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2019 (4) TMI 1380 - AT - Income TaxTP adjustment - comparable selection - correctness of excluding DCW Ltd from the final list of comparables - losses are continuously incurred for three or more years that a comparable can be excluded, but the question really is as to which three years are to be taken into account - whether the period to be taken into account is any three years in the past, or the current year and two immediately preceding years ? - arm's length price for purchase of raw material pertaining to manufacturing activity - HELD THAT - We find guidance from Rule 10B(4) which provides that the data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year (hereafter in this rule and in rule 10CA referred to as the 'current year') in which the international transaction has been entered into and proviso to this rule further provides that data relating to a period not being more than two years prior to the current year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared . The fact about profit in the financial year 2010-11, as also in the financial year 2015-16 onwards, is not even disputed by the revenue authorities below. In view of these discussions, the exclusion of DCW Ltd from the list of final comparables is not justified on the ground that it is a persistent loss making company. In the event of DCW Ltd being accepted as a valid comparable, there will be no need to deal with other issues raised with respect to this arm s length price determination, as, in that event, the profitability of the tested party will be well within acceptable range. TP Adjustment relating to availing of management services - ALP determination of payments tp AEs - as per TPO assessee has clubbed the payment of management service charges with manufacturing/ trading and benchmarked such aggregated transactions together using Transactional Net Margin Method as the Most Appropriate Method, using the assessee as the tested party - HELD THAT - relied on decision in own case 2017 (3) TMI 1727 - ITAT AHMEDABAD The only justification for taking ALP of services at NIL is under CUP but then there has to be something on record to show that in an arm's length situation these services are rendered without consideration. The worth of services cannot be decided by the TPO, nor is it open to him to question, as such an approach implicitly does, the commercial expediency of these services. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for them to decide what is necessary for an assessee and what is not. It is not for the TPO to question assessee's wisdom in making payment for the services, which, in the opinion of the TPO, are not of much use. The TPO has travelled much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of its AEs. As perused the evidence of services rendered and the nature of services in question, on random sample basis. In our considered view, there is reasonable evidence of the rendition of service and it cannot be open to TPO to proceed on the basis that the services were not rendered. The method of ascertaining the arm's length price, on the basis of TPO's subjective perception about worth of services, is not sustainable in law either. In view of these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to delete the impugned ALP adjustments. - Decided in favour of assessee.
Issues Involved:
1. Adjustment relating to international transaction pertaining to manufacturing operation. 2. Adjustment relating to international transactions pertaining to availing of management services. Issue-wise Detailed Analysis: 1. Adjustment relating to international transaction pertaining to manufacturing operation: The assessee challenged the upward adjustment of INR 207,021,190 made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) under the directions of the Dispute Resolution Panel (DRP) for the purchase of raw material. The TPO applied a 75% import content filter, narrowing down the comparable cases to DCW Ltd, Finolex Ltd, Kemrock Industries Ltd, and Supreme Petrochem Ltd. However, DCW Ltd and Kemrock Industries Ltd were excluded due to different accounting years and product profiles. The final comparables were Finolex Ltd and Supreme Petrochem Ltd, resulting in an arm's length price adjustment of INR 20,70,21,190. The Tribunal noted that the exclusion of DCW Ltd was not justified as it did not consistently incur losses for three consecutive years, as required by Rule 10B(4). The Tribunal directed the AO to recompute the arm's length margin after including DCW Ltd as a valid comparable. Consequently, other grievances related to this adjustment were deemed academic and not addressed further. The Tribunal allowed ground nos. 1 to 7 for statistical purposes. 2. Adjustment relating to international transactions pertaining to availing of management services: The assessee contested the adjustment of INR 31,458,460 made for management services fees paid to associated enterprises. The TPO rejected the Transactional Net Margin Method (TNMM) used by the assessee and applied the Comparable Uncontrolled Price (CUP) method, determining the arm's length price at "NIL" without identifying comparable uncontrolled transactions. The Tribunal observed that the issue was covered in favor of the assessee by decisions in its own cases for preceding assessment years. It emphasized that the benefit test and actual receipt of services are irrelevant for determining the arm's length price. The Tribunal noted that the TPO's approach of questioning the commercial expediency of the services and determining their worth was not sustainable in law. It held that the CUP method requires comparable uncontrolled transactions, which were not identified by the TPO. The Tribunal found reasonable evidence of the rendition of services and concluded that the TPO's subjective perception about the worth of services was not a valid basis for adjustment. It deleted the ALP adjustment of INR 31,458,460 and allowed ground nos. 8 to 12 in favor of the assessee. Other Grounds: The other grounds of appeal were not pressed before the Tribunal. Conclusion: The appeal was allowed in the terms indicated above and pronounced in the open court on March 8, 2019.
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