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TMI Blog2019 (7) TMI 1726X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s length price of international transaction with the Associated Enterprises (AEs) relating to export of finished goods. However, in ground no.2.2, the assessee has raised a legal issue challenging the authority jurisdiction of learned DRP in enhancing the income of the assessee. At the outset, we propose to deal with the aforesaid legal issue. 4. Brief facts are, the assessee, an Indian company, is engaged in the business of manufacture, trading and marketing including exports of fast moving consumer goods (FMCG) such as soaps, detergents, home and personal care (HPC) products, atta, beverages etc. For the assessment year under dispute, the assessee filed its return of income on 29th November 2013, declaring total income of Rs. 188,50,06,120. In course of assessment proceedings, the Assessing Officer noticing that in the relevant previous year, assessee has entered into various international transactions with its overseas AEs, made a reference to the Transfer Pricing Officer for determining the arm's length price of such international transaction. In the course of proceedings before him, the Transfer Pricing Officer examined the audit report as well as the other details file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, the sales to AEs was with a mark-up of 9% of the total cost. In that event, learned DRP observed, the cost of sales of Rs. 753.22 crore to the AEs comes to Rs. 691.02 crore giving a margin of Rs. 62.19 crore, which translates into net profit of 8.256%. Whereas, the total profit of the assessee as per the Profit & Loss account was Rs. 163.28 crore, meaning thereby, the profit of Rs. 101.09 crore pertains to sales made to the non-AEs which translates into a profit margin of 32.69%. Therefore, learned DRP issued a show cause notice to the assessee in terms with section 144C(8) of the Act, proposing to enhance the income. In the said notice, learned DRP called upon the assessee to explain why external Transactional Net Margin Method (TNMM) selected by it to benchmark the transaction relating to export of HPC and beverages should not be rejected and such transaction should not be benchmarked by applying internal Comparable Uncontrolled Price(CUP) / TNMM. In response to the aforesaid show cause notice, assessee made elaborate submissions objecting to the proposed enhancement. It was submitted by the assessee, learned DRP has no power to enhance the income of the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and iii) CIT v/s Knight Frank India Pvt. Ltd., [2016] 72 taxmann.com 300 (Bom.). 9. Drawing our attention to the Finance Bill 2010, the learned Sr. Counsel submitted, the main purpose for which Explanation to sub- section (8) of section 144C of the Act was introduced is to nullify the effect of the ratio laid down by the Courts and Tribunals with regard to DRP's power of enhancement. Thus, he submitted, the Explanation was intended to expand the scope of the main provision. Without prejudice to the aforesaid submissions, learned Sr. Counsel submitted, even after introduction of Explanation to section 144C(8) of the Act, the power of enhancement is only with reference to a variation made by the Transfer Pricing Officer and not challenged by the assessee before the DRP. To buttress his submission, learned Sr. Counsel drew our attention to section 251 of the Act and submitted, unlike Explanation to section 144C(8) of the Act, the power of the first appellate authority is much wider as it is not confined to variation in income by the Assessing Officer. He submitted, the power of enhancement under section 144C(8) of the Act is much narrower than the power of enhancement under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 144C(8) of the Act, the position has changed and all doubts regarding the power of enhancement of DRP has been put to rest. In this context he relied upon the decision of the Tribunal, Delhi Bench, in Bausch and Lomb India Pvt. Ltd. v/s ACIT, [2017] 85 taxmann.com 163 (Del.) and decision of Tribunal , Mumbai Bench in M/s. Hamon Shriram Cottrell Pvt. Ltd. v/s ITO, ITA no.7982/Mum/2011, dated. 19.04.2013. Thus, he submitted, aforesaid decisions of the Tribunal squarely cover the present dispute. As regards the merits of the issue, learned Departmental Representative relied upon the observations of learned DRP. 12. In rejoinder, though, learned Sr. Counsel for the assessee agreed that in the decisions of the Tribunal, the issue has been decided against the assessee, however, he submitted, in the said decisions the Tribunal had no occasion to deal with the argument advanced by him to the effect that the Explanation cannot expand the scope of main provision. 13. We have considered rival submissions and perused the material on record. Undisputedly, the international transaction with the AEs relating to export of HPC and beverages was benchmarked by the assessee applying external TNMM. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... makes it clear that the power of enhancement conferred with learned DRP extends to all matters arising out of assessment proceedings, irrespective of the fact whether any variation has been proposed therein or the assessee raised any objection with regard to any such issue. As per the scheme of section 144C of the Act, against the variation proposed in the Draft Assessment Order, the assessee, at its own option may either avail the Commissioner (Appeals) route or the DRP route. That being the case, it would be incongruous to say that powers of the Commissioner (Appeals) in the matter of enhancement are much wider than that of the DRP. If we accept the proposition that power of enhancement with the Commissioner (Appeals) is wider than that of the DRP, it will lead to a anomalous situation, where, in respect of an assessee opting for Commissioner (Appeals) route, power of enhancement in respect of any income, whether challenged by the assessee or not, can be exercised without any fetters. Whereas, in respect of an assessee availing the DRP route, power of enhancement would be restricted only to the variations objected to by the assessee. In our humble opinion, this cannot be the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the DRP has a power to enhance variations proposed in the draft order on an international transaction, even if it was not raised by the assessee. 'Enhance the variations' include not only increasing the amount of transfer pricing adjustment already proposed, but also making a new transfer pricing adjustment, which was omitted to be proposed/made by the AO/TPO. There is no doubt and cannot be that the power of the DRP is co-terminus with that of the AO/TPO. In other words, the DRP can also do all such things, which the authorities could have done but omitted to do. If the language of the provision is read as disabling the DRP to exercise the power of enhancement in the circumstances as are obtaining in the instant case, as has been canvassed on behalf of the assessee, it would amount to diluting the power, which the statute has expressly granted. 11. Sub-section (7) of section 144C makes it clear that the DRP, before issuing any final directions under sub-section (5), may either (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it. In the instant case, the DRP ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernal TNMM redundant. More so, when learned DRP has recorded a factual finding that the products sold to AEs and non-AEs are different except in case of only five items. It is relevant to observe, in course of hearing of the present appeal, the learned Sr. Counsel for the assessee has brought to our notice various factors which can make a significant difference between the transactions with AEs and non-AEs and would have impact on profitability. As could be seen, insofar as the AE segment is concerned, the assessee acts as a contract manufacturer, accordingly, bears limited risk as the major risk is taken by the AEs. The marketing and distribution are performed by the AE who source the products. Whereas, in case of non-AE segment, the entire risk and reward is with the assessee, as, it not only has to explore the market but has to promote its products. It has to appoint distributors and incur various other expenditures including advertisement, sales promotion, etc. Similarly, for A.E. segment, any new capacity is required to support supplies, the AE underwrites the capital spends. Further, any cost incurred by the assessee with regard to plant and machinery, moulds, etc., will be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asoning why external TNMM is not applicable. It is relevant to observe, in case of Piaggio Vehicles Pvt. Ltd. v/s DCIT, [2012] 26 taxmann.com 60 (Pun.), the Tribunal, Pune Bench, has also expressed the view that unless the business models of the AE and non-AE are completely similar, they cannot be treated as comparable. Viewed in the aforesaid perspective, the decision of learned DRP in determining the arm's length price of the export of HPC and beverages to the AEs by applying internal TNMM cannot be supported. Therefore, the adjustment proposed by learned DRP deserves to be deleted. 18. Having held so, it is necessary to observe, learned DRP has not at all gone into the aspect of acceptability of external TNMM applied by the assessee. However, it is evident, before the Transfer Pricing Officer, the assessee has furnished all documentary evidences to support its benchmarking under external TNMM. Of course, the Transfer Pricing Officer has not made any discussion on the issue and has simply accepted assessee's benchmarking. In view of the aforesaid, though, we hold that external TNMM applied by the assessee has to be treated as the most appropriate method in the given fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of non-AEs and 60 days in respect of AEs. He submitted, the assessee is a debt free company, therefore, when there is no chance of assessee utilizing borrowed funds and incurring expenditure to pass on the benefit to the AEs, there should not be any adjustment on account of notional interest on overdue receivables. He submitted, since the assessee charges the AEs at cost plus 9%, any delay on account of receivables is already factored in the mark-up charged to the AEs. Thus, he submitted, the adjustment made should be deleted. In support of such contention, he relied upon the following decisions:- i) CIT v/s Kusum Healthcare Pvt. Ltd., ITA no.765/2016, order dated 25.04.2017 (Del. HC); PCIT v/s Bechtel India Pvt. Ltd. ITA no.379/2016, dated 21.07.2016 (Del. HC); and ii) Bechtel India Pvt. Ltd. v/s DCIT, ITA no.1478/Del./2015, dated 21.12.2015. 23. The learned Departmental Representative strongly relying upon the observations of learned DRP and the Transfer Pricing Officer submitted, the AE and the non-AE transactions cannot be compared for determining the arm's length price of the interest on overdue receivables. 24. We have considered rival submissions and perused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned, Hindustan Unilever Ltd. is paying royalty for availing services from the AE. However, insofar as the export sales are concerned, the assessee avails services from the AE though the agreement remains the same. He submitted, in case of both Hindustan Unilever Ltd. and the AE, the Transfer Pricing Officer has accepted the royalty payment on such services to be at arm's length in the assessment year 2013-14 itself. In this context, he drew our attention to the orders passed under section 92CA(3) of the Act in case of Unilever PLC and Hindustan Unilever Ltd., for the assessment year 2013-14. The learned Sr. Counsel submitted, the assessee is a contract manufacturer, hence, has to avail certain services from the AE. Further, the royalty paid to the AE also forms part of assessee's cost base on which it gets mark- up of 9%. He submitted, if the arm's length price of royalty payment to the AE is determined at nil, then it has to be removed from the cost base of the assessee thereby reducing the income of the assessee to that extent. Further, he submitted, in the transfer pricing study report, the assessee had benchmarked the arm's length price of royalty payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid circumstances, if the payment of royalty to the AE is disallowed by determining the arm's length price at nil, then logically the income of the assessee also should be reduced. This is the view expressed by the Co-ordinate Bench in Mercer Consulting Pvt. Ltd. (supra). Thus, considering the overall facts and circumstances of the case and keeping in view the ratio laid down in the decisions cited before us, we are of the view that the adjustment made by determining the arm's length price of royalty payment at nil deserves to be deleted. Accordingly, we do so. Grounds are allowed. 31. In the result, assessee's appeal is partly allowed. ITA no.2096/Mum./2017 Assessee's Appeal 32. Ground no.1, is general in nature, hence, does not require adjudication. 33. Grounds no.2 to 9, are on the issue of adjustment made to the arm's length price of exports of HPC products and beverages to the AEs. 34. These grounds are identical to ground no.2 to 3.5, raised by the assessee in its appeal being ITA no.6648/Mum./2017. The only factual difference in the impugned assessment year is, the Transfer Pricing Officer has himself determined the arm's length price by ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty paid to the AE on technical documents, information and knowhow. Whereas, in grounds no.14 to 16, the assessee has challenged the adjustment proposed in respect of provisions of business service. 38. At the outset, we must observe, though, the aforesaid adjustments were proposed by the Transfer Pricing Officer on without prejudice basis considering the fact that the main adjustment was proposed by him while determining the arm's length price of export of HPC and beverages to the AEs by applying internal TNMM. In fact, while doing so, the Transfer Pricing Officer proposed adjustment of Rs. 85,94,39,962. After the directions of learned DRP on the issue, the Transfer Pricing Officer again made identical adjustment by stating that the assessee did not furnish any evidence to demonstrate that facts involved in the impugned assessment year are identical to assessment year 2013-14. While making the aforesaid adjustment, the Transfer Pricing Officer also made adjustment to the arm's length price of royalty paid on documentation, technical knowhow, as well as provisions of business service on without prejudice basis. However, it is observed, no addition on the aforesaid adjus ..... 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