TMI Blog2023 (1) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 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. Addition of excess depreciation claimed by the assessee - AO during the assessment proceedings found that the assessee was given reimbursement of capital expenses in the earlier years but the assessee has not reduced the same from the cost of the plant and machineries - CIT-A deleted the addition - HELD THAT:- 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 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. Adjustment for credit risk not required to borne by the AE sales vis-a-vis non AE sales. iv. Adjustment for interest free ECB loan received from AE. 5. Whether in facts and circumstances of the case as well as in law, the Ld.CIT(A) was justified in allowing adjustments of saving in selling and marketing cost in respect of TEAL products claimed by the. assesses which is contrary to the provisions of Rule I OH 6. Whether in facts and circumstances of the case as well as in law, the Ld. CIT(A) was justified in allowing the transaction of sale of TEAL Chemical to Reliance Industries Ltd., as comparable uncontrolled transactions for benchmarking the transaction of sale of Teal chemical products by assessee to ABs ? 7. Whether in facts and circumstances of the case as well as in law, the Id. CIT(A) was justified in rejecting the TPO's approach of price comparison in foreign currency value of international transaction without appreciating the fact that the price compared in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociated 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 different chemicals were also made to the non-associated enterprises. Thus, the assessee to benchmark the transactions with the associate enterprises has adopted internal TNMM after taking the PLI as return on total cost i.e. the ratio of operating profit to the total cost. As per the working of the assessee the PLI with respect to the sales made to the associated enterprises was worked out at 12.96% whereas PLI in case of non-associated the prices was worked out at 5.07%. Accordingly, the assessee claimed to have made sales to the associated enterprises at the arm length price and therefore no adjustment is required to be made. 4.1 However, the TPO was not satisfied with the working of the assessee on the reasoning that the arm length price should be calculated with respect to sales of different chemicals made to the associated enterprises. As such, the TPO has not allowed the aggregation of the sales of different chemicals made by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. We have also perused the detailed written submissions filed by the learned DR. 9. It is by now a reasonably well-established legal proposition that as long as It is reasonably possible to apply a direct method of ascertaining the arm's length price of a transaction, such a direct method will have an edge over application of indirect method of ascertaining the arm's length price. This principle has been reiterated in a large number of decisions of the coordinate benches, such as in the case of AC1T Vs MSS India Ltd [(2009) 32 SOT 132 (Pune) and Serdia Pharmaceutical India Pvt Ltd VS ACIT 1(2011) 44 SOT 391 (Mum)]. Going by this principle, all other things being equal, a direct method like Comparable Uncontrolled Price (CUP) method will have an edge over an indirect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, 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 rule 10C(1), a method which is best suited to the facts and circumstances of each particular transaction and a method and which provides the most reliable measure of arm's length price of the international transaction . Under rule 10C(2)(c), the availability, coverage and reliability of data necessary for application of the method is- one of the crucial factors determining suitability of a method of determination of arm's length price in a particular fact situation. Similarly, it is also important to determine whether accurate adjustments can be made for the differences between the international transactions and the comparable uncontrolled transactions, and unless such adjustments can be made the related method cannot be said to be most appropriate method. We have already seen as to how, in the CIT(A)'s analysis, suitable adjustments could not be mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plying 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 at 17.08 per cent, entire sales to AEs has been taken at ALP, but, the mark up in the many cases is dearly less than benchmark. To give one example, at page 221 of the paper-book, margin of 14.15 per cent (4 invoices), 13.95 per cent. 13.81 per cent, 14 per cent (4 invoices), 14.14 per cent (2 invoices), and 14.16 per cent is given by assessee's own computation, and, on the same page, on one invoice, the assessee has shown a margin as high as 27 per cent. The cost plus method, therefore, has not been correctly applied. In any case, one of the most important input, i.e. diamond, has been imported at a price for which no ALP documentation Is available and the price of imports have been taken into account in computation of costs as well. The costs of inputs have not been verified either. No efforts are made to show that the terms of sale to the AEs and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in this respect on account of irrelevant factors such as assessee claiming only 8% adjustment in the financial year 2005-06, as against 20% adjustment sought in this year, even though the transactions were under the same agreement. That is immaterial. What is material is that there is huge difference in the payment terms. The CIT(A) has also noted the deviations in the advance payment terms of 120 days under the agreement and the actual advance payment of 17 months on average. He has also noted that in three invoices on non-AEs the credit period was 60 days but then he declines to treat these evidence as support for the claim that in all cases similar credits were given. However, what is clear that there is dearly significant variation in payment terms. As a matter of fact, at page 29, learned CIT(A) himself notes that as per the agreement, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 under CUP ceases to be relevant as these factors are clearly missing in non AE transactions. We have also noted that Rule 10 B(l)(a)(H) itself provides that such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market but then while CIT(A) uphold the application of CUP method on the ground that adjustments can indeed be made, he rejects the adjustments on merits. That is clearly incongruous. When he admits that no adjustments can be made on merits, the very foundation of his decision to uphold application of CUP method ceases to hold good. In any case, having perused the material on record, we are of the considered view that accurate adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reiterating the stand earlier taken by the Tribunal vide order dated 31st December 2018, the Tribunal has, inter alia, observed as follows: ................ the nature of trade relationship in the sense of its impact on the functions, asset and risks assumed by the AEs which will have the crucial bearing on the prices. Unless these vital factors are taken into account, and suitable adjustments are made in the available CUP inputs, the application of CUP has no usefulness. The variations in nature of relationship affecting the FAR analysis is not even disputed by the revenue and rule 10 B(l)(a)(ii) itself provides that such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pprove 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 coordinate benches, in our considered view, the application of CUP method was indeed not justified on the facts of the present case. The intra AE transactions, on the facts of this case, were so fundamentally different in character in economic circumstances and contractual terms, that these cannot be compared with the independent transactions entered into by the assessee. We, therefore, reject the stand of the authorities below on this issue. 20. We have noted that the assessee has applied TNMM by comparing the profits on transactions with AEs and the non AEs and no specific defects have been pointed out in the a/location of costs in the segmental accounts which are duly reconciled with entity level consolidated accounts. We have also noted that dealing with the Internal TNMM adopted by the assessee the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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, ground no.1 and 2 of the Revenue s appeal would be redundant. The decision being binding in nature, the same has been considered for disposing the ground raised by the appellant. Since, the facts in the present case are identical in the assessment year under consideration, hence, respectfully following the decision of the Hon ble Tribunal, the addition made on this count is deleted. The appellant succeeds on Ground no.1 five sub grounds. 9.1 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'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 services and a/so to ascertain rendering of services. His jurisdiction is confined to quantification of ALP. We find that this aspect is squarely covered by the decisions referred by the Id. counsel for the assesses, more particularly, decision of Hon 'b/e Bombay High Court in the case of Lever India Exports Ltd. (supra) as we/1 as the decision of Hon 'b/e Delhi High Court in the case of CIT Vs. Cushman and Wakefield (supra). Apart from the above, we find that the assessee has produced evidence in the shape of agreement between it and the AE showing that AE would charge commission at the rate of X%''0n non-AE export sales/for rendering these services. The assesses has not debited other-expenditure for marketing and sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier years amounting to ₹ 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 preferred an appeal to the learned CIT-A who deleted the upward disallowance made by the AO by observing that the ITAT in the own case of the assessee for the assessment years 2007-08 in ITA Nos. 915 917/AHD/2015. 19. Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us. 20. Both the learned DR and AR before us vehemently supported the order of the authorities below as favourable to them. 21. 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 disallowance made by the AO after making the reference to the order of the ITAT as discussed above in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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