TMI Blog2019 (11) TMI 1190X X X X Extracts X X X X X X X X Extracts X X X X ..... me from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to in the manner as prescribed. Obligation under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly determined as stipulated. The contention, that the foreign/AEs be considered as a tested parties for determining the ALP of the international transaction, having no statutory sanction, is sans merit and hence jettisoned. Similar view of not accepting foreign/AE as a tested party has recently been taken in Bekaert Industries Private Limited Vs DCIT [ 2019 (4) TMI 1786 - ITAT PUNE] . Thus, we are of the considered opinion that no infirmity can be found in the view canvassed by the authorities below in rejecting foreign/Associated Enterprises as tested parties. Once we come to the conclusion that the international transaction of import raw material was not correctly benchmarked by the assessee and the TPO was justified in rejecting such ALP determination, we hold that the view adopted by the TPO in clubbing the international transactions of Import of raw ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... numerator as against the operating profit margin taken by the TPO. We have set out Rule 10B(1)(e) supra . It can be seen that sub-clause (i) provides for the computation of net operating profit margin realized by the assessee from an international transaction. D etermining the operating profit under the TNMM - Depreciation has to be necessarily considered as part of operating costs in the process of determining the operating profit under the TNMM. As such, there can be no question of excluding depreciation from the ambit of operating costs for the purposes of determining operating profit. At this stage, it is pertinent to note that as against Rule 10B(1)(e) specifically providing for adoption of operating margin under the TNMM, rule 10B(1)(b) and 10B(1)(c) containing mechanism for determining the ALP under the Resale Price method and Cost Plus method specifically provide for adopting the gross margin. The contention, therefore, raised by the assessee that the numerator in the formula as per rule 10B(1)(e) should have been Gross margin rather than the operating margin as applied by the TPO, is bereft of any force and hence repelled. Computing the transfer pricing adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect, then no addition should be made to that extent. With reference to certain other provisions, the ld. AR submitted that it represented certain purchase of goods made during the year for which bills were actually received in the subsequent year. It was stated on receipt of such bills, the amount of provision was reversed. AO is directed to verify this contention as well. In case, the same is found to be correct to the effect that the purchases were made during the year and debited to the provision, then of course no addition should be made provided such provision has been reversed in the subsequent year on the receipt of bills. Qua the remaining provision for which there is no evidence, the same is liable to be disallowed in the absence of the assessee furnishing any justifiable reasons. - ITA No.505/PUN/2015 - - - Dated:- 25-11-2019 - Shri R.S. Syal, Vice President And Shri Partha Sarathi Chaudhury, Judicial Member For the Appellant : Shri Vishal Kalra And Shri Saunyendra Tonar For the Respondent : Shri T. Vijaya Bhaskar Reddy ORDER PER R.S.SYAL, VP : This appeal by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o far as the Pune jurisdiction is concerned, only the Joint Commissioner of Income-tax (hereinafter also called `the JCIT ) (TP)-1, Mumbai was authorized to act as Transfer Pricing Officer (TPO). Then he referred to Notification No.196/2005 dated 09-09-2004 as per which again only the JCIT, Mumbai could act as TPO for Pune jurisdiction. He took us through Notification No. 262/2006, dated 14-09-2006, which expanded the number of authorities eligible to act as TPO covering not only the JCIT but also the DCIT or the ACIT for the Pune jurisdiction. He referred to Notification No. 231/2007 dated 22-08-2007 again providing for the JCIT or the DCIT or the ACIT to act as the TPO for the Pune jurisdiction. Referring to the Notification No. 59/2014 dated 03-11- 2014, the ld. AR invited our attention towards the Additional Commissioner of Income-tax having also been roped into to act as TPO in addition to the JCIT/DCIT/ACIT. In view of the fact that the Additional CIT has been authorized to act as TPO only w.e.f. 03-11-2014, the ld. AR submitted that the transfer pricing order passed in the case of the assessee on 28-01-2014 by the Additional CIT was violative of the mandate of the Circulars/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fers to `Joint Directors of Income-tax or Joint Commissioners of Income-tax . Thus it is evident that the relevant authorities for our purpose are the Additional Commissioners of Income-tax (Addtl. CIT) and Joint Commissioners of Income-tax (JCIT). At this stage, it would be significant to note the definition section 2 of the Act - which starts with the words : `In this Act, unless the context otherwise requires , which means that unless there is a different meaning given in the respective section, the meaning given to the terms and expressions in section 2 shall prevail. Section 2(1C) defines `Additional Commissioner to mean `a person appointed to be an Additional Commissioner of Income-tax under sub-section (1) of section 117 . In the like manner, section 2(28C), as inserted by the Finance (No.2) Act, 1998 w.e.f. 1.10.1998, defines `Joint Commissioner to mean `a person appointed to be a Joint Commissioner of Income-tax or an Additional Commissioner of Income-tax under sub-section (1) of section 117 . 8. When we turn to the definition of `Transfer Pricing Officer , it transpires that the same refers to `Joint Commissioner and not the `Joint Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of raw material was benchmarked by taking two foreign AEs as tested parties and certain foreign comparables. The international transaction of Export of finished goods was benchmarked by treating self as the tested party. For processing both the above transactions independently, the assessee applied Transactional Net Marginal Method (TNMM) and claimed that these transactions were at ALP. The TPO rejected the selection of two AEs as tested parties in the international transaction of Import of raw materials because of the absence of any verifiable data for computation of the ALP and unverifiable contentions put forth on behalf of the assessee. He thus aggregated both the transactions of Import of raw material and Export of finished goods and benchmarked them on a collective basis by taking assessee itself as the tested party. The TPO selected three domestic companies as comparable with their average adjusted Profit Level Indicator (PLI), after capacity utilization adjustment, at (-) 22.62%. The assessee s PLI of (-)27.96% led to the transfer pricing adjustment of ₹ 3,83,29,479/-. The Dispute Resolution Panel (DRP) echoed the draft order incorporating the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rifiable data of the so-chosen tested parties and also of the so-chosen comparables facilitating the comparison, the TPO was justified in discarding the assessee version. Once it is held that the assessee failed to substantiate the benchmarking of the international transaction of Import of raw materials for want of the relevant data, we hold that no exception can be taken to the view canvassed by the TPO in rejecting the same and proceeding with determining the ALP in his own way. 13. Notwithstanding the above, it is relevant to note that a tested party is a party in whose hands a transaction between the two related enterprises is tested vis- -vis other comparable uncontrolled transactions for ensuring that is not structured in such a way so as to deprive the Indian exchequer of the rightful tax due to it. Under the TNMM, it is the profit rate of the tested party which is compared with that of the comparables for ascertaining if the profit from the transactions between the related parties has been declared in India at arm s length. In case, profit rate of the tested party turns out to be less on a comparative analysis, then subject to other provisions, an upward in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.' 15. The term `enterprise under the TNM method, and for that matter all other methods, has been used to indicate the assessee in whose hands the benchmarking of the international transaction is done and the term `associated enterprise has been used to denote the foreign/AE, being the other related party to the international transaction. It is so borne out from rule 10B(1)(b)(i) under the Resale price method, which provides that : `the price at which property purchased . by the enterprise from an associated enterprise is resold is identified . As this method is usually applied in the hands of the party purchasing the goods and then reselling it, there remains no doubt that the term `enterprise has been used for the Indian as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign/AE for the purpose of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. Scope of transfer pricing addition under the Indian taxation law is limited to transaction between the assessee and its foreign/ AE. We fail to comprehend as to how the profit realized by the foreign/AE can be relevant, when the profit of the Indian enterprise is sought to be ensured at ALP. The underlying object of the transfer pricing provisions is, inter alia, to see that there is no profit shifting from the Indian taxation base by means of the foreign/AE charging more than that charged by comparable independent cases, which fact is ensured by determining the ALP of the international transaction. If foreign/AE has, in fact, charged more, then its profit rate will shoot up and the corresponding profit of the Indian enterprise will be squeezed. In that scenario, a comparison of the profit rate of the foreign/AE will run contrary to the mandate of the provisions. Whereas, we were required to determine if the profit charged by the foreign/AE is not more than that charged by uncontrolled comparables by seeing the profit rate of the Indian ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 300 Operating profit to sales of Foreign/A.E. 20% Operating profit to sales of assessee/Indian enterprise 20% It can be seen from the above that OP/Sales of the assessee is 20%, which is at ALP, when seen in the light of the OP/Sales of the Indian comparables. B. Non arm s length situation Now if goods with arm s length price of ₹ 200/- are actually transferred by the Foreign/associated enterprise at ₹ 208/- to the assessee/Indian enterprise with a view to reduce the incidence of tax in India, the changed position of Operating profit/Sales of the foreign/AE and the assessee/Indian enterprise in the above example will be as under : - Average Operating profit/Sales of Foreign comparables 20% Average Operating profit/Sales of Indian comparables 20% Purchases 140 Sales to AE 208 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . AR for considering the profit of the foreign/AE as 'profit A' for the purposes of comparison with profit of comparables, being 'profit B', for determining the ALP of transaction between the assessee and its foreign AE, misses the wood from the tree by making the substantive section 92 otiose and the definition of 'international transaction' u/s 92B and rule 10B becoming redundant. This is patently an unacceptable proposition having no sanction under the Indian transfer pricing law. It is axiomatic and again accentuated that the requirement under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to in the manner as prescribed. Thus, it is overt that the obligation under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly determined as stipulated. The contention, that the foreign/AEs be considered as a tested parties for determining the ALP of the international transaction, having no statutory sanction, is sans merit and hence jettisoned. Similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain factors as set out in clauses (a) to (d) of rule 10B(2). The relevant factors set out in clause (d) are: conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, cost of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail . Rule 10B(3) provides that: `An uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between the transactions being compared, . are likely to materially affect the . profit arising, such transactions in the open market or a : `reasonably accurate adjustments can be made to eliminate the material effects of such differences . On a conjoint reading of sub-rules (2) and (3) of Rule 10B, it is manifested that geographical location is an important factor to be judged for determining the comparability with an uncontrolled transaction. It implies that if the international transaction is at a particular geographical location and the comparable transaction is at a different ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the average adjusted PLI of comparables at (-)22.62%, which was taken as a benchmark for determining the ALP. To put it simply, the TPO accepted the contention of the assessee for granting capacity utilization adjustment. 25. The assessee has set up two-fold arguments here. First is that the capacity utilization adjustment should have been carried out in the profit margin of the assessee and not the comparables, which argument was not pressed during the course of hearing and the second that the gross margins should have been considered for benchmarking rather than the operating profit margin. 26. The fist fold of the argument which was initially raised by the ld. AR during the course of hearing but subsequently not pressed was that the capacity adjustment ought to have been granted in the hands of the assessee and not the comparables. Such a contention has rightly been not pressed in view of the clear mandate given in rule 10B(1)(e) as reproduced hereinabove. Sub-clause (i) of rule 10B(1)(e) in the process of determination of the ALP under the TNMM talks of the computation of net operating profit margin realized by the assessee from an international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit margin in the open market. It is this adjusted net profit margin of the comparable companies, as determined under sub-clause (iii), which is used for the purpose of making comparison with the net profit margin realized by the assessee from its international transaction as per sub-clause (i). Thus, it is palpable that the net profit margin realised by the enterprise as well as comparables is computed in relation to a common base, such as, costs incurred or sales effected etc. So, numerator in the formula for computation of margin is always net profit margin and denominator varies, which may be costs incurred or sales effected or assets employed etc. Meaning of the term `net profit in the formula has been considered by the Hon ble Supreme Court in DIT (IT) Vs. Morgan Stanley Company (2007) 292 ITR 416 (SC), in which it has been held that the : `TNMM apportions the total operating profit arising from the transaction on the basis of sales, costs, assets, etc. . Hence, it is evident that the term Net Profit or the Operating net Profit as used in Rule 10B(1)(e) is to be read as Operating Profit . No specific definition of the term Operating Profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding for adoption of operating margin under the TNMM, rule 10B(1)(b) and 10B(1)(c) containing mechanism for determining the ALP under the Resale Price method and Cost Plus method specifically provide for adopting the gross margin. The contention, therefore, raised by the assessee that the numerator in the formula as per rule 10B(1)(e) should have been Gross margin rather than the operating margin as applied by the TPO, is bereft of any force and hence repelled. 28. The last contention raised by the ld. AR on this score was that the TPO erred in computing the transfer pricing adjustment with reference to transactions with AEs as well as non-AEs. 29. It can be seen from page 307 of the paper book that the total cost incurred by the assessee under Truck Division is ₹ 71,77,79,275/-. Break-up of such cost is given under the specific heads. The total cost qua export to AEs ₹ 16,71,88,299/-. The total cost qua domestic sales is ₹ 52,09,69,353/- and total cost qua trading activities is ₹ 2,96,21,623/-. Total of the above three items comes to ₹ 71,77,79,275/-, which has been adopted by the TPO on page 24 of his order for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e international transactions. Since the TPO/AO has proposed/made the addition on the basis of transactions even with non-AEs, we set aside the impugned order and send the matter back to the file of the AO/TPO for deciding the issue afresh as per law after allowing a reasonable opportunity of hearing to the assessee. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. 32. Before proceeding to the next issue, it is made clear that the ld. AR candidly accepted that the otherwise determination of the ALP of the international transaction by the TPO, save and except the issues raised above in this appeal which have been dealt with, is correct and without any infirmity. 33. The next issue in this appeal raised through ground no.7 is against the making of transfer pricing addition to the tune of ₹ 1,04,92,049/- with respect to the international transaction of Import of fixed assets. 34. The assessee reported an international transaction, inter alia, of Purchase of fixed assets with transacted value of ₹ 1,40,92,538/- No method was employed for benchmarking this international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time, no further claim of depreciation on such assets will be entertained in next years as well. With the above remarks, we direct the AO/TPO to decide this issue afresh after allowing reasonable opportunity of hearing to the assessee. 36. The only other issue which survives in the instant appeal is against the disallowance of ₹ 1,13,83,667/- u/s.37(1) of the Act. 37. The facts apropos this issue are that Current liabilities at ₹ 22.18 crore and odd were reported in the Balance sheet. After perusing the details submitted on behalf of the assessee, the AO observed that there were sundry creditors to the tune of ₹ 1,31,36,105/-. On being called upon to prove the genuineness of the creditors, the assessee furnished evidence only for ₹ 17,55,437/-. The differential amount of ₹ 1,13,80,667/- was added by the AO u/s.68 of the Act. The DRP considered the contention of the assessee about these amounts pertaining to certain provisions and not sundry creditors. It was, therefore, directed that in the absence of assessee providing the genuineness of the provisions, the disallowance was called for u/s.37 of the Act rather than under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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