9911796707
TMI Blog2021 (8) TMI 1361X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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 Assessee had entered into the following international transactions with its AEs; Table 1- List of International Transactions Sl.No Nature of International Transaction Amount in (INR) MAM Used 1 Purchase of Consumables 77,189 Cost Plus Method 2 Purchase of Raw Materials 1,69,25,073 Cost Plus Method 3 Purchase of Stock-intrade 86,01,64,421 Cost Plus Method 4 Purchase of Capital assets 10,79,29,930 Cost Plus Method 5 Issue of Share Capital 87,00,00,000 Any Ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered the differential gross margins for application of CUPM. Those gross margins were applied on the sale prices of SIPL to arrive at the Arm's Length Price (ALP') of purchase of stock- in-trade effectively using Resale Price Method (RPM) while claiming to have applied the CUPM. Upon comparison of such ALP determined by the Ld TPO with the purchase price of SIPL, the TPO computed an adjustment of INR 21,61,37,271/- to the value of international transaction of purchase of stock-in-trade. 6. The Assessee in a letter dated 3.6.2017 submitted before the TPO that it had chosen the foreign AE as a tested party because it was least complex (amongst the parties to the transaction), reliable and accurate date was available for comparison and available data can be used with minimal adjustments. 7. The Transfer Pricing Officer to whom a reference was made by the Assessing Officer (AO) u/s.92CA of the Act, rejected the Transfer Pricing analysis of the Assessee for the following reasons: "Based on the functional analysis mentioned above, it is noted that Shindengen, Japan is engaged in the business of manufacturing and sale of semiconductors, electric equipments and power suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... got the details of purchase price of each item of the international transaction of purchase of stock in trade from AE and the price at which the Assessee sold each of the items to third parties. Thereafter the TPO computed ALP of the international transaction of purchase of stock in trade as follows: "9.2.3 Determination of ALP: 9.2.3.1 Method :CUP as MAM 9.2.3.2 Data: Current year data F.Y 2013-14. 9.2.3.3 The average price of the purchase and sale were taken to benchmark the transaction. Few products were purchased at lower than sales made to the third parties. Taxpayer has submitted comparison chart for 3 products i.e. Filter Sub Noice, Unit Assy Generator Control, Unit Comp Inverter. The average gross margin on these products is considered same as taxpayer calculated, where as in other 2 products i.e Reg rect com & Unit Assy Spark-3 lowest purchase price is considered to arrive the average margin. 9.2.3.4 Average margin is calculation as follows: S.No. Product Description Purchase price (INR) Sale Price (INR) Gross Margin Gross Margin % 1 Filter Sub Noise (AC) 88.82 93.39 4.57 5.15 2 Reg rect com 252 285 33 13.10 3 Unit Assy S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e argument of the assessee on application of CUP method by the TPO was that CUPM compares the price charged' property transferred in a controlled transaction to the price charged for property transferred in a comparable uncontrolled transaction in comparable circumstances. But, the TPO has selected various margins as stated in para 9.2.3.4 of the TP Order to benchmark the sales of the Assessee, based on which, the TPO is expecting the purchases of the Assessee to be at such prices which would fetch upon sale the .margins sated in the said paragraph. Thus the TPO erred in adopting the margins under CUPM fundamentally in violation of the CUPM as there were neither internal comparable nor external comparable in case of SIPL. The Assessee drew attention of the DRP to Rule 10B(1)(a) of the Income Tax Rules, 1962 which explains how ALP in relation to an international 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 diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erated submission that , a) Internal CUP is not Available: The Assessee has not purchased similar goods from an independent party. Furthermore, Shindengen Japan has not sold similar goods to an independent party. Since, these goods have specifically been manufactured by the Shindengen Japan for Assessee. Accordingly, there was no such internal comparable was available to invoke the CUP. b) External CUP is not Available: The products identical to those supplied by Shindengen Japan do not exist, as they are manufactured based on the specific requirements of only one customer of the assessee. Hence, there is no uncontrolled external comparable with which the prices charged in the international transaction can be compared. It was thus submitted that the TPO has failed to apply the CUPM as contemplated in 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage price for purchase and sale were taken to benchmark the same. The gross margin arrived with these respective products was considered to calculate the arm's length price in this purchase transaction. In other words, the TPO has compared the assessee's own purchases with its sales. The TPO calculates percentage of gross margin for each component and after reducing the Purchase price by the gross profit margin so calculated, to arrive at the so-called arm's length price of the purchases from the AE. 15. It was submitted that the methodology adopted by the TPO is a distorted version of RPM, though without bringing any comparable on record. A comparison of purchase price paid by the tested party with the sale price charged by it from its customers is unknown to any method prescribed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Sony Ericsson Mobile Communications India (2015) 374 ITR 118 (Del.) the Delhi High Court observed: "(vii) When the Assessing Officer/Transfer Pricing Officer rejects the method adopted by the assessee, he is entitled to select the most appropriate method, and undertake a comparability analysis. Selection of the method and comparables should be as per the command and directive of the Act and Rules and justified by giving reasons." Reference was also made to decision in the case of L. G. Electronics India (2013) 22 1TR (Trib) (Del. SB) wherein it was held: "(xxix) Sub-section (1) of section 92C provides that the arm's length price of an international transaction shall be determined by "any" of the five prescribed methods, being the most appropriate method. 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 determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a breach of natural justice. Reasons if given would substitute objectivity for subjectivity. (Maruti Udyog Ltd. Vs. ITAT (2000) 244 ITR 303 Delhi.) 18. The learned DR relied on the order of the DRP. We have carefully considered the rival submissions and are of the view that the issue needs to be remanded to the DRP for consideration afresh as the DRP as a first appellate authority has not given any findings on the factual and legal submissions made by the assessee before it. Since the order of the DRP is completely non-speaking order, we cannot on that basis uphold the claim of the assessee that the price paid in the international transaction is at Arm's length. As provided in section 92C of the Act, such arms's length price is to be determined by one of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 20. In ground No.13, the Assessee has raised ground with regard to disallowance of reimbursement of expenses amounting to Rs.20,81,884/- by invoking the provisions 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,19,160/- without adjusting the declared loss of Rs.3,59,98,221/-." 23. The reasons for raising the additional ground of appeal are that vide order dt. 16.10.2018 the AO while giving effect to the Directions u/s 144C of the DRP dt. 28.9.2018 determined the total income of Rs. 21,82,19,160/- and raised tax demand 11,46,26,360/-. The assessee had filed return on 26.11.2014 declaring loss of Rs. 3,58,98,221/-. This factual position is admitted by the AO in the very first paragraph of the Impugned Assessment Order. However, the declared loss has not been adjusted while computing total income. Hence the Assessee has raised the aforesaid additional ground. 24. The aforesaid additional grounds of appeal raise questions of law, which can be decided on the basis of material available on record. The omission to raise the aforesaid grounds of appeal is bonafide. In view of the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co Ltd vs CIT (229 ITR 383) and Jute Corporation of India vs CIT (187 ITR 688) and the discretion vested in your Honours under Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, the additional grounds of appeal is admitted for a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
