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2023 (2) TMI 568 - AT - Income TaxTP Adjustment - Manufacturing activity - Internal or External TNMM - HELD THAT - We are confronted with a situation in which not only there are huge volume differences inasmuch as sales made to AEs are less than 5% of total sales, the geographical differences also largely exist in the pattern of sales made to AEs and non-AEs. These factors cause a serious threat to the application of the internal TNMM. Under such circumstances, we hold that there can be no comparison between the price charged or profit realized by the assessee in domestic market from non-AEs and in the international markets from its AEs, thereby frustrating the application of the internal TNMM. In the hue of such significant differences, we are satisfied the internal TNMM is not the most appropriate method to be applied. We therefore, hold that it is the external TNMM which should prevail for determining the ALP of the international transaction in the manufacturing activity. Capacity utilization adjustment - TPO in the application of the external TNMM chose certain external comparables and determined the arm s length margin at 5.11% as against the assessee s OP to OC under the AE segment - HELD THAT - In principle, there can be no hindrance in granting capacity utilization adjustment, if all the necessary particulars are made available by the assessee. In the extant case, the assessee s contention for granting the capacity utilization adjustment in the profit margin of the comparables has remained to be given effect to notwithstanding the fact that the TPO agreed for its grant and the ld. CIT(A) not going into its nuances for having allowed relief by upholding the application of the internal TNMM. As we have overturned the impugned order in applying the internal TNMM and directed to apply the external TNMM, the assessee s claim for capacity utilization adjustment will reoccur and require adjudication. We, therefore, set-aside the impugned order on this score and send the matter to the file of the AO/TPO for recomputing the ALP of the Manufacturing activity afresh in above terms. Needless to say, the assessee will be allowed a reasonable opportunity of hearing. The ground raised by the Revenue urging to apply the external TNMM is thus allowed and the ground of the assessee in its cross objection for granting capacity utilization adjustment in case of external TNMM is also accepted for statistical purposes. TP adjustment in respect of Corporate Guarantee - The credit against the guarantee fee is directed to be restricted only to the extent of Rs.1.21 crore and the excess credit allowed for Rs.2.43 crore is directed to be reduced after verification. Needless to say, the assessee will be allowed an opportunity of hearing while redetermining the amount of guarantee fee in line with the above observations and those given by the Tribunal for earlier years. Thus, the Departmental ground against exclusion of performance guarantee is allowed; and for reducing the rate of guarantee fee from 2% applied by the TPO to 1.75% by the CIT(A) is dismissed. The assessee s ground against the application of corporate guarantee fee at 1.75% by the ld. CIT(A) is partly allowed in above terms. Assessment was framed u/s.144 - deletion of addition by the ld. CIT(A) at 10% of expenses made by the AO - HELD THAT - Assessee did not furnish necessary details during the course of assessment proceedings which led to the passing of the assessment order u/s.144. In such circumstances, the AO had no option but to frame the assessment to the best of his judgment. CIT(A) deleted the addition by considering that no such addition was made in the preceding or succeeding year. He, however, overlooked the fact that the assessee did not furnish any details of the expenses claimed in the Profit and loss account. In such a situation, the view point of the ld. CIT(A) cannot be countenanced. AR submitted that the assessee has got all the necessary details in support of the expenses and the same can be produced before the AO, if an opportunity is given. Considering the totality of the facts and circumstances of the case, we set-aside the impugned order on this score and remit the matter to the file of the AO for deciding disallowance of expenses as per law after allowing reasonable opportunity of hearing to the assessee.
Issues Involved:
1. Condonation of Delay 2. Transfer Pricing Adjustment in Manufacturing Activity 3. Transfer Pricing Adjustment on Corporate Guarantee Fee 4. Disallowance of Expenses Detailed Analysis: 1. Condonation of Delay: The assessee's appeal and cross-objection were time-barred by 79 and 89 days, respectively. The assessee filed condonation petitions explaining the reasons for the delay. The tribunal was satisfied with the reasons, and no serious objection was raised by the Revenue. Consequently, the delay was condoned. 2. Transfer Pricing Adjustment in Manufacturing Activity: The core issue was the determination of the Arm's Length Price (ALP) for international transactions in the manufacturing activity. The assessee initially employed the Comparable Uncontrolled Price (CUP) method, which was rejected by the Transfer Pricing Officer (TPO) in favor of the Transactional Net Margin Method (TNMM). The TPO applied external TNMM, while the Commissioner of Income Tax (Appeals) [CIT(A)] approved internal TNMM. The tribunal held that internal TNMM could not be applied due to significant differences in sales volume and geographical locations between AE and non-AE transactions. Consequently, the tribunal directed the application of external TNMM and remitted the matter to the AO/TPO for recomputation of the ALP, including consideration of capacity utilization adjustments. 3. Transfer Pricing Adjustment on Corporate Guarantee Fee: The dispute involved the arm's length rate for corporate guarantees provided by the assessee to its Associated Enterprises (AEs). The TPO applied a 2% guarantee fee, while the CIT(A) reduced it to 1.75% and excluded performance guarantees from ALP determination. The tribunal referred to its earlier orders for prior years, which set the guarantee fee at 0.5% plus any actual expenditure incurred by the assessee. The tribunal remitted the matter to the AO/TPO to ascertain actual expenditures and recompute the guarantee fee. Additionally, the tribunal corrected the credit for guarantee fee recovery, restricting it to Rs.1.21 crore and reducing the excess credit allowed. 4. Disallowance of Expenses: The AO disallowed 10% of various expenses due to the assessee's failure to furnish details during the assessment. The CIT(A) deleted the addition, noting no such disallowance in preceding or succeeding years. However, the tribunal found that the assessee did not provide necessary details during the assessment, justifying the AO's action. The tribunal remitted the matter to the AO for reconsideration, allowing the assessee an opportunity to furnish supporting details. Conclusion: The appeals of both the Revenue and the assessee were partly allowed, and the cross-objection of the assessee was allowed for statistical purposes. The tribunal directed the AO/TPO to recompute the ALP for manufacturing activity and corporate guarantee fee, and to reconsider the disallowance of expenses after providing the assessee an opportunity to present necessary details.
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