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2021 (2) TMI 1013 - AT - Income TaxTP Adjustment - MAM selection - benchmark the international transactions of freight receipts and expenses by taking TNMM as the most appropriate method and PLI of OP/VAE Operating Profit/Value added expenses - HELD THAT - No infirmity did emerge from the adoption of the PLI of OP/VAE by the assessee for benchmarking of its international transactions of freight receipts and expenses, there was, thus, no justification for substitution of the same by the PLI of OP/TC by the TPO/DRP. We, thus, in terms of our aforesaid observations direct the A.O/TPO to benchmark the international transactions of freight receipts and expenses by taking TNMM as the most appropriate method and PLI of OP/VAE. Transfer pricing adjustment considering the entire turnover of the freight receipts and expenses - claim of the assessee before the DRP that for working out the TP adjustment the TPO was obligated to consider only the operating costs attributable to the AE sales - HELD THAT - Admittedly, a TP adjustment envisaged in Chapter X is only in respect of the international transactions of the assessee with its AEs and cannot be extended to the transactions entered into by the assessee with the independent unrelated third parties. Insofar the aforesaid settled position of law as had been so canvassed by the ld. A.R before us is concerned, we are persuaded to be in agreement with the same. In fact, we find that in the case of CIT-8, Mumbai Vs. Tara Jewells Export (P) Ltd . 2015 (12) TMI 1130 - BOMBAY HIGH COURT and CIT Vs. Thyssen Crup Industries India Pvt. ltd . 2015 (12) TMI 1076 - BOMBAY HIGH COURT had clearly observed, that in terms of Chapter X of the Act the TP adjustment is mandated only in respect of International transactions and not the transactions entered into by the assessee with independent unrelated parties. We find that in case if a TP adjustment is allowed in respect of transactions entered into by the assessee with unrelated third parties then the same would be result into increasing of the profit in respect of such independent transactions which would be beyond the scope and ambit of Chapter X of the Act. Apparently, the claim of the ld. A.R that the TPO had wrongly worked out the TP adjustment in respect of the AE transactions by considering the total operating costs instead of the operating costs attributable to the AE sales is prima facie found to be correct. Accordingly, we restore the matter to the file of the A.O/TPO for the limited purpose of working out the TP adjustment only in respect of the transactions of the assessee with its AEs, and if the same is found to be within the safe harbour range of /- 5% of the ALP then no adjustment shall be called for in its hands. Inclusion/exclusion of certain comparables by the TPO/DRP w.r.t benchmarking of the international transactions of freight receipts and expenses of the assessee - Exclusion of companies functionally dissimilar with that of assessee. Disallowance u/s 36(1)(iii) - disallowance of interest expenditure - HELD THAT - More or less the assessee had been able to drive home its claim that the aforesaid amounts were advanced much prior to raising of the interest bearing loans/borrowings in question, as a result whereof no part of the interest expenditure was liable to be disallowed under Sec.36(1)(iii) of the Act. In sum and substance, the claim of the assessee that at the relevant point of time of giving the capital advances it had with it sufficient self owned funds to justify the same had not fairly been looked into by the lower authorities. In fact, both the lower authorities had approached the issue in question with a view that the assessee was obligated to disprove the existence of a one-to-one nexus between the capital advances and interest bearing loans/borrowings, which as observed by us hereinabove cannot be subscribed on our part. In the backdrop of our aforesaid deliberations, we are of a strong conviction that the aforesaid issue requires to be revisited and therein re-adjudicated by the A.O after calling for and considering the entire set of facts pertaining to the same. At this stage, we may herein clarify that in case if the assessee in the course of the set aside proceedings is able to establish that it had at the relevant point of time sufficient interest free funds available with it to justify the capital advances given w.r.t the aforesaid properties, then, it would be presumed that the aforesaid capital advances/investments were made by it from the interest free funds so available with it. Accordingly, in all fairness and in the interest of justice we restore the issue to the file of the A.O for the purpose of readjudication of the same in terms of our aforesaid observations. Needless to say, the A.O in the course of the set aside proceedings shall afford a reasonable opportunity of being heard to the assessee who shall remain at a liberty to substantiate its aforesaid claim on the basis of fresh material and submissions.
Issues Involved:
1. Validity of the assessment order passed under the directions of the Dispute Resolution Panel (DRP). 2. Upward adjustment to the income of the appellant in respect of international transactions of freight receipts and expenses. 3. Rejection of the Operating Profit (OP) to Value Added Expenses (VAE) ratio as the Profit Level Indicator (PLI) by the Transfer Pricing Officer (TPO). 4. Inclusion and exclusion of comparable companies in the comparability analysis. 5. Use of multiple year data for transfer pricing analysis. 6. Restriction of Transfer Pricing (TP) adjustment to the extent of international transactions with Associated Enterprises (AEs). 7. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act. 8. Disallowance under Section 36(1)(iii) of the Income Tax Act. Detailed Analysis: 1. Validity of the Assessment Order: The appellant argued that the assessment order passed in pursuance to the directions issued by the DRP was vitiated. The Tribunal did not specifically address this issue separately but proceeded to analyze the substantive grounds of appeal raised by the appellant. 2. Upward Adjustment to Income: The appellant challenged the upward adjustment of INR 22,61,25,615 for AY 2013-14 and INR 17,78,40,052 for AY 2014-15 made by the AO/DRP concerning international transactions of freight receipts and expenses. The Tribunal examined whether the TPO/DRP were justified in their approach and calculations. 3. Rejection of OP/VAE Ratio as PLI: The TPO rejected the OP/VAE ratio used by the appellant and substituted it with OP/TC. The Tribunal found that the appellant had rightly adopted the PLI of OP/VAE for benchmarking its international transactions of freight receipts and expenses, as supported by the Tribunal’s earlier decision in the case of DHL Logistics Private Limited. The Tribunal directed the AO/TPO to benchmark the international transactions using TNMM as the most appropriate method and PLI of OP/VAE. 4. Inclusion and Exclusion of Comparable Companies: The Tribunal noted that the TPO had included certain companies in the final list of comparables, which the appellant contested. The Tribunal found that the inclusion/exclusion of comparables should be reconsidered based on functional similarity. Specifically, the Tribunal directed the AO/TPO to reconsider the inclusion of Shreyas Relay System Ltd and Om Logistics Ltd, as the functional profile of the appellant remained similar to that of DHL Logistics Private Limited, where these companies were excluded. 5. Use of Multiple Year Data: The DRP upheld the TPO’s rejection of multiple year data used by the appellant, stating that Rule 10B(4) mandates the use of data for the financial year in which the international transaction was entered. The Tribunal did not find any error in the DRP’s decision on this matter. 6. Restriction of TP Adjustment: The appellant argued that the TP adjustment should be restricted to the extent of international transactions with AEs. The Tribunal agreed with the appellant, citing the Bombay High Court’s decisions in CIT Vs. Firestone International (Pvt.) Ltd., Tara Jewells Exports Pvt. Ltd., and Thyssen Krupp Industries India (P) Ltd. The Tribunal directed the AO/TPO to work out the TP adjustment only in respect of transactions with AEs and to restrict the adjustment within the safe harbor range of +/- 3%. 7. Initiation of Penalty Proceedings: The appellant contested the initiation of penalty proceedings under Section 271(1)(c). The Tribunal dismissed this ground as premature. 8. Disallowance under Section 36(1)(iii): The AO disallowed interest expenditure under Section 36(1)(iii) related to capital advances. The Tribunal found that the AO did not properly consider the appellant’s claim that the advances were made from interest-free funds available at the relevant time. Citing the Supreme Court’s decision in CIT (LTU) Vs. Reliance Industries Ltd., the Tribunal directed the AO to reconsider the issue, allowing the appellant to substantiate its claim that the advances were made from interest-free funds. Conclusion: The Tribunal partly allowed the appeals for AY 2013-14 and AY 2014-15. It directed the AO/TPO to: 1. Benchmark international transactions using TNMM and PLI of OP/VAE. 2. Reconsider the inclusion/exclusion of specific comparables. 3. Restrict TP adjustment to transactions with AEs. 4. Reassess the disallowance under Section 36(1)(iii) after considering the appellant’s claim regarding interest-free funds.
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