9911796707
TMI Blog2021 (9) TMI 341X X X X Extracts X X X X X X X X Extracts X X X X ..... rn declaring loss of Rs. 1,94,792 on 30.11.2011. A search action u/s. 132 of the Act was taken up in Sava group of companies including the assessee on 31.10.2012. Pursuant to such search, a notice u/s. 153A was issued calling the assessee to file return for the year under consideration. The assessee filed a letter stating that the return originally filed for the year may be treated as a return in response to notice u/s. 153A of the Act. The assessee reported an international transaction of "Sale of finished goods" amounting to Rs. 3,20,24,659 to Sava Trading FZC, Dubai in Form 3CEB. After taking prior approval of the Competent authority, the AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transaction. The TPO in his three page order passed u/s. 92CA(3) of the Act observed that: "The detailed order explaining the business model of the assessee, the facts of the case and resultant adjustment under transfer pricing having been discussed in the case of Anagha Pharma Ltd for the Assessment Year 2007-08. As the facts of the case of this assessee for this assessment year are same these are not reproduced here" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by them to India through dividends and remuneration to Shri Vinod Jadhav, who, in turn, claimed such income as exempt on the ground of his Non-resident status. It was further noted that the Settlement Commission rejected the non-resident status claim of Shri Vinod Jadhav and declared him as a Resident. The TPO noted the findings of the Investigation team in relation to the functions performed by the two Indian-based companies of the group along with those situated in Mauritius, Singapore and Dubai. He tabulated such functional analysis done by various group companies in para 27.3 of his order and held that the AEs performed no functions except receipt of sale proceeds and sending the same to the Indian entities. Rejecting the OIE's benchmarking done under the Transaction net margin method (TNMM), he proceeded to determine the ALP under the Profit Split method (PSM). He allocated 3% of the aggregate group profits to the AEs abroad for the services rendered by them and the balance 97% was divided between the two Indian entities. To be more precise, he aggregated the year-wise profits shown by the five group entities from the A.Ys. 2007-08 to 2013-14 and found out the total co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er:- A.Y. Anagha's Total Profit Less O.P. shown by the Assessee Total Adjustment Less Adjusted in the hands of Sava Medica Ltd. (As mentioned below) Net Adjt in the hands of OIE A B C D E F 2007-08 2,21,59,558 1,30,38,449 91,21,109 0 91,21,109 2008-09 17,16,80,562 1,69,42,134 15,47,38,428 0 15,47,38,428 2009-10 31,71,86,985 4,55,81,486 27,16,05,499 0 27,16,05,499 2010-11 8,54,72,298 73,95,355 7,80,76,943 0 7,80,76,943 2011-12 47,12,60,845 1,66,56,860 45,46,03,985 94,92,109 44,51,11,876 2012-13 12,92,72,186 5,99,91,658 6,92,80,528 54,08,126 6,38,72,402 2013-14 32,81,21,587 4,78,94,987 28,02,26,600 4,66,98,148 23,35,28,452 TOTAL 1,52,51,54,021 20,75,00,929 1,31,76,53,092 6,15,98,483 1,25,60,54,609 6. Through this table, he found out the amount of year-wise transfer pricing adjustment in the hands of the two Indian entities, namely, OIE and the assessee. Firstly, he computed the total adjustment under Column D collectively in the hands of both the Indian entities at Rs. 45,46,03,985 and then he reduced the amount of transfer pricing adjustment made in the hands of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M for benchmarking its transactions. - Both the methods applied by the assessee as well as the TPO were wrong. As the assessee was only into trading exports for the year under consideration, the correct method to be applied was the Resale Price Method (RPM). 9. Accordingly, the assessee was directed to furnish benchmarking analysis of its international transaction by applying the RPM. The assessee submitted the same which has been reproduced at page 83 of the DRP's directions. As per this exercise, the assessee computed its GP/Sales margin at 25.22%. The DRP made alterations to certain figures and hence re-worked out the amended GP/Sales at 16.52%. The assessee had identified 33 companies as comparables. The DRP removed 13 companies from such list and computed the average GP/Sales of the remaining 20 comparables at 28.32%. This is how, the differential profit rate of 11.80% (28.32% of the comparables and 16.52% of the assessee) was applied to the value of international transaction of exports made by the assessee at Rs. 3.20 crores for determining the transfer pricing adjustment at Rs. 37,78,910. It is this amount of transfer pricing adjustment which has been made by the AO i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction or the specified domestic transaction: Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction or specified domestic transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction or the specified domestic transaction;" 12. Rule 10A(1)(d) expressly sets forth the situations in which the Profit split method can be applied, inter alia, 'in multiple international transactions or specified domestic transactions w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TOTAL 20,53,57,136 -2,66,203 14,38,10,101 54,60,16,598 67,74,06,101 1,57,23,23,733 14. The next step in stage two is enshrined in sub-clauses (ii) and (iii), which provide that the relative contribution by each of the associated enterprises to the earning of such combined net profit is to be evaluated and then the combined net profit is to be split amongst the enterprises in proportionate to their relative contribution. However, before undertaking this exercise, the basic return particular to the concerned entity is to be determined as per first part of the proviso, which is to be reduced from the aggregate profit. The TPO in the extant case determined the basic return for OIE (Column D) and the overseas entities (Column E) in Table 28.2 and then worked out the entire Residual profit (Column F). In finding out the figures under certain columns of Table 28.2, the TPO made some infirmities. Firstly, for calculating the basic return of OIE under column D, the TPO applied percentages of profit earned by the comparables as per the TP report of OIE on the combined operating profit of all the five entities taken togeth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidual profit (after excluding the arm's length profits of the assessee and OIE from their respective international transactions of sale; and 3% to overseas entities) only to OIE by opining that all other activities were done by it alone. 18. At this juncture we take note of the following additional ground taken by the assessee: "19. The learned AO erred in law and on facts in referring the alleged international transaction of "Control & Management of Sava Group" to the learned TPO, without complying with the provisions of section 92CA(1) r.w.s. 92C(3) and 92B of ITA, 1961." 19. The Hon'ble Supreme Court in National Thermal Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC) has observed that "the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the tribunal for the first time, so long as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat income arising from the said international transactions needs to be benchmarked, in order to determine its arm's length price and before such reference to the TPO, show cause notice should have been given to the assessee. In the absence of any such show cause notice being given to the assessee, the same is irregularity (as held by the Hon'ble Bombay High Court) and the said irregularity cannot be made good by restoring back the same to the file of AO.......It is the case of violation of principles of natural justice and such an order passed in the hands of the assessee cannot stand and the same is invalid and bad in law". It can be seen from the order of the Tribunal in the case of OIE that the AO made a reference to the TPO in respect of two transactions viz., the first of sale to the AEs which was declared by the assessee in its Form No. 3CEB and the second of worldwide sale by the assessee group, which was not declared. We have reproduced Table 28.2 from the order of the TPO in the case of OIE in which Column No. D represents profit attributable to OIE for the reported international transactions and then Column No. F with the "Residual profit allocated to OIE". These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment order. As against that, the assessee has only one international transaction of export made to its AE with transacted value of Rs. 3.02 crore and the arm's length profit of Rs. 94,92,109/- It is only this transaction which was referred by the AO to the TPO and whose ALP has been determined. As neither any second international exists in the case of the assessee nor has been referred to the TPO, the ratio laid down by the Tribunal in the case of OIE has no application here. Had the factual position prevailing in the case of the assessee been similar, following the rule of stare decisis, we would have gone with the order passed in OIE. The fact that there is only one international transaction in the case of the assessee which was referred by the AO to the TPO and whose ALP has been determined, there can be no question of declaring the assessment order to be bad in law on this score. 22. The next contention of the Ld. AR, relying on the Tribunal order in OIE, is that the assessment order is bad in law because the TPO had no power to conclude that the control and management of affairs was situated wholly in India, which could have been done only by the AO. Again here, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions was more than Rs. 5.00 crores, it was requested that the reference should be made to the TPO so as to maintain consistency and a uniform ALP determination. The CIT got convinced with the AO's reasons and accorded his sanction. It was thereafter that the AO made a reference to the TPO for determining the arm's length price of international transaction of Rs. 3.20 crores vide his letter dated 19.11.2014, a copy of which has been placed at page 1009 of the paper book. The Ld. AR contented that Circular No. 3/2003 dated 20.05.2003 expressly provides that reference to the TPO can be made by the AO only when the value of international transaction exceeds Rs. 5 crores. It was submitted that since the value of international transaction in the instant case was less than such a threshold, it was incumbent upon the AO himself to determine the ALP. As the AO made a reference to the TPO, and the latter determined the ALP, all the proceedings were vitiated. 24. There is no doubt that Circular No. 3/2003 provides for making reference to the TPO only where the value of international transaction exceeds Rs. 5 crores. In other words, if the aggregate value of international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. 25. Now, we turn to the application of the Resale Price Method as directed by the DRP through which, it computed the amount of transfer pricing adjustment at Rs. 37,78,910. At this stage, it is pertinent to note the nature of the international transaction, which is 'Sale of Finished goods' to its AE. The DRP held in para 66 that: "Since the assessee is into trading exports of pharma products, Resale Price Method will be the most appropriate method". In order to evaluate if the RPM was properly directed to be applied, we need to refer to the relevant part of rule 10B(1)(b), which reads as under: "10B(1)..... (b) resale price method, by which-- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) to (v) ...." 26. Sub-clause (i) of the rule emphatically provides that: 'the price at which property purchased ... by the enterprise from an associated enterprise is resold ... to an unrelated enterprise, is identified'. Thus, it is glaring that this method applies where an Indian entity purchases goods from its foreign/AE and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... International transactions of 'Sale of finished goods' amounting to Rs. 9.55 crores and odd were declared in Form No. 3CEB. The AO made a reference to the TPO for determining their ALP. The TPO, vide his concise order dated 29.01.2016, determined the amount of transfer pricing adjustment at Rs. 54,08,226. He did not separately discuss the merits of the transfer pricing addition but, as done for the preceding year, relied on the discussion made by him in his order passed in the case of OIE for the A.Y. 2007-08. Similarly, for the A.Y. 2013-14, the assessee filed return declaring loss of Rs. 20,82,40,706. The assessee reported international transaction of 'Sale of finished goods' at Rs. 13,25,91,855. The AO made a reference to the TPO for determining the ALP of international transaction. The latter vide his order dated 29.01.2016, passed in the same way as for the preceding two years, determined the amount of transfer pricing adjustment at Rs. 4,66,98,148 by mainly relying on his order in the case of OIE for the A.Y. 2007-08. For both the years, the assessee had applied Transactional Net Margin Method (TNMM). The TPO rejected this method and resorted to the PSM. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and restored the TNMM as most appropriate method. The assessee is not aggrieved by the TNMM application. The only dispute is about the calculation of its own PLI. We have noted above that while calculating its PLI for the A.Y. 2012-13, the assessee treated Rs. 10.94 crores as non-operating costs on the premise that such expenses were incurred for the purpose of brand building, which efforts were from a futuristic perspective and results of these efforts were not reaped in the current year. The assessee has demonstrated its PLI working on this basis on pages 761 and 762 of paper book. Whereas the above extracted note has been given on page 761, it has been mentioned on page 762 that: "The cost with respect to employees hired for the purpose of brand creation, promotion and marketing in domestic market which has no relevance with the sales of manufactured products sold to AEs, hence the same is carved out to determine operating cost'. The Ld. AR attempted to justify the exclusion of sum of Rs. 10.94 crores by contending that the assessee incurred these expenses considering the futuristic impact of the market creation made in this year. He elaborated by stating that such costs re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployee cost and Operating & administrative expenses carved out by the assessee. On a specific query, it was admitted that the assessee started manufacturing operations from this year onwards and out of total sales of Rs. 11.26 crores, domestic sales amounted to Rs. 1.71 crores. It, therefore, transpires that the assessee incurred Employee cost and Operating & administrative expenses in relation to its manufactured products, which were sold in the year under consideration both in the domestic market to non-AEs and in the foreign market to the AEs. In such a situation, the assessee cannot justify the exclusion by correlating the same with its impact in the years to come. On a pertinent query, the Ld. AR admitted that these costs were not capitalized in the books of account but were taken as revenue expenses for the year under consideration. Once these costs are incurred for the year in question and claimed as deduction in entirety in this year alone, we fail to understand as to how these can be correlated with the sales to be made in future years without capitalizing them for accounting or tax purpose. 34. If the contention is that such expenses, which are otherwise operating in na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stic market. In such a scenario all the operating costs - both for AE and non-AE transactions - need to be considered for determining the rate of Operating profit to Total cost. The transfer pricing addition will result only by applying the differential PLI rate (PLI of the assessee and PLI of the comparables) only on sales made to the AEs and not the entity level transactions. 37. The position which finally emerges is that neither the Employee Cost and Operating and administration expenses have any relation with the 'brand building' nor even genuine brand building expenses can be excluded from the operating cost base on the facts and in the circumstances of the case. Thus the contention of the Ld. AR for reducing the operating cost base with the expenses of Rs. 10.94 for the A.Y. 2012-13 and Rs. 23.89 crores for the A.Y. 2013-14 is repelled. To sum up, we hold that the DRP rightly ordered the inclusion of such costs in the operating cost base for computing the assessee's PLI for both the years under consideration. 38. But for the above, the Ld. AR did not assail any other aspect of its own ALP determination presented before the DRP. We, therefore, accord our imprimat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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