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2020 (2) TMI 92 - AT - Income TaxTransfer pricing adjustments in respect of purchase of raw material from associated enterprise - selection of MAM - assessee s claim to have bench marked its international transaction by applying CUP as MAM, however, the comparable uncontrolled price taken up by the assessee is the purchases made by the AE and then supplied to the assessee - HELD THAT - What is claimed by the assessee is not in strict sense is CUP because even if the price at which the AE of the assessee has purchased the material is considered as CUP then it is the purchase price in the hand of the AE would be considered as CUP and not the price after making certain markup. If the AE is making any markup on the cost of purchase and charged from the assessee then the appropriate method would be cost plus method. The cost plus method is applied only when the cost of international transaction in the hand of the supplier AE is verifiable without any doubt. So far as the AE has supplied raw material to the assessee which represents the trading of AE being the purchases made from the third party, the MAM on such transaction for determination of ALP would be cost plus method as the AE has undisputedly charging price from the assessee after making some markup on the cost price. In such a case, the question arises is whether the change of margin/markup by the AE on the cost price is at arm s length or not and the exercise of determining the ALP is confined only to the markup charged by the AE from the assessee. Therefore, the transactions of purchases made from MCT to the tune of ₹ 46,62,68,683/- has to be tested by applying cost plus method as MAM because for the A.Y. 2011-12 and 2012-13, the TPO while passing the order dated 29/01/2016 has accepted the CPM as MAM for determination of ALP in respect of international transaction of purchasing of raw material from the AE. When there is no change in the facts and circumstances for the year under consideration then the TPO/AO is not permitted to take a different stand and view which is contrary to the view taken for the A.Y. 2011-12 And 2012-13. It is also undisputed legal proposition that res judicata does not apply to the income tax proceeding, however, the income tax authorities have to maintain rule of consistency. Once the CPM was accepted as MAM in the preceding year being A.Y. 2011-12 and 2012-13 then the same method has to be applied for the year under consideration for determination of ALP so far as the transaction of purchase of raw material from AE represents the trading of the AE in the said goods without any value addition. Purchases made from JPP - The first two transactions of purchases of polypropylene and Tafmer are also representing the purchases made by the AE from the third party and supplied the assessee without any value addition, therefore, these two transactions are to be tested by applying CPM as MAM as it was applied by the assessee in the preceding years and also accepted by the TPO/AO. Therefore, instead of applying any other method being CUP or TNMM these two transactions can be tested being at ALP by applying CPM as MAM. We find that the approach of the assessee is not permissible as per the transfer pricing regulation as there is no provision for taking the AE as tested party for determination of the ALP of price paid by the assessee. Third transaction of purchases, these are the AE s own manufactured product and therefore, the ALP for the third transaction which includes various items of purchases of raw material and consumables, therefore, a separate exercise of transfer pricing analysis is required in respect of third international transaction with the JPP - Though the assessee has claimed that there are some sale by the AE to the third party as well as there are some purchases of the same product by the assessee from third party and therefore, CUP is available for testing the said transaction, however, neither the assessee not the TPO has separately undertaken this exercise of testing these transactions by applying MAM. As we have discussed earlier that if the CUP is available then the same should be preferred as MAM in comparison to the other methods, however, while adopting CUP as MAM it is required to see that there is no scope of any variation and the comparable price should be perfectly matching with the transaction of the assessee. Hence the ALP of these transaction is required to be determined in above terms.
Issues Involved:
1. Transfer pricing adjustments in respect of the purchase of raw material from associated enterprises (AEs). 2. Determination of the Arm’s Length Price (ALP) using the Transactional Net Margin Method (TNMM) versus Comparable Uncontrolled Price (CUP)/Cost Plus Method (CPM). 3. Inclusion of freight, transport, handling charges, and foreign exchange loss in the cost of imported raw material. 4. Consistency in the application of methods from preceding years. 5. Incorrect computation of operating margins of the assessee and comparables. Detailed Analysis: 1. Transfer Pricing Adjustments in Respect of Purchase of Raw Material from AEs: The core issue revolves around the transfer pricing adjustments of ?6,70,13,030/- made by the Assessing Officer (AO) following the directions of the Dispute Resolution Panel (DRP). The assessee engaged in the manufacturing of polypropylene-based compounds had reported international transactions with its AEs, specifically the purchase of raw material from Mitsubishi Chemical (Thailand) Co. (MCT) and Japan Polypropylene Corporation (JPP). 2. Determination of ALP Using TNMM vs. CUP/CPM: The assessee initially used the CUP/CPM methods to benchmark its transactions, claiming that the majority of transactions were supported by back-to-back invoices from unrelated parties. The Transfer Pricing Officer (TPO) rejected this approach, instead applying the TNMM, and selected Arihant Gold Plast Pvt. Ltd. and Formulated Polymers Pvt. Ltd. as comparables. The TPO recalculated the operating profit margins and proposed an adjustment under Section 92C(2) of the Income Tax Act, 1961. 3. Inclusion of Freight, Transport, Handling Charges, and Foreign Exchange Loss: The DRP upheld the TPO's method, noting that the assessee incurred freight, transport, and handling charges, and included a net foreign exchange loss of ?6,82,66,919/- in the cost of raw material. The assessee contested these inclusions, arguing that these expenses were related to the sale of goods rather than imports and that foreign exchange losses should not be considered as part of operating costs under Rule 10TA of the Income Tax Rules. 4. Consistency in the Application of Methods from Preceding Years: The assessee argued that the CPM was accepted as the Most Appropriate Method (MAM) in previous assessment years (2011-12 and 2012-13) and should be consistently applied in the current year. The Tribunal agreed, emphasizing the importance of maintaining consistency in the application of methods unless there is a significant change in facts and circumstances. 5. Incorrect Computation of Operating Margins: The assessee also pointed out errors in the computation of operating margins by the TPO. Specifically, the operating margin of Formulated Polymers Pvt. Ltd. was incorrectly calculated at 5.29% instead of 1.56%, and the assessee's operating profit was incorrectly computed as a loss of 4.92% instead of a profit of 2.13%. The Tribunal noted that even by applying the TNMM with correct computations, no adjustment would be necessary as the assessee's margin would fall within the permissible tolerance limit. Conclusion: The Tribunal concluded that the CPM should be applied as the MAM for determining the ALP for transactions involving raw material purchases from AEs, consistent with prior years. The Tribunal set aside the issue of ALP determination and consequential adjustments, directing the AO/TPO to re-adjudicate after giving the assessee an opportunity for a hearing. The appeal was partly allowed for statistical purposes.
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