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TMI Blog2020 (2) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... hod (TNMM) instead of Comparable Uncontrolled Price Method (CUP)/Cost Plus Method (CPM) adopted by the assessee by incorrectly holding that rates charged to the assessee and unrelated parties by the AE were not uniform and varying in nature ignoring that more than 95% purchases made from AE is supported by back to back invoice of the parties from whom AE has purchased the raw material. 1.2 The ld. DRP and also the TPO has erred on facts and in law in considering the Arihant Gold Plast Pvt. Ltd. and Formulated Polymers Pvt. Ltd. as comparable entities while applying TNMM method. 1.3 The ld DRP has erred on facts and in law in making the following incorrect observations while upholding the TPO's action of application of TNMM:- (a) The assessee has incurred freight, transport and handling charges of Rs. 1,39,98,006/- on import of raw material from AE ignoring that no such expenditure is incurred. (b) The net foreign exchange loss of Rs. 6,82,66,919/- should be included for the purpose of proportion of cost attributable to the transaction of import of raw material from AE. (c) The TNMM was the correct method in lieu on the incomplete and unreliable CUP data. (d) The decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made purchases of raw material from its AE namely Mitsubishi Chemical (Thailand) Company (in short, MCT) and Japan Polyprolene Corporation (in short, JPP) in its transfer pricing study analysis. The assessee has bench marked its international transaction by applying Comparable Uncontrolled Price Method (in short, CUP)/Cost Plus Method (in short, CPM) as Most Appropriate Method (in short, MAM) for testing the transaction. The assessee has taken operating profit/operating cost as Profit Level Indicator (PLI) and MCT as a tested party. The assessee applied CUP as MAM in respect of purchases made from JPP. The TPO did not accept the transfer pricing study of the assessee and particularly adoption of MAM being CPM in case of purchases from MCT and CUP in case of purchases made from JPP. The TPO applied Transactional Net Margin Method (in short, TNMM) as MAM for determining the Arm's Length Price (in short, ALP). The TPO finally selected two comparable namely M/s Arohant Gold Plast Pvt. Ltd. and M/s Formulated Polymers Pvt. Ltd. The TPO has also recasted the profit margin of the assessee by making certain adjustments and computed the operating profit of the assessee as loss at 4.92% as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit period, however, the DRP has still upheld the adjustment made by the TPO by considering incorrect facts that the assessee incurred substantial freight, transport and handling charges for shipment and exchange loss which could have been avoided by producing raw material from Indian sources. The ld AR has pointed out that the freight, transport and handling charges are not paid in respect of import of goods but these are incurred in respect of sale of goods. He has referred the ledger account placed at page No. 292 to 294 of the paper book as well as invoices at page No. 295 to 309 of the paper book and submitted that the finding of the DRP is based on assumption of incorrect facts. He has also referred to Rule 10TA of the Income Tax Rules, 1962 (in short, the Rules) regarding Safe Harbour Rules for International Transaction and submitted that the operating expenses as defined in Rule means cost incurred by the assessee in relation to the international transaction during the course of normal operations which do not include, inter alia, loss arising on account of foreign currency fluctuation. The ld AR has thus contended that the CUP is the MAM for determining ALP in case of pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit period of 300 days is taken into consideration. The ld AR has submitted that the TPO as well as DRP has failed to consider the fact that out of the total purchases of Rs. 15.49 crores made from JPP the purchases of Rs. 13.04 crores are supported by back to back invoices and the purchase price in the hand of AE is fully verifiable. In respect of remaining purchases of Rs. 2.45 crores, the assessee furnished the evidences that some of the purchases are regarding same grade of material for which the AE has also charged from the third party which is more than the rate charged to the assessee. Thus, the ld AR has submitted that the TNMM is not the MAM when the assessee has produced all the relevant details of CUP. The ld AR has further contended that in the preceding years, the TPO accepted the ALP of the purchases made from the AE determined on the basis of the CPM. Thus, the ld. AR has submitted that when there is no change in the facts as compared to the preceding yeas being A.Y. 2011-12 and 2012-13 then the TPO/AO is not justified in taking a different stand. In support of his contention, he has relied upon the decision of the Hon'ble Supreme Court in the case of Radhasoam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded credit period allowed by the AE is also upset by the foreign exchange losses of more than Rs. 6.82 crores on account of payments made in USD to the AE. The ld CIT-DR has relied upon the orders of the authorities below. 7. We have considered the rival submissions as well as relevant material on record. The dispute is regarding transfer pricing adjustment made by the TPO in respect of the international transaction entered into by the assessee with its two AEs namely MCT and JPP. The assessee's claim to have bench marked its international transaction by applying CUP as MAM, however, the comparable uncontrolled price taken up by the assessee is the purchases made by the AE and then supplied to the assessee. Therefore, the assessee has not compared the actual cost of purchases made by the AE to test the price charged by the AE from the assessee but the assessee has claimed that the AE has charged very reasonable margin from the assessee which is at arm's length.Therefore, this fact itself shows that the assessee has not applied CUP as MAM for testing its international transaction but the assessee has claimed that the margin charged by the AE in respect of raw material supplied to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O/AO is not permitted to take a different stand and view which is contrary to the view taken for the A.Y. 2011-12 And 2012-13. It is also undisputed legal proposition that res judicata does not apply to the income tax proceeding, however, the income tax authorities have to maintain rule of consistency. Therefore, once the CPM was accepted as MAM in the preceding year being A.Y. 2011-12 and 2012-13 then the same method has to be applied for the year under consideration for determination of ALP so far as the transaction of purchase of raw material from AE represents the trading of the AE in the said goods without any value addition. 8. As regards the purchases made from JPP, the assessee has entered into three kind of international transaction with the said AE. The details of which are as under: (i) Polypropylene which JPP has purchased from unrelated party (trading)-Rs. 3,42,11,409/- (ii) Tafmer which JPP has purchased from unrelated party (trading)- Rs. 9,61,02,548/- (iii) Polypropylene, additives and other consumable items purchased out of own manufacturing of JPP- Rs. 2,45,27,687/-. The first two transactions of purchases of polypropylene and Tafmer are also representing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matching with the transaction of the assessee. Hence the ALP of these transaction is required to be determined in above terms. 10. As regards the assessee's contention that the assessee is availing extended credit period from the AE and therefore, the margin charged by the AE is at ALP. This contention of the assessee is contradictory to its contention that the loss on account of foreign exchange rate fluctuation cannot be considered as part of operating cost, hence on the similar analogy, cost of interest also cannot be considered as part of operating cost. The ld AR has referred to Rule 10TA of the I.T. Rules regarding Safe Harbour Rules for International Transaction which prescribes the definition of operation cost and excludes, inter alia, foreign exchange loss and interest from the operating cost, therefore, if a guidance is taken from Rule 10TA of the I.T. Rules then both exchange loss as well as interest cost would not form part of the operating cost or operating revenue. It is pertinent to note that the transactions of purchases from MCT are in order to avoid the anti-dumping duty on import on the said material directly from Exxon Mobil Chemical, Singapore, therefore, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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