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2021 (9) TMI 1467 - AT - Income TaxTP Adjustment - MAM selection - rejection of Comparable Uncontrolled Price (CUP) method adopted by the assessee Price and wrongly adopting Transaction Net Margin Method (TNMM) disregarding prices quoted by London Metal Exchange ( LME ) which is a global benchmark for commodity pricing - HELD THAT - As seen from the details of international transactions the assessee is importing raw material from its AE and also making exports of products to the customers in accordance with the Purchase Order which is carried out by Wieland group. Thus import as well as export transactions are interlinked and closely linked. The price of export is not free from the impact of the import price. Therefore the international transactions in respect of import of raw material has direct bearing on export of goods. TPO has applied TNMM by taking entire turnover of the assessee and then proposed an adjustment being the difference between the net margin of assessee as well as comparable price. Since these international transactions are closely linked and rather inter-dependent having a bearing on each other therefore for the purpose of determining the ALP it is appropriate to take composite transaction and apply TNMM as the most appropriate method. CUP is no doubt a preferable method of determining ALP as it leaves no scope of any possible variations in the process of computing ALP. When transactions are relatable and interrelated then if a particular transaction out of the composite transactions cannot be tested under CUP method then it is not proper to apply separate methods for determining the ALP for each of the transaction particularly when international transactions are closely linked and inter-depending having direct bearing on the price of each other. Therefore we are of the considered opinion that in the given facts and circumstances of the case the TNMM would be the most appropriate method for determining the ALP of international transactions entered into by the assessee with AE. We do not find any infirmity in the order of the DRP on this issue and the same is confirmed. TPO not considered the underutilization of manufacturing capacities and the resulting idle costs while computing the assessee s margins - AR submitted that assessee s request for adjustment of capacity utilization while computing operating margins under TNMM has not been considered by the revenue authorities - HELD THAT - The assessee has not furnished sufficient data pertaining to capacity utilisation of comparable companies so as to determine the material difference existing between the assessee and comparable. Hence we remit this issue to the file of TPO with a direction to the assessee to furnish necessary data pertaining to capacity utilisation of comparable companies and for fresh adjudication of the issue by the TPO. Selection of comparables by the TPO and application of filters - Manufacturing activities filter / Functional similarity filter - HELD THAT - It is not necessary for the comparable company and the taxpayer to cater to the same industries in order to be functionally comparable. TNMM does not require strict product comparability such as the difference in thickness of the copper and copper alloy products produced.The import filter objection has been dealt with in detail. Application of Foreign currency expenditure filter / Imports filter - HELD THAT - It is noted that the consumption of raw materials is there in all of the comparable companies. The TPO has narrowed down to industries engaged in copper and its alloys. If copper and alloys are available in foreign markets much cheaper than the local markets the comparables must have imported the raw materials from abroad. If the raw materials were much cheaper in India the prudent assessee must have procured them locally instead of importing them. Hence it goes to show that the cost of raw materials was not a differentiating factors whether one industry imports or not. Functional issues of each comparable are important here. The DRP compared each of the five companies with details and finally concurred with the findings of the TPO. Being so we find no infirmity in the same and accordingly uphold the order of DRP. Disallowance of IT Support and Maintenance charges as prior period expenses - AO disallowed the claim of expenditure relating to the earlier years - HELD THAT - From the details furnished by the assessee it is observed that all these expenses are from the related group concerns and assessee has not produced any evidence to show that these expenses actually crystallized during the current year except invoices from its AE. No evidence for negotiations or finalization of terms is produced. We don t find any such negotiations are required for the sharing of expenditure as much of the expenses are in the nature of Information Technology services made available to the assessee in India. Apparently no TDS was effected. There is no dispute that these expenses are related to earlier period and there is no substantiation that these are crystallised during the current AY except for the raising of invoices by the AE which is within the ambit of the assessee. Accordingly the expenditure is not relatable to this year as the same is crystallized this year. Hence we confirm the directions of the DRP.
Issues Involved:
1. Transfer Pricing Adjustment 2. Rejection of Comparable Uncontrolled Price (CUP) Method 3. Underutilization of Manufacturing Capacities 4. Selection of Comparable Companies 5. Application of Imports Filter 6. Disallowance of IT Support and Maintenance Charges as Prior Period Expenses Detailed Analysis: 1. Transfer Pricing Adjustment: The Assessing Officer (AO) and Transfer Pricing Officer (TPO) made a transfer pricing adjustment of Rs. 4,09,89,945/-. The Dispute Resolution Panel (DRP) upheld this adjustment. The assessee argued that the Comparable Uncontrolled Price (CUP) method was the most appropriate for determining the Arm's Length Price (ALP), but the TPO adopted the Transaction Net Margin Method (TNMM) instead. 2. Rejection of Comparable Uncontrolled Price (CUP) Method: The assessee contended that the CUP method was appropriate for transactions involving the transfer of goods, supported by guidelines from the OECD and the Institute of Chartered Accountants of India. The CUP method compares the price charged in a controlled transaction to that in a comparable uncontrolled transaction. The assessee used prices quoted by the London Metal Exchange (LME) as the benchmark. The TPO rejected this, arguing that the CUP method requires stringent comparability, which was not met in this case. The Tribunal upheld the TPO's adoption of TNMM, noting that the transactions were interrelated and a composite approach was necessary. 3. Underutilization of Manufacturing Capacities: The assessee argued that the TPO did not consider the underutilization of its manufacturing capacities, resulting in idle costs that should have been adjusted while computing margins. The Tribunal noted that the assessee did not furnish sufficient data on the capacity utilization of comparable companies. The issue was remitted to the TPO for fresh adjudication, with directions for the assessee to provide necessary data. 4. Selection of Comparable Companies: The assessee objected to the selection of comparable companies by the TPO, arguing that these companies were full-fledged manufacturers, unlike the assessee, which was a slitting center. The Tribunal upheld the TPO's selection, noting that TNMM does not require strict product comparability and that functional issues of each comparable were considered. 5. Application of Imports Filter: The assessee argued that none of the comparable companies selected by the TPO had significant imports, unlike the assessee, which was fully dependent on imported materials. The Tribunal upheld the TPO's selection, noting that the cost of raw materials was not a differentiating factor and that the functional issues of each comparable were important. 6. Disallowance of IT Support and Maintenance Charges as Prior Period Expenses: The assessee incurred Rs. 72,44,263/- towards IT Support and Maintenance charges, which were considered prior period expenses by the revenue authorities. The assessee argued that the liability crystallized during the year based on invoices received. The Tribunal upheld the disallowance, noting that the assessee did not provide evidence of negotiations or finalization of terms, and the expenses were related to earlier periods. Conclusion: The appeal by the assessee was partly allowed for statistical purposes, with the issue of underutilization of manufacturing capacities remitted to the TPO for fresh adjudication. The Tribunal upheld the TPO's adoption of TNMM, the selection of comparable companies, and the disallowance of IT Support and Maintenance charges as prior period expenses.
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