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2013 (8) TMI 75 - AT - Income TaxTransfer pricing adjustment - reference to TPO - whether there existed an AE relationship between the assessee and M/s O&S Metal Import GmBH - Held that - The assessee has to establish that the assessee company has exported goods to other parties on similar prices and conditions & most importantly, evidences are to be brought on record by the assessee to show that the prices and other conditions were not influenced by M/s O&S Metal Import GMBH. That M/s O&S Metal Import GMBH had no share holding or control or management of assessee company in the impugned assessment year has to be verified by the AO. Hence, the issue to be remitted the file of AO to determine whether there existed an AE relationship between the assessee and M/s O&S. Metal Import GmBH. As held in Sanchez Capital Services vs. ITO (2012 (10) TMI 285 - ITAT MUMBAI) the mere filing of Form 3CEB by the assessee does not automatically imply that S.92A conditions were satisfied and there is an AE relationship. Rather, the specific facts and circumstances of the case have to be analyzed in order to conclude whether or not an AE relationship actually exists - in favour of revenue for statistical purposes. Rejection of Most Appropriate Method (MAM) adopted by the assessee-company as Cost Plus Method (CPM) for determining the Arm's Length Price - Held that - When the assessee has chosen a Most Appropriate Method (MAM) and substantiated the choice in its TP study, it is up to the TPO to record and substantiate the reasons as to why the assesse's MAM is incorrect and why some other TP method needs to be the Most Appropriate Method (MAM). In the instant case however no substance in any of the TPO's multiple arguments for rejection of assessee's internal CPM and adoption of external TNMM. Also as decided in DIT (Intl. Taxation) vs. Morgan Stanley (2007 (7) TMI 201 - SUPREME Court) the most appropriate method has to be applied for computation of the arm's-length price. It will depend on facts and circumstances of each particular international transaction.... . Applying this ratio internal CPM seems to be the Most Appropriate Method (MAM) rather than external TNMM. In favour of assessee. Whether a sick company under BIFR would be erroneous to compare it cursorily using external TNMM - Held that - Correct comparability analysis would be a non-trivial exercise and the entire TNMM application is bound to be sub-optimal. Given that internal CPM is available and easily applicable in the instant case, no merit in applying external TNMM in the instant case. In favour of assessee. Adjustments during the computation of the arm's-length price - whether be restricted only to the international transactions and not to the entire turnover of the assessee? - Held that - As decided in Lionbridge Technologies (P) Ltd. vs. DCIT 2012 (8) TMI 326 - ITAT, MUMBAI assessee entered into international transactions with its AEs and also non-AEs and transfer pricing adjustment can be made only with reference to the international transactions with the AEs and not non-AEs. Thus AO is directed to restrict the adjustments, if any, only to international transactions. In favour of assessee. No need for provision of /- 5% range for CPM of the arm's-length price as there are no comparable prices in the instant case providing a set or range of multiple prices to be addressed by the /-5% range. Against assessee.
Issues Involved:
1. Whether M/s O&S Metal Import GMBH, Germany is an Associated Enterprise (AE) of the assessee company. 2. Appropriateness of the Transfer Pricing (TP) methods used by the assessee company. 3. Application of +/- 5% range for determining the Arm's Length Price (ALP). 4. Allocation of costs for determining ALP. 5. Adjustments to the total income and brought forward losses. Detailed Analysis: 1. Associated Enterprise (AE) Relationship: - The primary issue revolves around whether M/s O&S Metal Import GMBH, Germany qualifies as an AE of the assessee company under Section 92A of the IT Act. - The CIT(A) concluded that M/s O&S Metal Import GMBH, Germany was not an AE, based on the provisions of Section 92A(2)(e), 92A(2)(i), and 92A(2)(m). The CIT(A) noted that Mr. Wolfgang Ormeloh was not an Executive Director and there was no evidence that prices and conditions were influenced by M/s O&S. - The Revenue argued that Mr. Wolfgang Ormeloh's role as a full-time director implied an executive role, thereby fulfilling the conditions of Section 92A(2)(e). Additionally, substantial transactions between the companies indicated a mutual interest under Section 92A(2)(i). - The Tribunal remitted the issue back to the Assessing Officer (AO) to verify the role of Mr. Wolfgang Ormeloh and determine if an AE relationship existed under Section 92A(2)(i) and 92A(2)(e). 2. Transfer Pricing Methods: - For the assessment years under consideration, the appropriateness of the TP methods used by the assessee was contested. - The CIT(A) and the Tribunal upheld the use of the Cost Plus Method (CPM) by the assessee, rejecting the Transactional Net Margin Method (TNMM) applied by the TPO. The Tribunal emphasized that internal CPM was more appropriate given the assessee's significant domestic sales. - The Tribunal directed the AO/TPO to compute the ALP using internal CPM and to re-examine the allocation of costs to domestic, export, and job-work activities. 3. Application of +/- 5% Range: - The Tribunal dismissed the application of the +/- 5% range for determining the ALP, stating that it applies only if there is more than one comparable price. Since CPM was used, there were no multiple comparable prices to address. 4. Allocation of Costs: - The Tribunal noted that the TPO's dismissal of the internal CPM due to incorrect allocation of costs was unfounded. Instead, the allocation of costs should be re-examined and computed correctly. - The Tribunal directed the AO/TPO to calculate the appropriate allocation of direct and indirect costs for the assessee's various activities. 5. Adjustments to Total Income and Brought Forward Losses: - The Tribunal directed the AO to compute the total income after providing appropriate adjustments for brought forward losses. - It was emphasized that any adjustments during the computation of the ALP should be restricted to international transactions and not the entire turnover. Separate Judgments: - For the assessment years 2003-04 and 2004-05, the Tribunal allowed the Revenue's appeals for statistical purposes, remitting the issue of AE relationship back to the AO. - For the assessment year 2005-06, the Tribunal partly allowed the assessee's appeal for statistical purposes, directing the AO to re-examine the AE relationship and the appropriateness of the TP methods. - For the assessment year 2006-07, the Tribunal partly allowed the assessee's appeal for statistical purposes, directing the AO/TPO to use internal CPM and re-examine cost allocations. - For the assessment year 2007-08, the Tribunal partly allowed the assessee's appeal for statistical purposes, reiterating the use of internal CPM and restricting adjustments to international transactions. Conclusion: The Tribunal's orders across various assessment years focused on verifying the AE relationship, upholding the use of internal CPM for TP, and ensuring correct cost allocation and appropriate adjustments to the total income. The cases were remitted back to the AO/TPO for detailed verification and computation.
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