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TMI Blog2023 (10) TMI 697X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income-tax, 15(3)(1), Mumbai u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 Act"), pursuant to the directions dated 24 September 2018 by Dispute Resolution Panel. Mumbai ("DRP") u/s 144C(5) of the Act and read with order dated 27 October 2017 issued by Transfer Pricing Officer ("TPO") u/s 92CA(3) of the Act, is bad in law and void ab-initio 2. General Ground 2.1. That on the facts and circumstances of the case and in law, the learned AO/ DRP/ TPO have erred in making an upward adjustment of Rs. 11,29,97,681/- to the total income of the Appellant by holding that transactions of purchase of trading equipments etc. and payment for services by the Appellant to its Associated Enterprise ("AE") is not at arm's length. 2.2. The learned AO/DRP/TPO failed to appreciate that the MoD, is the Government of India with stringent controls over its procurements coupled with a rigorous system of purchasing, thus enjoys superior commercial leverage against its vendors such as the Appellant precluding any possibility of excessive profits. On the other hand the Russian Federation, being related party supplier also decides its selling price under strict Russian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marking the international transaction of the Appellant. 5.2. The learned AO/ DRP/ TPO erred in selecting comparable companies which are functionally different from the functional profile of the Appellant. Further, that the companies chosen by the learned AO/ DRP/ TPO for benchmarking differ significantly from the Appellant in terms of nature of business, scale, composition, nature of clientele and peculiar nature of the contracts rendering those companies inappropriate for benchmarking with the Appellant. 5.3. The learned AO/ DRP/ TPO also erred in selecting companies which are having incomparably high turnover, related party transactions and different financial year ending etc. during the year under consideration. 5.4. The learned AO/ DRP/ TPO erred in rejecting the Transfer Pricing Documentation without stating reason as required under Section 93(C)(3), merely on premise that financials of AE were not provided. 5.5. The learned AO DRP/ TPO erred in not considering detailed rebuttals filed against the comparable companies selected by the learned AO/ TPO. 6. Principle of Res-judicata 6.1. The learned AO/DRP/TPO failed to appreciate that the modus operandi of the Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was stated between tow government entities where prices are negotiated between them, it states that International Transaction of Purchases of equipments spares and service fees is at Arm's Length. 05. The Ld. Transfer Pricing Officer held that the assessee is mere distributor of product, he adopted the transactions net margin method [TNMM] as the most appropriate method and determined the arm's length price of import of stores considering the gross profit as the PLI. The PLI was determined after considering liquidated damages expenses and forex loss as operating expenses at -4.06%. As assessee has disclosed the grass margin of 7.60%, the learned TPO substantially computed it at a lower figure for the reason that foreign currency fluctuation loss of Rs. 11.84 crore suffered by the assessee during the year was considered to be an operating item. The assessee considered it to be non-operating expenditure. The TPO selected 26 comparables whose PLI was 21.12% and assessee was asked to show cause why the adjustments should not be proposed. The assessee submitted that a. As the rate of supply of equipment is decided by The Ministry of Defense and therefore it does not have any control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned transfer pricing officer were considered, TPO was directed to exclude 11 comparable companies which were found to be engaged in service segment, but accepted the filters adopted by the TPO. c. The learned DRP deleted the adjustment proposed by the TPO on account of international transaction towards import of service. 09. on the basis of directions, the ALP adjustment of Rs. 13,81,82,259/- was scaled down to Rs. 11,29,97,681/-. With respect to the disallowance of ARI mismatch was confirmed to Rs. 7,51,252/-. 010. Accordingly, final assessment order was passed on 20.12.2017 determining income at Rs. 5,55,84,393/- .Assessee aggrieved with the same is an appeal before us. 011. Ground no. 1 general and nature and ground no. 7 initiating penalty proceedings is premature. Therefore, those are dismissed. Ground no. 4 challenging the violation of the principle of natural justice was not pressed, hence, dismissed. 012. Adverting to ground number [2] to [6] except [4] on transfer pricing adjustment, The Ld. Authorized Representative has referred to the paper book containing 282 pages and further written note containing 24 pages. The Ld. Authorized Representative submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by the learned TPO are dealing in different set of machineries and none of them is engaged in trading of defense equipments. Further assessee is only dealing in spare parts and not even the machineries, even if, the defense equipments are also considered to be the broader part of machinery segment. He referred to the OECD guideline at paragraph number 2.29 and 2.34 for principles of identification of comparables. h. He further submitted that the learned transfer-pricing officer himself has considered some of the companies to be incompatible with the appellant while completing assessment of immediately preceding year. He made a reference to page number 125 of the paper book where different set of companies were selected which if those are selected for the current year results into the average margin of 2.04% which was less than the gross margin earned by the appellant. i. He further stated that the foreign currency fluctuation loss of Rs. 11.84 crores suffered by the assessee is on account of abnormal fluctuations/depreciation in the value of Indian currency which resulted in loss on account of outstanding payables in foreign currency to associated enterprises. He referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for benchmarking the international transaction of the assessee, the 'other method' should be adopted as the most appropriate method. m. He referred to 15 comparables selected by the learned TPO and submitted a chart stating that all these 15 comparables cannot be used for comparability of this international transaction as none of the company is engaged in the business of supply of equipments to the Ministry of Defence and also spare parts and services. He submitted that as assessee is supplying the goods to the Ministry of Defence the cost structure, the functions, the risk are different than all these 15 entities. n. In the result is submitted that the transfer pricing adjustment measures to be deleted. 013. The learned CIT DR vehemently supported the order of the learned AO and transfer pricing officer and direction of the learned dispute resolution panel. He submitted that admittedly the learned dispute resolution panel has upheld the most appropriate method as the resale price method. However with respect to the computation of the margin of the assessee, though the issue is covered in favour of the assessee however the revenue had the time to file the appeal before the ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipments are supplied with a predetermined condition that the end-user for all those equipment shall always be Ministry of defence. Each independent transaction entered into between assessee and the associated enterprise is governed by supplement contracts which are concluded on the basis of the contract/purchase order with the Ministry of defence signed after due negotiation based on the last purchase price or the estimated price on record is with the Ministry of Defence. The assessee imports spares for military equipments from assessee only if the same is ordered by the Indian Navy as per the approval from the Ministry of Defence Enterprises approved by the Ministry of defence which forms the basis of the pricing. In this circumstances the functions of the assessee are very limited except to the extent of training and personnel management where it trains its employees and may also send them to a joint location along with the specialist of associated enterprise for joint training if necessary. Assessee also does not undertake any research and development activities and does not own any intangible assets. It does not have any market risk also. The foreign exchange risk lies on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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