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TMI Blog2019 (12) TMI 1626X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of ANH. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in not upholding and granting a relief to the assessee from Splitting the time period between April 2008 to January 2009 and February 2009 to March 2009 for the purpose of price comparison in case of ANH product. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in deleting the disallowance of depreciation to the tune of Rs. 15,46,130/-, without appreciating the fact that the as per the provisions of 43A the assessee company should have reduced the amount of reimbursement from the cost of asset and since the expenditure is made by Gulbransen chemicals Inc., USA(GCI), same cannot be capitalized in the books of assessee company. 4. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary." Assessee's appeal : 2009-10 1. In respect of the Appellant's international transaction of sale of chemical products viz. ANH, MBTC and TTC to its Associated Enterprises ('AEs') Gulbrandsen Chemicals Inc, USA and Gulbrandsen EC Limited, UK, the learned Commissioner of Income Tax (Appeals) (& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing adjustment of Rs. 2,24,01,998 u/s 92 of the Act in this regard. 3. In the facts and circumstances of the case and in law, the ld.CIT(A) grossly erred in not quashing the ld.AO's action of initiating the penalty proceedings u/s.274 r.w.s. 271(1)(c) of the Act." Assessee's appeal : A.Y.2010-11 "1. In respect of the Appellant's international transaction of sale of chemical products viz. ANH, TTC, DBTO and TEAL to its Associated Enterprises ('AEs') Gulbrandsen Chemicals Inc, USA and Gulbrandsen EC Limited, UK, the learned Commissioner of Income Tax (Appeals) ('CIT(A)') grossly erred - i. In upholding the Ld. TPO/AO's action of rejecting the Transactional Net Margin Method (TNNM') as the most appropriate method. ii. In upholding the Ld. TPO/AO's action of adopting the Comparable Uncontrolled Price ('CUP') method as the most appropriate method. iii. In upholding the action of Ld.AO/TPO of not allowing following comparability adjustments claimed by the Appellant for material differences in contractual terms, underlying commercial circumstances, functions, assets, risks and other economic factors between Appellant's transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- 6. Before the ld.TPO, the assessee has filed transfer price study report, and other documents which were required. On an analysis of the TP study report, the ld.TPO has issued a detailed show cause notice. He pointed out that with regard to international transaction of sale of finished goods, the assessee has benchmarked these transactions using Transactional Net Margin Method (TNMM), stating to be the most appropriate method on the facts and circumstances of the case. According to the TPO, these transactions were aggregated with all other internal transactions by the assessee by submitting that all the transactions are closely linked and arose from long term business contract with the AEs. He further found that similar sales to non-AEs were also made in the year under consideration, and internal TNMM was selected for benchmarking these transactions. The return on total cost i.e. ratio of operating profit to the total cost was selected as the profit level indicator (PLI) for AE segment was 11.10% as compared to the PLI of non-AE segment being 2.60%. It is pertinent to note that the assessee has sold following seven chemicals during this year to the AE as well as non-AE. Names o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntity on account of large purchase order. Taking these facts into consideration it is clear that instead of volume discount being granted to associate enterprise, it has been granted to the non associate enterprise i.e.- National -Titanium- Dioxide Company Ltd. Considering the large volume bought by this enterprise vis a vis the AE, the assessee must have granted atleast 10% volume discount to this entity. Therefore^ it is proposed to proposed to modify the per unit price received from non associate enterprise to account for the 10% volume-discount. 1.4 Adjustment for advance payment The assessee has submitted that the AE, Gulbrandsen Chemical Inc has provided an average 5 months advance payment to the assessee and corresponding reduction in price should be allowed in respect of such grant of advance money. The same claim was made in proceedings before DRP for A.Y. 2006-07 and in last year where it was disallowed. It is therefore proposed not to allow this adjustment this year also. 1.5. Adjustment for marketing and selling expenses The assessee has claimed adjustment for marketing and selling -expenditure which need to be incurred by it for making non AE sales. In this y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the contrary it is seen that the interest is waived off by the AE since the assessee, allowed the AE to purchase its products in large quantity thereby allowing the AE to have assured source of purchase of products required by itself. Thus becomes clear that the quid pro quo of interest waiver by the AE is the assurance of committed sales by the assessee to AE. In such a scenario, there does not remain any requirement for the assessee to grant reduction in price to the AE in consideration for non charging of interest, In such a scenario there is no need for any adjustment on this ground. The calculation of average rate per unit in the case of non AE, after the adjustment, is as follows SLNo. Name of the non AE Rate Volume adjustment being 10% Adjusted rate (Rate/90%) Period 1. National Titanium Dioxide Company Ltd 1.159 0.128 1.287 Apr 08- toJan 09 Thus, it is seen that on FOB price of USD 0.945 per unit for the period April 08 to January 2009 for Gulbrandsen Chemicals Inc, the^ FOB price per unit in the case of non AE transactions comes to USD 1.287. Taking these figures into account, it is proposed to bench marking the sale transaction of ANH to AE (Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 2. On appeal, the ld.CIT(A) did not examine the issue in detail, rather observed that identical aspects considered in the Asstt.Year 2007-08, and therefore, the ld.CIT(A) followed the order of his predecessor in the Asstt.Year 2007-08, and upheld the adjustment made by the ld.TPO. The discussion made by the ld.CIT(A) on this issue read as under: "5. So far as ground No.1 and 2 are concerned, the same are in relation to the adjustment made in Arms' Length Price of International Transactions by the TPO. The appellant is engaged in the business of manufacturing of chemicals. The product range includes Aluminium Chloride Anhydrous (ANH), Mono-N-Butyl Tin Trichloride (MBTC), Stannic Chloride and Tri Chloro Benzene. It is a supplier to industries including petrochemicai industry, pharmaceutical and chemical manufacturers. During the year under consideration, the appellant entered into following international transactions with its Associated Enterprises (AEs): Nature Amount Sale of finished goods (chemical and hoods) 70,00,88,244/- Purchase of raw material 19,23,545/- Reimbursement of expenses 80,33,761/- Availing of selling, distribution and Marketing services 2, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its order for AY 2006-07, in the appellate order passed by my predecessor in Appeal No. CABI/ 186/2010-11 dated 02.01.2012 for AY 2007-08 and in the appellate order for AY 2008-09, passed in Appeal No. CAB-IV/200/2012-13 dated 11.06.2013 passed by the CIT(A)-IV, Baroda. Since, the facts are similar, hence, the rejection of Internal TNMM method and adoption of CUP method, the appellant has filed detailed submission against the action of the AO of rejecting the internal TNMM method adopted by the appellant and thereafter applying CUP method to sale of individual products for bench marking the sale of these products as has been done by the TPO is upheld. Accordingly, ground No.1.1.1 and 1.1.2 are dismissed." 10. The ld.counsel for the assessee at the very outset submitted that identical issue was considered by the Tribunal in the Asstt.Year 2008-09. The ld.CIT(A) has upheld the order of his predecessor in the Asstt.Year 2007-08 and 2008-09. The Tribunal did not approve the action of the ld.Revenue authorities in the Asstt.Year 2008-09 and held that CUP method is not required to be applied for benchmarking of transaction for sale of finished goods. Thus, according to the ld.counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be any straight-jacket formulas holding application of a particular method in case of a particular type of product or service. While rule 10B(1) of the Income Tax Rules 1962, provides that arm's length price in relation to an international transaction shall be determined by any of the methods, "being the most appropriate method", set out therein, Rule 10 C(1) provides the mechanism for selecting the most appropriate method "which is best suited to the facts and circumstances of each particular transaction" and "which provides the most reliable measure of arm's length price of the international transaction". Rule 10C(2) further provides that in selecting the most appropriate method as specified in rule 10C(1), certain factors are to be taken into account: (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This approach, though in the case of application of Cost Plus Method, has been rejected by a coordinate bench of this Tribunal in the case of ACIT Vs Tara Ultimo Pvt Ltd [(2012) 143 TTJ 91 (Mum)], though the same reasoning will be equally applicable in respect of the CUP as well as the computation mechanism, in that respect, is materially similar. In this case, speaking through one of us (i.e. the Vice President), the coordinate bench had observed as follows: The way this rule works, the benchmark gross profit is to be applied on each transaction with the AEs , while, for computing the benchmark, one could take into account a series of same or similar transactions. In other words, while setting the benchmark, one can take into account several transactions with unrelated enterprise on what can be termed as 'global basis', essentially in respect of same or similar property or services though, the benchmark so arrived at cannot be applied on the global basis i.e. the average of gross profit earned from same or similar transactions with AEs. The application of CPM has to be on transaction basis rather than on global basis, and this fundamental scheme of cost plus method is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Innovative Plastic India (P.) Ltd. v. Dy. CIT [2013] 59 SOT 138/35 taxmann.com 177 (Ahd.), and we are in considered agreement with the same. 13. When comparing the prices of products sold in intra AE transactions vis-à-vis independent transactions, it is not sufficient to compare the prices de hors the economic circumstances in which the respective AE and non AE transactions take place. This principle is beyond any doubt or controversy. In the OECD Guidelines for Multinational Enterprises and Tax Administrators, it is clearly stated that application of CUP method "requires high degree of comparability not only in the products sold and services provided but also in the economic circumstances in which the respective AE and non AE transactions take place". In the UN Transfer Pricing Manual, it is observed that "degree of comparability between controlled and uncontrolled transactions is typically determined on the basis of a number of attributes of the transactions or parties that could materially affect prices or profits and the adjustment that can be made to account for differences" and then it is observed that "these attributes, which are usually referred to as the five co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of these transactions is different. 15. It is also important to bear in mind the undisputed fact that the AE had an obligation to buy at least 50% of its products and the assessee was reseller rather than an end user. These contractual terms and the difference in functions also seriously affect the comparability. The reasons given by the CIT(A) for rejecting these variations are wholly superficial and devoid of any legally sustainable merits. The variations in quantities between the AEs and the non AEs cannot be ignored either. There is no dispute that there is huge variations in quantities sold to the AEs vis-à-vis the quantities sold to the non-AEs but the CIT(A) has rejected the plea on the basis that "there is no consistent pattern or correlation between the volume and sale prices" and that "there is no reference to any volume discount in the agreement". That is again a superficial approach. Whether there is a mention of the volume discount or not or whether there is always a direct relation between the prices and volumes, the fact remains that the transactions with such huge variations, as in this case, cannot be considered to be comparable transactions and that is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed stands by the authorities. As regards the decision of coordinate bench in the case of Serdia Pharmaceuticals (supra), that was a case in which no dispute was raised with respect to the comparables cases except on account of quality for which suitable adjustment was allowed. This precedent, therefore, does not offer any help to the case of the revenue. 16. A lot of emphasis has been placed on the fact that the assessee on its own was using the Internal CUP method in past, and, there was, thus, no good reason to deviate from the same. It is for this main reason that the application of TNMM has been declined by the authorities below. Nothing, however, turns on this plea. What is before us is the question as to which method is most appropriate method for ascertaining the arm's length in the present year. We donot see how this question is to be adjudicated simply on the basis of what has been accepted by the assessee, on his own, as the most appropriate method in the earlier years. Such a choice of method in the earlier years, in our humble understanding, cannot act as an estoppel against the assessee. In our considered view, the decision as to what is the most appropriate method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s put together donot make out a case for application of CUP in this case. Not only that there is no justification, beyond vague generalities, for CUP in the present case and not only that that CUP method application mechanism is incorrect, we find that sufficient quantity of reliable CUP inputs are not available on the facts of this case. that In the light of these discussions, as also bearing in mind entirety of the case, we donot see legally sustainable merits in the case of the learned Commissioner (DR) and we reject his plea that on the facts and in the circumstances of this case, CUP method is required to be applied. In any case, the issue is squarely covered by the decision of the coordinate benches, in favour of the assessee, and having perused these decisions and material on record, we are not inclined to take any other view of the matter than the view so taken by the coordinate benches. We have also noted that Hon'ble High Court is already seized of the matter and it is only a matter of time that Their Lordships take a call on the matter. Given this situation, even if we had any reservations on the correctness of the coordinate bench decision, which we donot have anyway, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation of assessee as "not accepted". In appeal also, no specific adjustments were suggested to the allocations made in the segmental accounts and the discussions were confined to generalities. In these circumstances, we see no reasons to disturb the internal TNMM adopted by the assessee. ............. 5. There are some variations in this year, such as the advance payment in this year is for 13.97 months on an average, as evident from the calculations at pages 149-150 of the paper book, and such as the fact that there have no sales of certain products to non AEs at all and yet internal CUP mechanism has been adopted. These variations will, however, not have any impact on the conclusions arrived at by us. We, therefore, see no reasons to take any other view of the matter for this assessment year. In any case, that approach is not even disputed by the parties before us. 6. We, therefore, uphold the plea of the assessee and delete the impugned ALP adjustment which was made by adopting Internal CUP method and rejecting the TNMM adopted by the assessee for benchmarking the sales to AEs. Once we hold so, all other issues raised in the appeal are rendered infructuous calling for no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of the assessee. Copy of this agreement is available on page no.198 of the paper book. The assessee has benchmarked this internal transaction by applying TNMM method. The ld.TPO while determining ALP of this transaction at NIL, assigned three reasons viz. (a) no documentary evidence of the relevant year was furnished to conclusively prove that AE rendered services; (b) no documentary evidence produced to support the appropriateness of rate of commission, and (c) appellant failed to establish requirement of services. 16. The ld.TPO thereafter recommended upward adjustment of Rs. 2,24,01,998/-. In other words, expenses claimed by the assessee for these services were recommended for disallowance, which enhanced taxable income of the assessee. Appeal to the CIT(A) did not bring any relief to the assessee. 17. Before us, the ld.counsel for the assessee has filed synopsis pointing out how this expenditure has wrongly been disallowed to the assessee. In his first fold of contentions, he submitted that to take the ALP of this transaction at NIL, on the strength of the above reasoning, is beyond the jurisdiction of the TPO. It was not job of the TPO to ascertain whether the services r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has in fact rendered the services and the transaction is a bonafide transaction: a) Selling and marketing service agreement between the appellant and the AE placed at Page 198 of PB. b) Email communications between appellants' employees and AE's marketing and sales team as well as between AE and non-AE customers of the appellant placed at Pg. 455 to Pg. 463 and Pg. 352 to Pg. 365 of PB. From these email communications, it is clearly discernible that the AE is rendering sales and marketing services to appellant even in the period prior to and subsequent to the year under consideration. The email communications for the year under consideration could not be furnished to lower authorities because as per the appellants corporate policy (placed at Page 366 of PB), the emails for the relevant year were not readily available as the same were already purged/deleted/removed from the system. c) The copies of non-AE customers purchase orders where names of AE's marketing employees/contact details are mentioned along with the copies of the relevant invoices of the appellant against such purchase orders (placed at Pg. 439 to Pg. 454 of PB). The reference on these purchase order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urangabad ([2015] 63 taxmann.com 173, Pune-Trib) (Para 8 to 8.1) III. It is not always possible to establish the rendition of services by the AE with documentary evidences. Reliance is placed on TNS India (P) Limited v/s ACIT ([2014] 48 taxmann.com 128 (Hyderabad-Trib) (para 16 to 17.1) IV. The failure of the appellant to bring on record the documentary evidences establishing the rendition of services does not on its own automatically lead to the conclusion that AE has not rendered the services unless the Ld. TPO brings on record the evidences to the contrary. Reliance is placed on Principal Commissioner of Income-tax, Delhi-2 Vs Blue Scope Steel India (P). Ltd. ([2019] 103 taxmann.com 340 (Delhi), HC- Del) (Para 4 to 6) 3.2. The details of appellants' non-AE exports over a period of time upto FY 08-09 is placed at Pg. 265 of PB. It can be seen that the appellants export sales have considerably increased from Rs. 9 Crores approximately in FY 05-06 to Rs. 44.56 Cr in FY 08-09 and the Appellant immensely benefitted due to marketing and selling efforts of the AE. It is to be seen in the context that the appellant does not have any in house export sales and marketing resource ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reliance is placed on Radhasoami Satsang v. Commissioner of Incometax ([1992] 60 taxman 248 (SC)) (Para 13). 6) The Ld. TPO cannot determine the ALP at Nil. Reliance is placed on the case laws cited in clause B.2(l) above. It is worth noting that Ld. AO has accepted this transaction to be bonafide and also accepted that AE has rendered the services and, consequently, the Ld. AO has not made any dissallowance u/s 3 7 of the Act. 7) The fact that the AE has not charged selling commission in earlier years, though it has provided such services even in the earlier year, cannot be the basis for determining Nil ALP in the current year under consideration when the selling commission is actually charged. Reliance is placed on the following cases: i. IMC Global Technology Services Pvt. Ltd. Vs. The Income Tax Officer, Ward 1(4), Pune (ITA no. 976/Pun/2015, Pune- ITAT) (Para 13) ii. Dresser-Rand India (P.) Ltd. Vs. Add. CIT, Range-6(2), Mumbai ([2011] 13 taxmann.com 82 (Mumbai-ITAT) (Para 8). 8) The Appellant's detailed submission on this ground no.2 regarding selling commission, as made to Ld. CIT(A), are placed at pg. 419 to 428 of PB, which may be referred." 19. On the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnected with ground no.2 of the assessee's appeal in the Asstt.Year 2010-11. In the grounds of appeal, the assessee has challenged initiation of penalty proceedings under section 271(1)(c) of the Act. To our mind these grounds are premature at this stage. In case any penalty proceedings would be undertaken against the assessee, then it could take independent opportunity to contest them. At this stage, both the grounds are premature and we reject them. Appeals of the assessee are partly allowed. 22. Ground no.2 in the Revenue's appeal. 23. In this ground of appeal, Revenue has pleaded that the ld.CIT(A) has erred in deleting the disallowance of depreciation amounting to Rs. 15,46,130/-. 24. Brief facts of the case are that in the accounting year relevant to the Asstt.Year 2007-08, the assessee-company has accounted for an amount of Rs. 1,42,66,483/- to plant & machinery account on debit note raised by Gulbrandsen Chemicals Inc. USA. The AO was of the opinion that it is the reimbursement of capital expenditure from Gulbrandsen, USA and therefore, it should not be capitalized for claiming the depreciation. Whereas the stand of the assessee was that it was an expenditure incurred b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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