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TMI Blog2023 (1) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... in facts and circumstances of the case as well as in law, the Ld.CIT(A) was justified in rejecting the TPO's approach of adopting the CUP method as MAM which is contrary to the provisions of Rule 1OC of the Income Tax Rules P 3. "Whether in facts and circumstances of the case as well as in law, the Ld,CIT(A) was justified in allowing the TNMM over the CUP method as the MAM which is contrary to the provisions of section 92C and Rule 10B & 10C of the Income Tax Rules ?" 4. "Whether in facts and circumstances of the case as well as in law, the Ld.CIT(A) was justified in allowing following appropriate adjustments claimed by the assesses for material difference in contractual terms, underlying commercial circumstances, functions, risk, and other economic factors between assessee's transactions with AEs vis-a-vis assessee's transactions with non-AEs while applying the cup method which is contrary to the provisions of the section 92C and Rule 10B & 10C of the Income Tax: Rules ? i. Adjustment on account of business volumes differences. ii. Adjustment for marketing and selling expenses not required to be incurred for AE sales vis-a-vis non AE sales. iii. Adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards excess depreciation claimed on the ground that the cost of plant and machinery was required to be reduced, despite the said addition was in consonance to the provisions of section 43A of the I. T. Act, 1961." 4. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary. 3. The interconnected issue raised by the Revenue in ground Nos. 1 to 8 is that the learned CIT-A erred in deleting the upward adjustment made by the AO/TPO amounting to Rs. 1,26,30,767.00 on account of sales made to the associated enterprises. 4. The necessary facts as culled out from the order of the authorities below are that the assessee in the present case is a private limited company and engaged in the business of manufacturing of chemicals. The assessee was manufacturing and selling different kinds of chemicals which were aggregated for the purpose of determining the ALP with respect to the sales made to the associated enterprise. As per the assessee all the transactions of different chemicals were closely linked and the same were arising from the long-term business contacts with the AE's. It was also submitted by the assessee that similar sales of the diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties and perused the materials available on record. At the outset we note that, the learned CIT-A has deleted the upward adjustment made by the TPO/AO after making the reference to the order of the ITAT as discussed above in the earlier years. The relevant extract of the order of the ITAT reads as under: I have carefully considered the material facts and also the decision of the Hon'ble ITAT. The issue is identical and the facts are also identical The Hon'ble ITAT vide its order in 1TA No.1215 & 1216/AHD/2017 for the . 2009--10 and AY 2010-11 held that TNMM is t!. late method in the case of sale of chemicals and granted relief accordingly. The relevant part of the order is reproduced as under: "11, We have duly considered rival submissions and gone through the record carefully. We find that identical chemicals were sold in the immediately preceding year. The assessee has benchmarked its transaction by applying TNMM method that has been changed by the TPO and he determined ALP by following CUP method. This change of method did not meet approval of the Tribunal in the Asstt. Year 2008-09. The discussion made by the Tribunal reads as under: "8. We have heard the rival co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 international 'transaction and the uncontrolled transaction and between the entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method [Emphasis, by underlining, supplied by us] 10. What is clear from the above analysis is that a method of determining arm's length price, to be held as a 'most appropriate method' (MAM), should be, as provided in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 also evident from the plain wordings of Rule 10 B as well. Any other view of the matter will /result in incongruities. For example, if our average mark up to unrelated enterprises is 20 per cent, and we charge a mark-up of 2 per cent in one transaction with AE and 38 per cent in another transaction with the AE, both these transactions, by applying the mark up on global basis, will meet the test of ALP whereas in the first case, the mark up charged is certainly not a mark-up resulting in an ALP. In this particular case, for example, the normal mark up in transactions with has been computed at 16.31 per cent, and the average of mark up on sales to AEs having been taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 comparability factors, include: (i) Characteristics of the property or service '-"transferred; (ii) Functions performed by the parties taking into account assets employed and risks assumed, in short referred to as the functional analysis" (iii) Contractual terms; (iv) Economic circumstances; and (v) Business strategies pursued". Clearly, therefore, the significant variations in economic circumstances and contractual terms can take seemingly comparable transactions outside the ambit of comparability. 14. We have noted huge and crucial variations in payment terms of the transactions with the AEs vis-a-vi transactions with non AEs. The CIT(A) has rejected the adjustments i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the consistent approach in benchmarking analysis. The scale of transactions is an important economic factor affecting the comparability. We have also noted that the AEs have reimbursed R&D costs, with mark up, to the assessee. The AEs have also given interest free ECB loans. These are a/so equally important factors. When we take the transactions with the AEs in the light of these surrounding economic and contractual realities, in our considered view, the transactions with non AEs, on the facts of this case and as a whole, are not comparable at alt. We cannot consider the price of the product in isolation with a/I these factors, and that is the reason why the comparability und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea, 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 do not 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 on the facts of this case is to be taken in the light of the facts and material on record before us in the present year. The past conduct of the assessee, with regard to the selection of the most appropriate method for ascertaining arm's length price for the present assessment year, is not really decisive. We, therefore, reject this plea of the revenue authorities as well. 17. As we do so, we may also add that one of the decisions relied upon by the assessee was in the case of DCIT vs Dishman Pharmaceuticals & Chemicals Ltd and vice versa [(45 SOT 37 (2011)]. While dealing with a subsequent year's appeal, for the assessment year 2010-1.1, and reiteratin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quarely 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 do not have anyway, the matter could not have been referred for the constitution of a special bench and this division bench could not have taken a different view of the matter. That is what is the settled legal position. ?n 'view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the iearneu CJ / (A) anii decline interfere in the matter. 18. We see no reasons to take any other view of the matter in this case. The decisions of the coordinate benches in the above cases hold good in the present context as well. 19. In view of the above discussions and following the consistent view being take by the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, 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 call/no for no adjudication by us." 12. Since there is no disparity on facts, more particularly, when the Id.CIT(A) has not made any detailed analysis except putting reliance upon the order of his predecessor in the Asstt. Year 2007-08 and 2008-09, therefore, we are of the view that the issue is squarely covered in favour of the assessee by the order of the Tribunal passed in the Asstt .Year 2008-09 (supra). Respectfully following the order of Co- ordinate Bench, we delete the impugned ALP adjustment of Rs.7,99,59,176/-. Since we have upheld the computation of ALP of international transaction of sale of finished goods according to TNMM method, consequently, gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropriate method. 13. Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us. 14. Both the learned DR and AR before us vehemently supported the order of the authorities below as favourable to them. 15. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that, the learned CIT-A has deleted the upward adjustment made by the TPO/AO after making the reference to the order of the ITAT as discussed above in the earlier years. The relevant extract of the order of the ITAT reads as under: I have carefully considered the material facts and also the decision the Hon'ble ITAT. The issue is identical and the facts are also identical, The Hon'ble ITAT vide its order in ITA NO. 1215 & 1216/AHD/2017 for the AY 2009-10 and AY 2010-11 held that TNMM is the most appropriate method in the case of sales commission and granted relief accordingly. The relevant part of the order is reproduced as under: "20. We, have duly considered rival submissions and gone through the record carefully. As far as first fold of, contention is concerned, the Id. TPO cannot question the requirement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. In view of the above, we do not find any infirmity in the order of the learned CIT-A. Hence the ground of appeal of the revenue is hereby dismissed. 16. The issue raised by the Revenue in ground No. 12 is that the learned CIT-A erred in deleting the addition made by the AO for Rs. 11,17,079.00 representing the excess depreciation claimed by the assessee. 17. The AO during the assessment proceedings found that the assessee was given reimbursement of capital expenses in the earlier years amounting to Rs. 1,42,66,483.00 but the assessee has not reduced the same from the cost of the plant and machineries. Thus, it was found that the assessee has claimed excess depreciation in the earlier years as well as in the year under consideration. The amount of excess depreciation for the year under consideration was calculated by the AO at Rs. 11,17,079.00 which was disallowed and added back to the total income of the assessee. 18. Aggrieved assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e can see appellant accordingly it also capitalized the amount of Rs. 1,42,66,483/- spent for setting up of the Plants to the respective plants account in FY 2006-07 when it received debit notes made the payment. 14. In fact, A.O. has invoked Section 43A on the basis of misconception in as much as receipt of Rs. 14266483/- was for reimbursement from the company and same was the debit to the company and this aspect is not disputed. On account of aforesaid discussion, we allow the appeal of the appellant and direct the A.O. to excess depreciation of Rs. 2139973/-. 15. In view of the above discussion, we allow this ground of appeal. Since, the facts are identical in the present case, respectfully following the order of the Tribunal, the addition on this count is hereby deleted. The appellant succeeds on Ground no.3. 22. Before us, no material has been placed on record by the ld. DR to demonstrate that the decisions of Tribunal that were followed by the Ld.CIT(A) while dismissing the appeals of Revenue have been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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