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TMI Blog2018 (4) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... its Associated Enterprise was not at arm's length. 1 : 2 The Assessing Officer / Dispute Resolution Panel erred in rejecting the Transactional Net Margin Method (TNMM) which was determined by the Appellant as the most appropriate method as per the provisions of section 92C(1) of the Income-tax Act, 1961. 1 : 3 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the international transaction relating to the export of goods entered into by the Appellant with its Associated Enterprise was at arm's length and hence no adjustment in respect thereof was called for and the stand taken by the Assessing Officer / Dispute Resolution Panel in this regard is misconceived, erroneous and incorrect. 1: 4 The Appellant submits that the Assessing Officer be directed to delete the upward adjustment of Rs. 13,55,73,433/- made by him to the Appellant's total income and to recompute its total income and tax liability accordingly. 2 : 0 Re.: Adjustment of Rs. 1.19,960/- to the international transaction relating to Corporate Guarantee: 2 : 1 The Assessing Officer 7 the Dispute Resolution Panel has erred in making an u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant submits that the Assessing Officer be directed to delete the additional disallowance u/s. 14A so made by him and to re-compute its total income and tax thereon accordingly. 3. The grounds of appeal for assessment year 2013-14 reads as under: 1 : 0 Re.: Adjustment of Rs. 13,16,87,917/- to the international transaction relating to export of goods: 1 : I The Assessing Officer / Dispute Resolution Panel has erred in making an upward adjustment of Rs. 13,16,87,917/- to the total income of the Appellant by holding that the international transaction relating to the export of goods entered into by the Appellant with its Associated Enterprise was not at arm's length. 1 : 2 The Assessing Officer / Dispute Resolution Panel erred in rejecting the Transactional Net Margin Method (TNMM) which was determined by the Appellant as the most appropriate method as per the provisions of section 92C(1) of the Income-tax Act, 1961. 1 : 3 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the international transaction relating to the export of goods entered into by the Appellant with its Associated Enterprise was at arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to re-compute its total income and tax thereon accordingly. 4. The assessee has also filed common additional grounds for both the assessment years. The common additional ground reads as under: On the facts and in the circumstances of the case and in law, the action of the Assessing Officer ("AO") of making reference to the learned Transfer Pricing Officer ("TPO") without giving any opportunity of being heard, is in violation of the provisions of section 92CA of the Income-tax Act, 1961 and needs to be quashed. The Appellant submits that the reference made to the TPO is not in accordance with law and hence the Order passed pursuant to the illegal reference is bad in law. 5. Regarding the admission of additional ground, the ld. Counsel of the assessee submitted that it is an important legal issue affecting the jurisdiction assumed by the Assessing Officer. Hence, he submitted that the same should be admitted. 6. Per contra, the ld. Departmental Representative submitted that the assessee has not raised this ground before any of the authorities below. Hence, he pleaded that this additional ground should not be admitted. 7. Upon careful consideration, we find that it is an impo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that any of the transactions considered as international transaction have been wrongly done by the Assessing Officer. Hence, the ld. Departmental Representative submitted that there is no merit whatsoever in the additional ground raised by the assessee. 10. We have carefully considered the submissions and perused the records. In this regard, we may gainfully refer to the provision of section 92CA which reads as under: Reference to Transfer Pricing Officer. 92CA. (1) Where any person, being the assessee, has entered into an interna- tional transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm's length price in relation to the said international transaction or specified domestic transaction under section 92C to the Transfer Pricing Officer. (2) Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires: Provided that in the circumstances referred to in clause (ii) or clause (x) of Explanation 1 to section 153, if the period of limitation available to the Transfer Pricing Officer for making an order is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to have been extended accordingly. (4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer. (5) With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend any order passed by him under sub- section (3), and the provisions of section 154 shall, so far as may be, apply accordingly. (6) Where any amendment is made by the Transfer Pricing Officer under sub- section (5), he s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licability of Chapter X by an assessee then the requirement for taking a decision after taking on board the objection becomes necessary. In the absence of it being considered at this stage, the same could only be considered by the DRP and as pointed out above, if considered at the very threshold by the Assessing Officer it could save an elaborate exercise of determining the ALP which may turn out to be entirely academic. It is for the above reason that grant of personal hearing before referring the matter to the TPO has to be read into Section 92CA(1) in cases where the very jurisdiction to tax under Chapter X is challenged by the assessee. Admittedly the aforesaid exercise of considering the objection of no income arising or potentially arising from the transaction has not been done in this case and finds no mention even in the draft assessment order. 12. Furthermore, in this connection, the CBDT has issued Instruction No. 15 of 2015 dated 16.10.2015 the relevant part of which reads as under: However, in the following situations, the AO must, as a jurisdictional requirement, record his satisfaction that there is an income or a potential of an income arising and/or being affecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional ground raised by the assessee cannot be sustained. It is not at all the case of the assessee that there is any objection to the applicability of Chapter X of the I. T. Act. Hence, on the anvil of the above said Hon'ble jurisdictional High Court decision, this additional ground raised by the assessee deserves to be dismissed. 14. Furthermore, a reading of the CBDT Instruction referred above, provides for three situations where the Assessing Officer must provide an opportunity of being heard to tax payers before recording his satisfaction or otherwise. These situations are as under: (a) where the taxpayer has not filed the Accountant's report under Section 92E of the Act but international transactions undertaken by it come to the notice of the AO; (b) where the taxpayer has not declared one or more international transaction in the Accountant' s report filed under Section 92E of the Act and the said transaction or transactions come to the notice of the AO; and (c) where the taxpayer has declared the international transaction or transactions in the Accountant's report filed under Section 92E of the Act but has made certain qualifying remarks to the effect that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee as on 31.03.2012) 12,85,50,000 - Determination of ALP : Export of finished goods: Rs. 43,07,76,529/- Purchase of raw materials (Marcoat) Rs. 1,03,73,706/- Purchase of finished goods Rs. 7,56,157/- 18. The assessee has adopted Transitional Net Margin Method for determining ALP for export of finished goods to AE Omni Active Health Technologies Inc, USA. It was submitted that the assessee manufactures and supplies natural ingredient products. It has sold natural ingredient products to AE during the year under review. Also, occasionally, assessee also sources raw material from third parties based in USA. On account of presence of AE in USA, such sourcing is done via AE and AE charges assessee on cost to cost basis. During the year under review, assessee imported raw material via AE mounting to only Rs. 1,03,73,706/- and Finished goods of Rs. 7,56,157/- which is miniscule as compared to overall volume of assessee's business. Thus, both of aforesaid international transactions are clubbed together and the export of finished goods being the major tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned that though the assessee in the TP report has bench marked the transaction under TNMM, no verifiable data has been provided to substantiate the method used. He further added that CUP would be a more appropriate method to bench mark the sale transaction. He proceeded to add that it was seen from the CUP details in respect of export of sale major discrepancies were noted. Hence, he inferred that the assessee has sold the goods at a very lower rate to the AE vis-a-vis non AE entities. He proceeded to compute the amount at which sale was made to the AE at a lesser price. Accordingly, the Transfer Pricing Officer show caused the assessee as to why a sum of Rs. 13,42,05,433.80/- should not be added while working out the ALP of the transaction on account of sale to AE. The assessee's response was summarised by the Transfer Pricing Officer as under: - The assessee has adopted the TNMM method considering the above mentioned two comparable companies. The reasons for the export sale price charged at a lower rate to the AEs because there is a high level of competition in those geographies. - The reason for non-application of the CUP being the products are patented technology and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 4.3 The DRP has noted that the average sale price at which goods were sold to AE were lower than the average sales price at which the goods were sold to non - AE. The DRP is constrained to note that the price difference is substantial and can't be just explained by geographical factors, volume sales, commission expenses etc. The Rule 10B(a)(ii)clearly provide that even when CUP method is adopted, adjustments can be made if it materially affects the price in the open market. During the DRP proceedings, the assessee company has just made general observations and has failed to provide any data or evidence to enable it to make economic adjustments on these ground. 4.4 The DRP is also of the considered opinion that when an internal CUP is easily available, the TNMM is to be treated as the method of last resort. In view of these circumstances, the action of the TPO / AO in making an adjustment of Rs. 13,55,73,433 /- on account of transaction of export of goods is upheld. Accordingly, this ground of objection of the assessee company is rejected. 24. Against the above order, the assessee is in appeal before us. 25. We have heard both the counsels and perused the records. The ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, the Transfer Pricing Officer summarily rejected and held that the application of TNMM is the method of last resort when the comparable price method cannot be applied. However, he noted that in the assessee's case since the comparable price for the same or similar products to the third parties has been provided by the assessee, the same has to be considered for bench-marking this transaction. Accordingly, Transfer Pricing Officer proceeded to apply the CUP method for bench marking. The assessee's objection in this regard was also dismissed by the DRP when it held that it was of the opinion that when internal CUP is easily available, the TNMM is to be treated as method of last resort. 28. From the above discussion, we find that the Transfer Pricing Officer has rejected the consistently applied TNMM method without bringing on record any cogent reason. It is the settled law that the consistent method followed can be changed only if there is a change of facts or law. There are various decisions of Hon'ble Apex Court in this regard including that from Radhasoami Satsang (supra). In the present case, there is no case that there is a change of law or there is a change in fact. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method. iii. Rule 10B of the Income-Tax Rules, 1962 ("Rules") states that: (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international 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 tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s including by the Hon'ble Apex Court that the consistency should be maintained in the assessment proceedings. A consistently applied method can be changed only if there is a change in facts and law. In the present case, we find that there is no such case has been made out. Rather the Transfer Pricing Officer has proceeded to examine the issue on the basis of TNMM method. He has ordered for updated data of comparable. Thereafter, when even on the basis of updated data, the international transaction was found to be at arm's length, he laconically held that CUP method would be preferred. The DRP had summarily upheld the change from TNMM to CUP method without assigning any cogent reason whatsoever. By no means it is justified to keep on finding a method for addition by trial and error method. Accordingly, on the anvil of aforesaid Hon'ble Apex Court's decision as discussed hereinabove, we hold that there was no justification in rejecting the TNMM method applied by the assessee as in the preceding year. Since as per the same computation the assessee's margin was found to be at arm's length, we set aside the order of authorities below and decide the issue in favour of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 92B has now set at rest all the pursuant ambiguities about the status of guarantee being an international transaction which is well covered in Explanation C. The DRP held that if the guarantee has not been provided, the AE could not have obtained the loan. Hence, by providing the corporate guarantee, the assessee has provided a service to its AE. Thereafter, the DRP referring to several decisions of ITAT, it also refers to OECD transfer pricing guidelines. The DRP concluded as under: 6.22 In view of the detailed discussion above, following the recent decision of Hon'ble Bombay High Court in the case of Everest Kanto, and Mumbai ITAT in Glenmark Pharmaceuticals Ltd. in ITA No. 5031/Mumbai/2012 dated 13.11.2013 (A.Y. 2008-09), a downward adjustment to the naked quotes of the rates of bank Guarantee has been done in this year, while benchmarking the transaction. It is seen that the bank guarantee rates vary generally between 1% to 3% giving an average of about 2.0%. Accordingly, it would be appropriate to charge a corporate guarantee of 1.5% from the AE. 34. Against the above order, the assessee is in appeal before us. 35. We have heard both the counsel and perused the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idiary companies in India and dividend income from foreign subsidiary are already subject to tax, the issue is remitted to the file of the Assessing Officer. The Assessing Officer shall examine the veracity of the above submissions and thereafter grant the assessee necessary relief, as per law. Addition of Rs. 6,66,30,953/- being the disallowance u/s. 35(2AB) for assessment year 2013-14: 40. The assessee has set up an in-house research and development facility which has been approved by the Secretary, Department of Scientific & Industrial Research ('Prescribed Authority/ 'DSIR'). During the year under consideration, the assessee has incurred revenue expenditure of Rs. 5,31,21,608/- and capital expenditure of Rs. 67,54,672/- in connection with its in-house research and development facility and it has claimed a weighted deduction of 200% of the said expenditure in its Return of income. 41. The Assessing Officer disallowed the deduction claimed as the assessee has not filed the necessary certificate issued by the prescribed authority in Form 3CL from 3CM. 42. Before the DRP, the assessee inter alia submitted that the assessee adhere to compliance requirements on its part to claim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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