TMI Blog2021 (8) TMI 1361X X X X Extracts X X X X X X X X Extracts X X X X ..... ining 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. Determination of ALP on the basis of facts and circumstances and as per the requirements of the relevant statutory provision is mandatory and cannot be accepted owing to default. We therefore set aside the order of the AO/TPO on the issue and the directions of the DRP on the issue and remand the issue to the DRP for passing a speaking order after meeting the specific objections raised by the Assessee. The relevant grounds of appeal being Gr.No.1 to 12 are accordingly treated as allowed for statistical purpose. Disallowance of reimbursement of expenses by invoking the provisions of Sec.40(a)(ia) - submission of the Assessee on the aforesaid disallowance was that the reimbursements were purely on a cost to cost basis and there was no margin whatsoever and therefore there was no quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014-15. 2. The first issue that arises for consideration in this appeal is with regard to the addition made to the total income of the assessee of a sum of Rs.21,61,37,271 being an addition made consequent to determination of Arm s Length Price (ALP) u/s.92 of the Act, in respect of an international transaction entered into by the assessee with its Associated Enterprise (AE). The assessee is a wholly owned subsidiary of Shindengen Electric Mfg Co., Ltd, Japan. It was incorporated in India on August 21, 2012 under the Indian Companies Act, 1956 to carry on the business of manufacturing of electrical components for two wheelers and trading of power system products. During the year under consideration, the assessee was engaged in the trading of power system products electrical components for two wheelers. The assessee was in the process of setting up a manufacturing facility at Bangalore for manufacture of electrical components like Capacitor Discharge Ignitor (CDI) along with Regulator Rectifiers for two wheelers. A Return of Income in respect of AY 2014-15 was filed by the assessee on November 26, 2014 declaring a total loss of Rs.3,58,98,221/-. During the relevant year, the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. Subsequently, the TPO initiated verification proceedings to determine whether the transactions undertaken by the Assessee Company adhere to the arm's length standard prescribed in the Indian Transfer Pricing Regulations. Information/explanations were sought at various instances, including but not limited to show-cause proceedings, and an order dated October 31, 2017 was passed (hereinafter referred to as `TP Order'). 5. Through the said TP Order, TPO has conducted a fresh benchmarking analysis in respect of the international transaction of purchase of stock-intrade (INR 86,01,64,421) using Comparable Uncontrolled Price Method ( CUPM ) disregarding the benchmarking analysis carried out by the assessee in respect of purchase of consumables, raw materials, stock-in-trade and capital assets by selecting Cost Plus Method (CPM') as Most Appropriate Method (MAM') and the overseas AE as tested party. In this process, the TPO compared the prices at which stock-in-trade were purchased by SIPL with the prices at which they were sold to third parties and considered the differential gross margins for application of CUPM. Those gross margins were applied on the sale pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged for property transferred in a controlled transaction to the price charged for property transferred in a comparable uncontrolled transaction in comparable circumstances. CUPM is a more direct measure of the ALP than the other methods, all of which indirectly determine ALP through evaluation of the arm's length profits. It compares the consideration for a comparable product in comparable circumstances instead of seeking to compute the margin the enterprise might be expected to achieve for functions undertaken, assets utilized and risks assumed. The Assessee pointed out that contrary to be above process adopted in CUPM, the adoption of profit margin percentage to benchmark the purchase transaction price is in violation of the CUPM, though, CUPM only considers the price charged for property transferred in a comparable uncontrolled transaction which can be compared to the price charged for the property in the controlled transaction. 9. The TPO accepted in paragraph 9.2.1 of her order that in CUP method margin at 10% on sales to third parties cannot be assumed. The TPO however got the details of purchase price of each item of the international transaction of purchase of st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (%) (C) Margin price per product (1))=(B)*(C) ALP price for purchase (E) = (B)- (D) Difference of Purchase price ALP (F) Quantity purchased (G) Adjustment (H)=(F)*(G) 1 Filter Sub Noise (AC) 87 90 5.15 4.64 85.37 1.64 25123 41076 2 Reg rect corn 317 285 13.1 37.34 247.67 69.34 948068 65734295 3 Unit Assy Spark 491 453 15.56 70.49 382.51 108.49 874949 94920417 4 Unit Assy Generator Control 6569 6241 7.33 457.47 5783.53 785.47 13008 10217333 5 Unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transaction is determined by applying CUP method a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) 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; (iii)the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; The Assessee summarized the steps involved in applying CUPM as given below: 1. Identification of comparable uncontrolled transaction 2. Identification of price charged in such comparable uncontrolled transaction 3. Identification of differences between controlled and uncontrolled transaction 4. Adjustment of price to account for the differences It was pointed out that the CUP method evaluates the arm's-leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Rule 10B(1)(a),in arriving at ALP without identification of any uncontrolled transactions against the comparability analysis embodied in the Indian TP Regulations. In the absence of any comparable, there is no benchmark against which the transaction can be examined. 11. The DRP in its directions dated 28.9.2018 has reproduced the grounds of objection 1 to 6 and has extracted the relevant observations of the TPO and concluded as follows in para 3.3: 3.3 Having considered the submissions of the assessee made before the DRP and also the TPO, we are of the view that in the peculiar facts and circumstances of the case as extracted above, the TPO has correctly made computation of arm's length price (ALP). Accordingly, we find no reason to interfere with the approach and method adopted by the TPO. Grounds of objection 2 to 6 are rejected accordingly. 12. It is clear from a perusal of the order of the DRP that the DRP has not dealt with the objections of the Assessee as to why its TP study choosing the foreign AE as tested party was not accepted by the AO and as to how the choice of foreign AE as a tested party was not correct because it was not the least complex (amon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bed in Rule 10(1)(a). The TPO has not followed any method prescribed by Rule 10B of the Rules. The learned counsel for the Assessee relied on decision of ITAT Hyderabad Bench in the case of Trinity Advanced Software Labs (P) Ltd. [2015] 55 Taxmann.com 210 (Hyd.) explaining CUPM, as follows: Rule 10B(1)(a) of IT Rules prescribes the method for determination of ALP under CUP. As per the said provision, TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction or a number of such transactions and thereafter making necessary adjustments of such price on account of differences between the international transactions and comparable uncontrolled transactions or between the enterprises entering into such transactions which could materially affect the price in the open market, TPO will have to determine ALP. Therefore, unless, comparables are brought on to benchmark the price charged by a particular assessee, it cannot be said that the price charged by assessee is not within the arm's length. However, on a perusal of the order dated 23/05/2013 of the TPO passed in pursuance to the direction of the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod. The word any used under section 92C(1) would ordinarily imply that any specific or non-specific method or even a combination of one or more prescribed methods is sufficient. However, the ambit of the word any in sub-section (1) has been restricted by the `following five specific methods given in the later part of the provision. There cannot be a combination of one or more of the five methods for determining the arm's length price. The Transfer Pricing Officer or for that matter any other authority cannot apply or direct to apply any other method. It is equally not permissible to invent a new procedure and try to fit such procedure within any of the existing procedures prescribed under these methods. However, although there is no express reference to any method employed for determining the arm's length price of the international transaction this factor in itself would not be detrimental to the computation of the arm's length price, if in substance it has actually been computed by any of the prescribed methods. (xxx) A comparable uncontrolled transaction to be considered for benchmarking the normal gross profit mark-up has to be similar to the internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... methods prescribed, which is found to be the most appropriate method having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as may be prescribed. The manner in which such most appropriate method is to be applied for determination of arm s length price is prescribed in Rule 10B of Income-tax Rules, 1962. 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 tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of Sec.40(a)(ia) of the Act. The submission of the Assessee on the aforesaid disallowance was that the reimbursements were purely on a cost to cost basis and there was no margin whatsoever and therefore there was no question of deduction of tax at source on such reimbursements. It was the plea of the Assessee that the reimbursements were wrongly treated as fees for services rendered. It was submitted that the supporting documents to prove that the payments were purely reimbursements were given before the AO and in this regard our attention was drawn to pages 545 to 616 of the paper book. The DRP on this issue did not allow any relief to the assessee by following the decision of the Hon ble Supreme Court in the case of Transmission corporation of AP Ltd. 239 ITR 589 (SC) wherein it was held that the payee cannot decide taxability or otherwise of a payment in the hands of the recipient and choose not to deduct tax at source. It was submitted by the learned counsel for the assessee that the decision in the case of Transmission Corporation (supra) has been explained by the Supreme Court in G E Technologies (327 ITR 456), wherein it is held that in a case where the amount remit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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