation and other evidences supplied by the assessee should be acceptable. . 11. Ld DR submitted that the CUP is a good method in itself but t .....

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have carefully considered the rival contentions and we are of the view that in the assessee‟s own case for AY 2006-07 , the coordinate bench in ITA No. 5722/Del/2010 has held relying on several Tribunal decisions that the CUP is the most appropriate method in case of trading transactions and internal CUP has been held to be more appropriate than external CUP data for comparability analysis. Before the coordinate bench the international transaction were sale of traded goods and purchases of .....

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TNMM. The viewpoint canvassed by the Revenue in such rejection is that the necessary details required for the application of CUP method were not forthcoming from the assessee‟s side. Several Benches of the Tribunal has held that CUP is the most appropriate method in case of trading transactions provided the uncontrolled transactions relied by the assessee are really comparable and necessary data requiring adjustments, if any, is available. Internal CUP has been held as more appropriate th .....

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ty to discard the CUP method and resort to any other suitable method. 5. Adverting to the facts of the instant case, it is seen that the details of its export transactions of Soyabean meal to its AEs is available on pages 64 & 65 of the paper book. Major transactions are of export to AE in Singapore and few transactions are of export to its AE in Indonesia. Page 135 of the paper book is a copy of Invoice dated 21.3.2006 pursuant to contract dated 2.3.2006 in which price of ₹ 193 per MT .....

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which is available on page 67 of the paper book, the assessee tried to show that its invoices to its AE were comparable with that charged from non-AEs. In the like manner the assessee tried to show that the comparable data of non-AEs was very much available, which the authorities below have refused to look into. From the order passed by the DRP, we find that there is no worthwhile discussion about the objections taken by the assessee in Form No. 35A. It can be seen from the DRP‟s order tha .....

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ication of CUP method and hence the matter should be restored to the file of TPO instead of DRP, who had also failed to appreciate the contentions made before him. We can observe from the order of the TPO as well that though detailed submissions were filed before him, but those have not been appropriately considered while proposing the addition of ₹ 7.23 crores. The ld. DR, though relied on the impugned order but suggested that if the matter was to be sent back then it should go to the TPO .....

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required to be done with the actual uncontrolled transactions and not quotations etc. If the assessee succeeds in providing appropriate data relevant for comparison under the CUP method, then the TPO should determine the ALP under the CUP method. If however, it turns out that necessary details furnished by the assessee are incomplete or not relevant, then the TPO may proceed with any other appropriate method. Needless to say the assessee will be allowed a reasonable opportunity of being heard i .....

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riate method for benchmarking the trading transactions with its AE in this year too. 14. Now the issue comes that whether the quotations‟ in the form of external CUP and custom data of third party shipping bills, brokers rates, SOPA Rates etc whether these can be considered as the reliable comparable data or not and whether they satisfy the requirement of Rule 10D (3)(c) of the Income Tax Rules, 1962. The coordinate bench in the assessee‟s own case has rejected that quotations etc. o .....

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s and quotation by One Oil World for comparability analysis Before us the ld DR has stated that that these data are not authentic. However, we do not find a whisper in the order of ld. Transfer Pricing Officer that the internal and external comparable data have been examined at all with respect to their authenticity. They have been simply rejected relying on Rule 10D(3) of the Income Tax Rules. On the issue before the Hon'ble Gujarat High Court in case of CIT Vs. Adani Wilmar Ltd. was not on .....

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process, the assessee had presented two sets of prices claiming them to be comparable. One set of transactions relied on by the assessee was supplied by Malaysian Palm Oil Board (hereinafter referred to as 'the MPOB'). Simultaneously, the assessee also relied on the quotations by one Oil World, an organisation based in Germany. The assessee adopted the average of two sets of prices and claimed that the price variance between the assessee's transaction and the average of two sets of p .....

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d did not have any statutory authority. The second objection was that Oil World was an independent organisation registered in Germany and had nothing to do with the oil prices prevailing in Malaysia. He relied on Rule 10D)(3)(a) of the Income tax Rules (hereinafter referred to as 'the Rules'), to place heavy reliance on the price list of the MPOB. 4. The assessee carried the matter in appeal. The Commissioner of Income tax (CIT) (Appeals) discarded both the objections of the TPO. Referri .....

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. The oil world compiles information of various countries in the oil sector. This publishes daily, monthly and yearly journals in oil sector. This compiles information of various countries and, therefore, is broad based data base. The quotation adopted by the appellant from Oil World is for Malaysia and not for Germany. Therefore, it is an authentic independent trade quotations and is duly covered under the various documents which has been listed in sub rule (3)(b) & (c) of Rule 10D of the I .....

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have been made less than 5% of the arithmetical mean. Besides the above, I also find that the appellant has entered into contract with AE on long term basis for continuous supply of constant quality to ensure continuity in production into continuous plant which is also an important factor for considering the ALP and due weightage is required to be given while comparing the rates given by MPOB. Even the average price paid by the appellant is lower than average price on the basis of rates of MPOB .....

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he parties we notice that the determination of Arms Length Price under section 92C of the Act is to be done as per the Rules contained in Rule 10B Clause A to subsection 10. Rule 10B of the Rules pertains to CUP method. Rule 10D pertains to 'Information and documents to be kept and maintained under section 92D'. Sub rule (3) provides inter alia that the information specified in sub rule (1) shall be supported by authentic documents, which may include the following : "Information and .....

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and ownership linkages among them; (c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted; 7. In terms of clause (c) of subsection (3) of Rule 10D of the Rules, these price publications as long as the same were authentic and reliable, would be relevant materials. In this background, mere base of the organisation would be of no consequence. Further, though the .....

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rice prevailing in Malaysia. When the CIT (Appeals) as well as the Tribunal have accepted the reliability and authenticity of the organisation and its publication of ratelist, such objection of the TPO must be overruled. Learned advocate Mr.Bhatt for the Revenue, however, strenuously attempted to persuade us that the Oil World is a forecasting agency and further that such rates were not based on actual transactions. Quite apart from the observations of the CIT (Appeals) and Tribunal being to the .....

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wherein there is an addition to Chapter II of the Transfer Pricing Guidelines relating to commodity transactions [ Extracted from OECD publication Aligning Transfer pricing Outcomes with value creation OECD 2015] as under:- The following paragraphs are added to Chapter II of the Transfer Pricing Guidelines, immediately following paragraph 2.16. 2.16A Subject to the guidance in paragraph 2.2 for selecting the most appropriate transfer pricing method in the circumstances of a particular case, the .....

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or domestic commodity exchange market. In this context, a quoted price also includes prices obtained from recognised and transparent price reporting or statistical agencies, or from governmental price-setting agencies, where such indexes are used as a reference by unrelated parties to determine prices in transactions between them. 2.16B Under the CUP method, the arm‟s length price for commodity transactions may be determined by reference to comparable uncontrolled transactions and by refe .....

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se of business in the industry to negotiate prices for uncontrolled transactions comparable to the controlled transaction. Accordingly, depending on the facts and circumstances of each case, quoted prices can be considered as a reference for pricing commodity transactions between associated enterprises. Taxpayers and tax administrations should be consistent in their application of the appropriately selected quoted price. 2.16C For the CUP method to be reliably applied to commodity transactions, .....

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reign currency terms. For some commodities, certain economically relevant characteristics (e.g. prompt delivery) may lead to a premium or a discount. If the quoted price is used as a reference for determining the arm‟s length price or price range, the standardised contracts which stipulate specifications on the basis of which commodities are traded on the exchange and which result in a quoted price for the commodity may be relevant. Where there are differences between the conditions of the .....

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ated in accordance with the guidance provided in these Guidelines. 2.16D In order to assist tax administrations in conducting an informed examination of the taxpayer‟s transfer pricing practices, taxpayers should provide reliable evidence and document, as part of their transfer pricing documentation, the price-setting policy for commodity transactions, the information needed to justify price adjustments based on the comparable uncontrolled transactions or comparable uncontrolled arrangemen .....

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is determined) selected by the parties to determine the price for commodity transactions. Where the taxpayer can provide reliable evidence of the pricing date agreed by the associated enterprises in the controlled commodity transaction at the time the transaction was entered into (e.g. proposals and acceptances, contracts or registered contracts, or other documents setting out the terms of the arrangements may constitute reliable evidence) and this is consistent with the actual conduct of the pa .....

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ermine a different pricing date consistent with those other facts of the case and what independent enterprises would have agreed in comparable circumstances (taking into considerations industry practices). When the taxpayer does not provide reliable evidence of the pricing date agreed by the associated enterprises in the controlled transaction and the tax administration cannot otherwise determine a different pricing date under the guidance in Section D of Chapter I, tax administrations may deem .....

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ation. It would be important to permit resolution of cases of double taxation arising from application of the deemed pricing date through access to the mutual agreement procedure under the applicable Treaty. [ underline supplied by us] 16. Therefore respectfully following the decision of Hon‟ble Gujarat High Court and drawing support from OECD BEPS Action Plan , we are of the view that even the quoted prices‟ which is authentic may be acceptable as per Rule 10D(3) of the Income Tax R .....

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ce, which serves letter of the law but leads to the conclusion diametrically opposed to the spirit of the law, has to be deprecated. We are in considered agreement with this school of thought. To that extent, the methods of determination of arm‟s length prices have to be essentially implemented in a reasonable and pragmatic manner so as to achieve its laudable objectives without any collateral damage. 23. The lawmakers have also not been oblivious of this compelling need of a certain degre .....

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would have been charged or paid, for the same or similar uncontrolled transaction, with or between nonassociated (i.e. independent) enterprises, under similar circumstances considering all the relevant facts . 24. Very significantly, the above method, which is only method prescribed under any other method‟ under section 92C(1)(f) read with rule 10B(1)(f) , is not a residual method in the sense that it is not a condition precedent for the application of this method that all other methods, .....

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od covered by rule 10AB, which is duly covered by Section 92C(1) satisfies the test of being the most appropriate method‟, it can be applied to a fact situation. There is clearly no bar on its applicability just because a method specified in rule 10B, even if indirect method like TNMM, can also be applied to the same. Quite to the contrary, as noted by the coordinate benches in the cases of ACIT Vs. MSS India Pvt Ltd (supra), direct methods, such as CUP and the other method‟ under ru .....

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ds of determining ALP, such an order of preference being drawn up is an integral, though somewhat subliminal, part of the process of determining the ALP and that whenever a direct method of ascertaining arm‟s length price can be used, it should be preferred over an indirect method. In view of these discussions, method under rule 10BA, which is a direct method of ascertaining arm‟s length price- as is the case with Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM) .....

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can be said to be arm‟s length price. As we have noted earlier in this order, the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression price which….would have been charged on paid is used in rule 10BA, dealing with this method, in this method the place of price charged or paid , as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the a .....

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ss model said to have been adopted by the assessee, in principle, meets the test of arm‟s length price determination under rule 10BA as well. 26. No doubt, rule 10BA as also the corresponding enabling rule 10B(1)(f) are inserted by the Income Tax (Sixth Amendment) Rules 2012 and are specifically stated to be effective from 1st April 2012, i.e. assessment year 2012- 13 onwards. However, in Hon‟ble Supreme Court‟s five judge constitutional bench‟s landmark judgment, in the .....

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rospective effect Hon‟ble Supreme Court has observed that This (the foregoing analysis) exactly is the justification to treat procedural provisions as retrospective . Their Lordships then further observed that, In Government of India & Ors. v. Indian Tobacco Association (2005) 7 SCC 396 the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation and that The same doctrine of fairness, to .....

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towards prospectively. 27. It may appear to be some kind of a dichotomy in the tax legislation but the well settled legal position is that when a legislation confers a benefit on the taxpayer by relaxing the rigour of pre-amendment law, and when such a benefit appears to have been the objective pursued by the legislature, it would a purposive interpretation giving it a retrospective effect but when a tax legislation imposes a liability or a burden, the effect of such a legislative provision can .....

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India. 18. In view of above, we hold that ; i. The CUP is the most appropriate method to be applied for the international transactions of import and export of traded goods of the assessee. ii. The assessee is required to support the international transaction by authentic documents which may also include quoted prices. iii. the assessee may support its international transactions benchmarking analysis by the other method u/s 92C(1)(f) of the act which is held to be retrospective by the decision of .....

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hod. In the event the assessee is unable to support its international transactions by that method then the international transactions of the assessee may be benchmarked by adopting other methods including the sixth method after granting assessee adequate opportunity of hearing. 20. As we have already held in ground No. 2 of the appeal regarding the most appropriate method for benchmarking the international transaction the other grounds of appeal of the assessee becomes infructuous and therefore .....

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013 is dismissed. ITA No 6470/Del/2012 A Y 2008-09 23. This appeal is preferred by the assessee against the order of the ld Assessing Officer, dated 30.10.2012 u/s 143(3) read with section 144 C of the Income Tax Act for the AY 2008-09 incorporating the direction passed on 03.08.2012 by the Dispute Resolution Panel-II, New Delhi. 24. The brief facts of the case is that the assessee filed its return of income on 29.03.2010 showing income of ₹ 755107/-. During the year the assessee entered i .....

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0.2011 rejected the TP study of the assessee and applying the TNMM method as the most appropriate method and adopting OP/TC as the profit level indicator, taking 9 comparables computed the arm‟s length price of the transaction and proposed an adjustment u/s 92CA of the act of ₹ 2887388546/- . Based on this ld Assessing Officer passed draft assessment order on 08.11.2011 computing the total income of ₹ 289493953/-. Against which the assessee filed objection before Dispute Resolu .....

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e entity vide approach followed by TPO for application of TNMM. The ld DRP further directed for exclusion of two comparables. Pursuant to those directions final order u/s 143(3) read with Section 144C of the Act was passed by ld AO determining total income of ₹ 219941443/- against the return income of the assessee of ₹ 755107/-. 26. The assessee has preferred this appeal raising following grounds:- 1. That on the facts and circumstances of the case and in law, the Learned Assessing O .....

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ellant for the purposes of determination of Arm's Length Price ("ALP") of international transactions relating to export of Iron Ore, Chemical, Cotton and Import of Pulses, Vegetable Oil, Coal and Cotton undertaken with its Associated Enterprises during the year relevant to the assessment year. 3. That the Hon'ble DRP erred both on fact and law in accepting the Ld. TPO's observations that the benchmarking exercise conducted by the Appellant consisted of many infirmities. 3.1 .....

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ntity thereby misconstruing the Rule 10B(l)(a)(ii) of the Income-tax Rules, 1962 ("the Rules"). 3.3. That on the facts of the case, the Ld. AO/Ld. TPO/Hon'ble DRP has erred in holding that the Appellant has not carried out any adjustments in the analysis. 3.3.1.That on the facts of the case the Ld.AO/Ld. TPO/Hon'ble DRP has erred in not taking in consideration adjustments on account of Inco-terms made by Appellant. 3.4. That on the facts of the case the Ld. AO/Ld. TPO/DRP has e .....

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facts of the case the search process and methodology adopted by the Ld. TPO, in applying TNMM is flawed and contrary to law. 5.1 That on the facts of the case and in law, the Ld. TPO has applied different formula for calculating Profit Level Indicator ("PLI") in case of comparable companies as compared to formula used in case of the Appellant. 5.2 That on the facts of the case the methodology followed by the Ld. TPO in compiling the set of comparables for the purposes of application o .....

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ise accounting of the Appellant PLI can be computed at enterprise level. 7. That on the facts of the case and in law, the Ld. AO erred in not taking into consideration the eligible brought forward losses under Section 72 for the purposes of computing total income. 8. That on the facts and circumstances of the case and in law, the ld AO erred in initiating penalty proceedings u/s 271(1)(c) of the Act. 9. That the order passed by the ld AO/ld TPO/DRP is bad inn law and void ab-initio. 27. The firs .....

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