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2019 (11) TMI 1190 - AT - Income TaxTP Adjustment - Validity of order passed in the case of the assessee by the Additional CIT - HELD THAT - On harmoniously reading Explanation below 92CA(7) along with sections 116 on one hand and section 2(28C) on the other, the sequitur is that both the authorities, namely, JCIT and Addtl. CIT can act as TPO and there is no statutory proscription in the Addtl. CIT acting as TPO in the facts and circumstances of the case. As the impugned order has been passed by the Addtl. CIT on 28-01-2014, which obviously is after the insertion of the definition of Joint Commissioner given in section 2(28C), we hold that no infirmity can be found in his passing the order u/s.92CA(3). Ergo, the additional ground raised on behalf of the assessee is jettisoned. Whether the foreign/Associated Enterprise(s) can be considered as tested party or only the Indian entity, which has recorded the transaction in its books of account, can be so considered? - international transaction - HELD THAT - It is axiomatic and again accentuated that the requirement under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to in the manner as prescribed. Obligation under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly determined as stipulated. The contention, that the foreign/AEs be considered as a tested parties for determining the ALP of the international transaction, having no statutory sanction, is sans merit and hence jettisoned. Similar view of not accepting foreign/AE as a tested party has recently been taken in Bekaert Industries Private Limited Vs DCIT 2019 (4) TMI 1786 - ITAT PUNE . Thus, we are of the considered opinion that no infirmity can be found in the view canvassed by the authorities below in rejecting foreign/Associated Enterprises as tested parties. Once we come to the conclusion that the international transaction of import raw material was not correctly benchmarked by the assessee and the TPO was justified in rejecting such ALP determination, we hold that the view adopted by the TPO in clubbing the international transactions of Import of raw material and Export of finished goods, in the absence of the assessee putting up any alternate way of computation of the ALP of the international transactions separately, is unassailable. Since the sales made to non-AEs in India are at an altogether different geographical location vis- -vis the exports made to AEs in the USA and Brazil, the internal comparable, being, sales made in India cannot be considered as a comparable transaction unless the effect of difference in the geographical locations on the profitability is ironed out. The assessee has not put forth any data eliminating the effect of difference due to varied geographical locations in sales made in India vis- -vis Brazil and the USA. The Hon ble Bombay High Court in the case of Pr. CIT Vs. Amphenol Interconnect India (P) Ltd. 2018 (3) TMI 536 - BOMBAY HIGH COURT has upheld the exclusion of certain comparables by the Tribunal, inter alia, on the basis of geographical differences and timing differences etc. In the hue of the foregoing discussion, it is held that the argument of the assessee for adopting profit on sales made in India to non-AEs as a comparable instance for determining the ALP of international transactions including exports made to the AEs in Brazil and the USA, cannot be countenanced for lack of the provision by the assessee of any data offloading the effect of such geographical differences in the profit margins. TPO accepted the contention of the assessee for granting capacity utilization adjustment - TPO ought to have considered the gross margins of the assessee as well as the three comparables chosen by him because of under-utilization of the installed capacity by the assessee as well as the comparables - HELD THAT - Adjustment on account of differences, if any, between the assessee and comparables, is to be carried out only in the computation of the margin of comparables and not that of the assessee. It is ergo held that the ld. AR was correct in not pressing the first limb of his argument, when the legal position in this regard was put across to him. The second fold of the argument in this regard was that the TPO should have taken gross margin of the assessee and comparables, that is, before the effect of depreciation etc. We do not find any force in the contention of the ld. AR urging the adoption of gross margins for determining the ALP under the TNMM as numerator as against the operating profit margin taken by the TPO. We have set out Rule 10B(1)(e) supra . It can be seen that sub-clause (i) provides for the computation of net operating profit margin realized by the assessee from an international transaction. D etermining the operating profit under the TNMM - Depreciation has to be necessarily considered as part of operating costs in the process of determining the operating profit under the TNMM. As such, there can be no question of excluding depreciation from the ambit of operating costs for the purposes of determining operating profit. At this stage, it is pertinent to note that as against Rule 10B(1)(e) specifically providing for adoption of operating margin under the TNMM, rule 10B(1)(b) and 10B(1)(c) containing mechanism for determining the ALP under the Resale Price method and Cost Plus method specifically provide for adopting the gross margin. The contention, therefore, raised by the assessee that the numerator in the formula as per rule 10B(1)(e) should have been Gross margin rather than the operating margin as applied by the TPO, is bereft of any force and hence repelled. Computing the transfer pricing adjustment with reference to transactions with AEs as well as non-AEs - Transfer pricing adjustment cannot be made with reference to the non-AE transactions, but, the same has to be confined only to the international transactions. Since the TPO/AO has proposed/made the addition on the basis of transactions even with non-AEs, we set aside the impugned order and send the matter back to the file of the AO/TPO for deciding the issue afresh as per law after allowing a reasonable opportunity of hearing to the assessee. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. Transfer pricing addition with respect to the international transaction of Import of fixed assets - Assessee has placed on record certain documents evidencing the purchase of fixed assets, which is albeit not complete, we consider it expedient to set-aside the impugned order on this count and remit the matter to the file of AO/TPO for examining such evidence and ascertaining if such evidence really documents the purchase of fixed assets. To the extent, the evidence, namely, invoices etc. for the purchase of the fixed assets are available, there will not be any question of making transfer pricing addition. However, to the extent of non-availability of invoices and other accompanying documents supporting the purchase of fixed assets, the transfer pricing addition would be called for, but not to the value of purchase of such fixed assets but only to the extent of depreciation on such fixed assets claimed in the computation of total income. At the same time, no further claim of depreciation on such assets will be entertained in next years as well. With the above remarks, we direct the AO/TPO to decide this issue afresh after allowing reasonable opportunity of hearing to the assessee. Disallowance u/s.37(1) - Current liabilities were reported in the Balance sheet - AR contended that some of the provisions were voluntarily written back by the assessee in the computation of income - HELD THAT - The claim of the assessee which now stands is about the deductibility or otherwise of the provisions amounting to ₹ 1.13 crore. The ld. AR contended that some of the provisions were voluntarily written back by the assessee in the computation of income. The AO is directed to verify the correctness of this contention. In case the same is found to be correct, then no addition should be made to that extent. With reference to certain other provisions, the ld. AR submitted that it represented certain purchase of goods made during the year for which bills were actually received in the subsequent year. It was stated on receipt of such bills, the amount of provision was reversed. AO is directed to verify this contention as well. In case, the same is found to be correct to the effect that the purchases were made during the year and debited to the provision, then of course no addition should be made provided such provision has been reversed in the subsequent year on the receipt of bills. Qua the remaining provision for which there is no evidence, the same is liable to be disallowed in the absence of the assessee furnishing any justifiable reasons.
Issues Involved:
1. Validity of the final assessment order based on the Transfer Pricing Officer's jurisdiction. 2. Transfer pricing adjustment for import of raw materials and export of finished goods. 3. Transfer pricing adjustment for the import of fixed assets. 4. Disallowance under Section 37(1) of the Income-tax Act, 1961. Detailed Analysis: 1. Validity of the Final Assessment Order Based on the Transfer Pricing Officer's Jurisdiction: The assessee challenged the validity of the final assessment order, arguing that the Transfer Pricing Officer (TPO) was not competent to pass the order under Section 92CA(3) of the Income-tax Act, 1961. The order was passed by the Additional Commissioner of Income-tax, Pune, rather than the Joint Commissioner, Deputy Commissioner, or Assistant Commissioner, as stipulated by the law at the time. However, the tribunal found that the definition of 'Transfer Pricing Officer' in Section 92CA(7) includes the term 'Joint Commissioner,' which, as defined in Section 2(28C), encompasses both the Joint Commissioner of Income-tax and the Additional Commissioner of Income-tax. Therefore, the tribunal held that the Additional Commissioner was competent to act as the TPO, and the final assessment order was valid. 2. Transfer Pricing Adjustment for Import of Raw Materials and Export of Finished Goods: The assessee, an Indian company associated with Eaton Corporation, USA, reported international transactions of importing raw materials and exporting finished goods. The assessee used the Transactional Net Margin Method (TNMM) for benchmarking these transactions but failed to provide verifiable data for the foreign comparables. The TPO aggregated the transactions and benchmarked them collectively, leading to a transfer pricing adjustment of ?3,83,29,479/-. The tribunal upheld the TPO's approach, noting that the assessee failed to substantiate its benchmarking due to the lack of reliable data. The tribunal also rejected the argument that the foreign associated enterprises should be considered as tested parties, emphasizing that under Indian law, the profit margin of the Indian enterprise must be compared with that of the comparables. 3. Transfer Pricing Adjustment for the Import of Fixed Assets: The assessee reported an international transaction of purchasing fixed assets but did not provide sufficient documentation for a portion of the transaction. The TPO proposed a transfer pricing adjustment for the undocumented amount of ?1,04,92,049/-. The tribunal remitted the matter to the AO/TPO for re-examination, directing that the adjustment should be limited to the depreciation claimed on the undocumented fixed assets, not the entire purchase value. 4. Disallowance under Section 37(1) of the Income-tax Act, 1961: The AO disallowed ?1,13,83,667/- under Section 37(1), treating it as unexplained sundry creditors. The assessee contended that these were provisions for expenses, some of which were added back in the computation of income or reversed in the subsequent year. The tribunal directed the AO to verify the assessee's claims and make appropriate adjustments, disallowing only the provisions for which no evidence was provided. Conclusion: The tribunal upheld the validity of the final assessment order and the transfer pricing adjustments for the import of raw materials and export of finished goods. It remitted the issues of the transfer pricing adjustment for the import of fixed assets and the disallowance under Section 37(1) to the AO/TPO for re-examination and verification. The appeal was partly allowed for statistical purposes.
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