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2022 (8) TMI 481 - AT - Income TaxTP Adjustment - determination of Arm s Length Price (ALP) - avabilability of comparable uncontrolled transactions - international transactions of sale of extruders and parts and elements of extruders manufactured by the Assessee to it s Associated Enterprise (AE) - Whether the profit margins for the purpose of comparison of Assessee s profit margin with that of the comparables has to be arrived at the entity level as was done by the Assessee or that part of the export sale to AE and non-AE as was done by the TPO or that part of the export sale to AE alone as was canvassed by the Assessee by way of an alternate plea? - HELD THAT - As we find that there is no dispute in the present case that TNMM is the MAM. Rule 10B(1) (e) of the Rules provides the manner of determination of ALP under TNMM. Rule 10A(d) defines transaction to include a number of closely linked transactions . In terms of Rule 10B(1)(e) (i) of the Rules, the net profit realized by an enterprise from an international transaction has to be ascertained first. Assessee in it s Transfer Pricing study at page-12 paragraph 4.5.5 has given reasons for choosing profit margin of Assessee at entity level for the purpose of comparison. It has been stated therein that the transactions of sale and purchase of extruders and parts and elements of extruders, commission on sales, purchase of fixed assets and services received were considered as closely linked transactions. Therefore, the Assessee evaluated the international transactions by adopting Combined Transaction approach at entity level. Admittedly as per TP Study the transaction of purchase of intangibles and interest received from China were benchmarked separately. The three international transactions are of purchase of extruders and parts from Steer China and payment of commission to Steer Japan and Steer America. The other international transaction is of purchase of fixed assets from Steer China. As to how these international transactions are interlinked and interdependent is not spelt out in the TP study. By it s very nature, these transactions appear to be independent. We also find that in the transfer pricing study the Assessee has given reasons as to why CUP method was not suitable in its case. It has been stated therein that the extruders parts and elements are manufactured based on specific order. The products are unique and not comparable to others. The terms and conditions and the economic circumstances under which the Assessee sells extruders parts and elements to AE are materially different from the comparable uncontrolled transactions. We are therefore of the view that the question of adopting the profit margins at the entity level based on the submissions made by the Assessee before the CIT(A) cannot be accepted. Whether the profit margin of export sale including sale to AE and non AE or only export sale to AE ought to have been considered by the TPO? - The sale and proportionate expenses relatable to sale to AE alone has to be considered to arrive at the profit margin of the Assessee for the purpose of comparison of Assessee s profit margin. Similar exercise has to be carried out by the TPO with regard to the two comparable companies and the profit margin of the two comparable companies has to be arrived at by identifying expenses relatable to export sale to AE and for this purpose the TPO may exercise his powers u/s.133(6) of the Act and call for the required details from the the comparable companies. Apportionment of expenses - As basis of apportionment as adopted by the TPO is just and fair and calls for no interference. The Assessee has not given any other manner of apportionment except to say that expenses attributed to the export sale are not proper. In our view the Assessee is in knowledge of its own affairs and should be in a position to justify a better manner of apportionment rather than simply contend that the basis of apportionment by the TPO was unfair. Foreign exchange gain to be treated as part of the operating profits for the purpose of comparison of Assessee s profit margin and that of the comparable companies - We agree with the plea of the Assessee. Foreign exchange fluctuation to the extent it relates to the international transaction has to be regarded as part of operating profit and the decision of Delhi high court in the case of Prl.CIT Vs. Ameriprise India 2016 (3) TMI 1272 - DELHI HIGH COURT TP supports the plea of the Assessee in this regard. Application of filter of 75% export sales - As we have already Rule 10B(1)(e) of the Rules, do not prescribe any fixed filters. An element of flexibility is always inbuilt in the rules. The idea is to get data for comparison. Assessee s transaction with AE has to be compared with that of an uncontrolled transaction. The net profit margin referred to in the uncontrolled transaction has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market. In such circumstances, the reasoning of the TPO in applying export turnover filter at 25% of the turnover is proper and calls for no interference. The two comparable companies which are admittedly comparable companies available for comparison, cannot be excluded on the basis of a filter which has no relevance to the factual scenario in the present case. We direct the TPO to determine the ALP in accordance with the directions contained in this order after affording the Assessee opportunity of being heard. Correctness of determination of ALP in respect of provision of Corporate Guarantee by the Assessee to its AE - HELD THAT - The law is by now well settled that providing corporate guarantee to AE is an international transaction and the provisions of Sec.92 of the Act are applicable to such transactions. Assessee had given a gurantee in favour of SBI, Shanghai for a cash credit facility availed by Steer China in a sum of Rs.2,18,00,000. The Assessee did not charge any commission from Steer China for providing such guarantee and hence the TPO determined the ALP by obtaining credit rating and relevant interest rate of corporate bonds from CRISIL at arrived at 0.925% as the appropriate rate at which the Assessee ought to have charged guarantee commission from the AE. By applying the said rate on the sum for which guarantee was extended the AO arrived at a sum of Rs.2,01,650 as the ALP of the international transaction of providing guarantee and the same was added to the total income of the Assessee and the action of the TPO was confirmed by the CIT(A). The limited prayer before the Tribunal is to adopt 0.5% as the appropriate rate and that too on the sum utilized by the AE from and out of the sum of Rs.2.18 crores extended as credit limit to the AE and the submission so made is based on the decisions of ITAT rendered in the case of Associated Capsules Pvt. Ltd. 2020 (11) TMI 334 - ITAT MUMBAI - We are of the view that the prayer so made based on the decision cited is acceptable. We accordingly direct that the ALP be determined at 0.5% of the credit limit utilized and not that what is sanctioned.
Issues Involved:
1. Correctness of determination of Arm’s Length Price (ALP) in respect of international transactions of sale of extruders and parts to Associated Enterprises (AEs). 2. Correctness of determination of ALP in respect of provision of Corporate Guarantee by the Assessee to its AE. Detailed Analysis: 1. Correctness of Determination of ALP in Respect of International Transactions of Sale of Extruders and Parts to AEs: Background: The Assessee engaged in manufacturing extruders and parts, entered into international transactions with its AEs: Steer Japan Corporation, Steer America Inc., and Steer China Corporation. The Assessee adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP, using entity-level margins for comparison. Assessee's Position: The Assessee argued for using entity-level margins for comparison, citing reasons such as the interdependent nature of transactions, availability of comparable data only at the entity level, and the integrated nature of its operations. The Assessee also contended that the TPO's allocation of expenses based on turnover was incorrect and that foreign exchange gain should be treated as part of the operating profit. TPO's Position: The TPO rejected the entity-level comparison, arguing that segmental analysis was necessary. The TPO allocated expenses between domestic and international sales based on turnover and excluded foreign exchange gain from operating profit. The TPO computed an adjustment of Rs. 5,92,37,627/- for the manufacturing segment. Tribunal's Findings: - Entity-Level vs. Segmental Analysis: The Tribunal found that the Assessee did not justify the interdependence of transactions adequately. The Tribunal held that only the profit margin of export sales to AEs should be considered, not the entire international segment. - Apportionment of Expenses: The Tribunal upheld the TPO's method of apportioning expenses based on turnover, finding it just and fair. - Foreign Exchange Gain: The Tribunal agreed with the Assessee that foreign exchange gain related to international transactions should be included in operating profit. - Export Turnover Filter: The Tribunal upheld the TPO's application of a 25% export turnover filter, rejecting the Assessee's argument for a 75% filter. Conclusion: The Tribunal directed the TPO to determine the ALP by considering only the export sales to AEs and including foreign exchange gain in operating profit, while maintaining the 25% export turnover filter. 2. Correctness of Determination of ALP in Respect of Provision of Corporate Guarantee: Background: The Assessee provided a corporate guarantee to SBI, Shanghai, for a cash credit facility availed by Steer China, without charging any commission. The TPO determined the ALP for the guarantee commission at 0.925%, resulting in an addition of Rs. 2,01,650 to the Assessee's income. Assessee's Position: The Assessee argued for adopting a 0.5% rate on the utilized credit limit, based on the decision in Associated Capsules Pvt. Ltd. Vs. ACIT. Tribunal's Findings: The Tribunal accepted the Assessee's argument, directing that the ALP be determined at 0.5% of the utilized credit limit. Conclusion: The Tribunal directed the TPO to adopt 0.5% as the rate for the guarantee commission on the utilized credit limit. Final Decision: The appeal of the Assessee was partly allowed, with specific directions to the TPO to re-determine the ALP based on the Tribunal's findings.
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