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2015 (11) TMI 1790 - AT - Income TaxTP Adjustment - international transactions entered into by the assessee with its associated enterprises in respect of export of finished goods and import of goods - MAM selection - TNMM method or CUP method - HELD THAT - As relying on assessee's own case 2015 (7) TMI 1 - ITAT PUNE we find no merit in the orders of authorities below in determining the arm's length price in respect of international transactions undertaken by the assessee for the year under consideration. Transactions of exports, imports and payment of commission to agents are closely inter related and are part of single business activity of the assessee and the profit earned by the assessee is collective result of all these transactions and hence, it is impractical to analyse the profits of each individual transactions. Accordingly, the assessee has rightly aggregated the above transactions for the purposes of determining the ALP under TNMM. Even if the various transactions are evaluated independently, the net final result remains the same. The assessee has adopted TNMM for determining the ALP for the various transactions and the assessee had contended that its net operating margin is much higher than the comparable companies. This fact has not been disputed by the learned TPO since he himself has accepted that more than 95% of the exports and imports are at ALP as per the TNMM method. Accordingly, even if the various international transactions are evaluated separately, the final result remains the same. The assessee has adopted TNMM wherein the net operating margin of the assessee is compared with the net operating margin of the comparables. Once the net margin of the assessee is higher, it means that all the international transactions entered into by the assessee with its AEs are at ALP. CUP method is not the most appropriate method in the case of the assessee since suitable adjustments are not possible to be made in respect of the above differences. So, the addition on this account is not justified. No adjustment is to be made for determining the arm's length price in respect of international transactions undertaken by the assessee for the year under consideration. We direct the Assessing Officer to delete the said adjustment made in the hands of assessee on account of arm's length price of international transactions entered into by the assessee with its associate enterprises. Accordingly, we allow the ground of appeal Nos.4, 5, 6 and 7 raised by the assessee. The alternate plea raised vide ground of appeal Nos.8 and 9 are dismissed. In view of no addition being made in the hands of assessee, there is no merit in the ground of appeal No.10 raised by the assessee for granting the benefit of 5% as per proviso to section 92C(2) of the Act.
Issues Involved:
1. Limitation of the assessment order. 2. Re-computation of transfer price for international transactions. 3. Ad-hoc addition based on Supreme Court's decision. 4. Adjustment of Rs. 90,04,462/- beyond the scope of total income. 5. Adoption of Comparable Uncontrolled Price (CUP) Method for export transactions. 6. Adoption of CUP Method for import transactions. 7. Rejection of Transactional Net Margin Method (TNMM) for benchmarking. 8. Adjustment for higher prices charged to associated enterprises (AEs) for exports. 9. Adjustment for lower prices paid to AEs for imports. 10. Benefit of 5% as per proviso to section 92C(2). Detailed Analysis: Issue 1: Limitation of the Assessment Order The assessee contended that the assessment order passed under section 143(3) r.w.s. 144C(13) was barred by limitation and should be declared null and void. However, this ground was not pressed during the appeal. Issue 2: Re-computation of Transfer Price for International Transactions The assessee argued that the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) erred in recomputing the transfer price of international transactions relating to exports and imports of goods and payment of commission. The appellant claimed that none of the conditions prescribed in Section 92C(3) of the Income Tax Act, 1961, had been violated. Issue 3: Ad-hoc Addition Based on Supreme Court's Decision The assessee contended that the addition of Rs. 90,04,462/- was not permissible under law in view of the Supreme Court's decision in the case of K.P. Verghese [131 ITR 597]. This ground was also not pressed during the appeal. Issue 4: Adjustment of Rs. 90,04,462/- Beyond the Scope of Total Income The assessee argued that the adjustment made by the TPO/DRP was beyond the scope of total income as defined in section 5 of the Act and did not partake the character of income as defined in section 2 of the Act. Therefore, the adjustment should be deleted. Issue 5: Adoption of CUP Method for Export Transactions The TPO adopted the CUP Method for determining the Arm's Length Price (ALP) in respect of some international transactions pertaining to export of finished goods. The assessee argued that the CUP method was not appropriate due to various differences such as functional, transactional, geographical, volume, timing, and business risks. The assessee preferred the TNMM, which it demonstrated to be the most appropriate method. Issue 6: Adoption of CUP Method for Import Transactions Similar to the export transactions, the TPO adopted the CUP Method for determining the ALP for certain import transactions. The assessee argued against this, citing differences in transactional, functional, geographical, volume, timing, and business risks, and advocated for the TNMM. Issue 7: Rejection of TNMM for Benchmarking The assessee contended that the TPO/DRP erred in rejecting the TNMM as the most appropriate method for benchmarking certain international transactions. The assessee's transfer pricing study demonstrated that the TNMM was the most appropriate method for determining the ALP of export and import transactions pertaining to the manufacturing segment. Issue 8: Adjustment for Higher Prices Charged to AEs for Exports The assessee argued that for certain products exported, it had charged higher prices to its AEs compared to non-AEs, and this amount should have been adjusted, with only the net amount being added. Issue 9: Adjustment for Lower Prices Paid to AEs for Imports Similarly, the assessee contended that for certain products imported, it had paid lesser prices to its AEs compared to non-AEs, and this amount should have been adjusted, with only the net amount being added. Issue 10: Benefit of 5% as per Proviso to Section 92C(2) The assessee argued that if the addition made under section 92C was warranted, the TPO/DRP ought to have granted the benefit of 5% to the assessee company as per the proviso to section 92C(2). Tribunal's Findings: 1. On CUP vs. TNMM: The Tribunal found that the CUP method was not suitable due to various differences such as timing of the transaction, volume of order, and geographical locations. It was held that the TNMM was more appropriate for determining the ALP. 2. On Aggregation of Transactions: The Tribunal agreed with the assessee's approach of aggregating the transactions under the manufacturing segment and found that the TPO's application of the CUP method for certain transactions was not justified. 3. On Similar Issues in Previous Years: The Tribunal noted that similar issues had been raised in the assessee's own case for previous assessment years (2005-06 to 2008-09) and had been decided in favor of the assessee. The Tribunal followed the same reasoning for the current assessment year. 4. On Adjustments for Higher/Lower Prices: The Tribunal dismissed the alternate pleas raised by the assessee regarding adjustments for higher prices charged to AEs for exports and lower prices paid to AEs for imports, as the main issue was decided in favor of the assessee. 5. On Benefit of 5%: Since no addition was made in the hands of the assessee, the ground for granting the benefit of 5% as per proviso to section 92C(2) was dismissed. Conclusion: The Tribunal directed the Assessing Officer to delete the adjustment made in the hands of the assessee on account of the ALP of international transactions. The appeal of the assessee was partly allowed.
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