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TMI Blog2012 (4) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... intained by it. The Learned CIT (A) has mentioned only one instance where ROCE may not be an appropriate PLI i.e. in the case of a seasonal business. However, even though he himself admitted that the appellant is not engaged in a seasonal business, he still held that ROCE cannot be used in the case of the appellant without providing any cogent reason. 4. The Learned CIT (A), as well as Learned AO/TPO have erred in facts of the case by introducing a new PLI i.e. Operating Profit as a percentage of total cost. The Learned CIT (A) has erred in facts and circumstances of the case by holding that the raw material cost is not a pass through cost and thus rejecting the appellant's contention that raw material cost should be excluded from total cost. 5. The Learned CIT (A) has erred in not allowing an adjustment of +/- 5% while determining the ALP, as provided by proviso to section 92C (2) of the Act. 6. The above grounds of appeals are independent and without prejudice to one another. 7. The appellant craves leave to add/withdraw or amend any ground of appeal at the time of hearing." The grounds in revenue's appeal in ITA No.4767/Del/2009 read as under :- "01. The order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associated enterprise JMUK and wash coated substrates from its associated enterprise Johnson Matthey Malaysia ('JMM'). JMM purchase raw substrates, for further processing, from independent suppliers and performs wash coating operations before supplying to the assessee. The economic analysis carried out by the assessee in the transfer pricing report submitted with the Assessing Officer can be summarized as below :- "(i) On the basis of easy availability of financial data and non possession of intangibles, the appellant selected itself as the tested party in order to benchmark the international transactions with its AEs. (ii) On the basis of functional and risk profile and on examining the available comparable data, the Transactional Net Margin Method QJ ('TNMM') was determined to be the most appropriate method for determination of Arm's Length Price ("ALP"). (iii) For application of TNMM the 'Rate of return on capital employed' was selected as the Profit Level. Indicator ('PLI') for all the international transactions except for transactions involving sale of catalysts to the AEs for which Net Profit Margin (i.e. Profit after tax) as a perce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO vide Note sheet entry dated 24.3.2006. Assessee has filed its reply vide letter dated 28.3.2006 which is placed on record. Assessee's submission in this regard has been considered. In the submission, assessee has more or less reiterated the arguments that were put forth before the TPO. The TPO while analyzing the case of the assessee adopted the Operating profit/ Total cost ratio method as the Profit Level Indicator (PLI). Assessee had shown an OP/TC of 6.79%. However, on comparing the OP/TC of the assessee company with that of the comparable companies, it is seen that assessee had under stated such profit level indicator and the variants in more than the permissible limit of +/5%. The Average OP/TC of the comparable companies worked out to 16.85%. On the other hand the OP/TC shown by the assessee is 6.79%. So the difference between the two ratios is 10.06% which is almost double of the normal acceptable range of +/- 5% variance. Therefore, it is held that assessee has under disclosed his OP/TC which when quantified results in an upward revision of his income by Rs. 8,33,86,859/-. In view of the same assessee's income is enhanced by such amount. 5. The issue of Profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the financial ratios. Also, if the average balance sheet does not accurately reflect the average use of capital throughout the year, ROA may be a less reliable PLI. Such situations occur, for instance, when the business of a company is seasonal. 10.2.5 From the above discussion, since the appellant is not engaged in a seasonal business and the appellant is engaged in the manufacturing of automobile exhaust catalysts and making import of raw-material from its AE, in these circumstances, I am of the view that Return on Capital Employed is not an appropriate PLI in the case of appellant and thus the TPO was right in rejecting such PLI." CIT (A) dismissed the assessee's appeal on this ground. 6. The issue regarding the treatment of raw material which was raised as an alternate contention by the assessee, the CIT (A) decide the issue as under: "10.3.1 The appellant has raised another contention that if the PLI suggested by TPO (i.e. Operating Profits as a percentage of Total Cost) were to be accepted then instead of Operating Profit as a percentage of Total Cost, Operating Profit as a percentage of Total Cost minus raw material cost should be considered. I have carefully con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice and the quantity which is to be purchased and the appellant acts accordingly. Further the usage of the material also has to be done for the purposes of manufacturing the items which are to be sold to vendors of the Maruti Udyog Limited. Based on the above facts, the appellant claims that the purchase of the materials should be treated as a pass through cost and the appellant should be treated as contract manufacturer and the margins be computed excluding the cost of the material. 10.4.2 It is necessary to examine the role of the appellant in detail both in light of the above facts and also in light of the agreements entered into between the appellant and Maruti Udyog Limited and the AE with respect to the above purchase. 10.4.3 The appellant has an agreement with Maruti Udyog Limited under which it IS obliged to purchase the material on the basis of price quotes advised by Maruti Udyog Limited. In the course of the manufacture, the appellant is permitted a set amount of manufacturing loss and nay unutilized material is to be disposed off as per the advice of Maruti Udyog Limited. It is pertinent to note that the material in question is a very expensive material and as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited but from the vendors of Maruti Udyog Limited and that too after a prolonged credit period. Even at the end of the credit period, Maruti Udyog Limited does not give a guarantee that in the event of a default by the vendor, Maruti Udyog Limited will make the payment. 10.4.5 In this regard it is worth mentioning here that inspite of opportunities given at the appellate stage, no agreement between the appellant and the "vendors of Maruti Udyog Limited" have been made available so as to know the terms/conditions and the business model. 10.4.6 Further, it is also important to note the accounting entries which are effected by the appellant and the AE in the course of the transaction. The AE at the time of selling the material to the appellant includes it in its turnover and the appellant includes the corresponding purchase in its expenditure side. Once the material is processed and sold to the vendors of Maruti Udyog Limited, the appellant includes the total sale value in its turnover. Nowhere, the accounting entries show that the material purchased is to be treated as pass through cost. No doubt that the accounting entries are not conclusive proof for the purposes of taxation, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a contract manufacturer and also accepted the PLI considered by the appellant. AY 2005-06 OP/TC - Raw Material was considered as the appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO has mentioned that the appellant is a contract manufacturer and also accepted the PLI considered by the appellant. AY 2006-07 OP/TC - Raw Material was considered as the appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO has mentioned that the appellant has classified itself as a contract manufacturer and also accepted the PLI considered by the appellant." Ld. AR pleaded that for the assessment year 2003-04, the return on capital employed was considered as the most appropriate PLI in the transfer pricing study. The TPO has stated that the assessee is a contract manufacturer. However, he rejected the PLI considered by the assessee and substituted the same with his own PLI which is OP/TC (without excluding the cost of raw material). In assessment year 2002-03, the assessee considered the return on capital employed as appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO mentioned that assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. Assistant Commissioner of Income Tax v. M/s. L'oreal India Pvt. Ltd. - [ITA No.6745/M/2008)" 8. On this issue, the learned DR submitted that it is a general rule that principle of res judicata is not applicable to the decisions of income-tax proceedings. In assessment for a particular year is final and conclusive between the parties only in relation to that particular year. The decision gave in any particular assessment year is not binding on either side in the subsequent years. He also submitted that these principles of res judicata and estoppel by record applies to decisions of civil courts and has no application to the decisions of income-tax authorities. The tax authorities are not precluded for determination of a question in a subsequent year. Such proposition has been held by the Hon'ble Supreme Court in the case of New Jehangir Vakil Mills Co. Ltd. v. CIT - [1963] 49 ITR (SC) 137 and also in other case, namely, ITO v. Murlidhar Bhagwan Das - [1964] 52 ITR 335 (SC). He relied on the order of the CIT (A). 9. We have heard both the sides in detail. We have also considered the case laws relied upon by both the sides. In our considered view, the principle of res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is engaged in the manufacturing of automobile exhaust catalysts and making import of raw material from its AE, the return on capital employed is not an appropriate PLI. Further the operating profit as a percentage of total cost has to be the basis instead of operating profit as a percentage of the total cost minus raw material cost which the assessee claims. The assessee's explanation to justify the same by explaining the business model and pricing arrangement with the customer cannot be accepted. The assessee's claim that the assessee has no role to play in selecting either the supplier of raw material or determining the terms of pricing of the raw material and determining the customer. It is also claimed that the cost of raw material does not affect the profitability, hence it cannot be taken into account while working out the PLI as operating profit. This view of the assessee cannot be accepted. It is a fact that its raw material supplied by the AE is not exactly in the same condition which has been purchased on the instructions of customer (Maruti Udyog Limited). Further, after the manufacturing of automobile catalyst the same are not directly sold and supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous precision metal for manufacturing catalyst raw material and they are also accounting the precious precision metal in the same manner as the assessee is doing. AE also do not treat it as a pass through cost. All these facts show that the assessee's claim to treat the cost of purchase of precious metal as a pass through cost has no basis. In view of this, we are unable to agree with the assessee's contention that cost of purchase of precious metal should not be added to the cost. In our considered view, it must be a part of the cost base for computing the profit element. 11. On the issue of allowing adjustment of +/-5% for determining the ALP as provided in the provisions of section 92C(2) of Income-tax Act, the CIT (A) has decided the issue as under :- "12.3.1 I have gone through the above submission of the appellant, where the appellant claims the benefit of +/-5% as a standard deduction. The appellant claims the benefit of adjustment under proviso to Section 92C (2) which read as under:- "Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in such cases, the price declared by the taxpayer may be accepted. 12.3.5 In effect, the transfer price shown by the taxpayer was not to be disturbed if it was within +/-5% mean ALP range i.e. upto 5% less (i.e. in case of receipts) or up to 5% more (i.e. in case of outgoings) than the arm's length price determined by the AO based on the arithmetical mean of the prices. If the transfer price shown by the taxpayer was less than 5% (in case of receipts) or more than 5% (in case of outgoings) of the arithmetical mean arm's length price (i.e. mean ALP) determined by the AO, then the transfer price declared by the taxpayer was not to be accepted and the adjustment.) was required to be made for the difference between the arm's length price determined by the AO based on the arithmetical mean of the prices (i.e. mean ALP) and the transfer price shown by the taxpayer. 12.3.6 The relaxation in transfer pricing adjustments provided by the Board's Circular No.12 dated 23.8.2001, referred to in the proceedings paragraph, was clearly intended to remove hardship to the taxpayers in whose cases the variation between the declared transfer price and the determined mean ALP wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, such benefit cannot be considered to be a standard/universal deduction allowed in each and every case where the assessee exceeds the permissible limit and falls outside the arm's length range. If it is considered as a standard deduction, then it would be an incorrect interpretation of the law whose intention was in substance to provide relief to assessees who fall within the prescribed range. The principle of substance over form cannot be overlooked as claimed by the Appellant by stating the ruling of Sony India Private Limited. 12.3.10 Further, the proviso only provides a relief to the tax payer at the time of *determining the ALP. The Hon'ble ITAT has observed that the TP provisions are not an exact science and this is the reason as to why the assessee has been provided the shelter of variation of 5% by the proviso. The shelter is available to ensure that the assessee need not make any changes in its transactional price if the variation w.r.t. the ALP is within a range of 5%. The proviso ensures that neither the assessee is burdened at the time of conducting the TP analysis, nor is the assessee burdened with small amounts of additions made by the revenue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 281 ITR 431(MP); SAE Head Office Monthly Paid Employees Welfare Trust: 271 ITR 159 (Del); CIT v. Sarabhai Sons Ltd. 143 ITR 473, 486 (Guj); and that the decision does not lose its binding force merely because Sub-section (6) of Section 801 has not been specifically reproduced/ incorporated in the judgment since: (a) Section 801 has been specifically referred and considered by the Court; and (b) arguments based on the language of Sub-section (6), similar to the one addressed before this Bench, were also very much raised and considered by the Court. Reference, in this regard, was made to Ballabhdas Mathuradas Lakhani AIR 1970 SC 1002, 1003 wherein their Lordships observed in the context of binding effect of decision of Supreme Court on the High Court that: 4 .... The decision was binding on the High Court and the High Court could not ignore it because they thought that relevant provisions were not brought to the notice of the Court. Following the aforesaid decision, the Supreme Court in Director of Settlements, AP v. M.R. Apparao observed: 7. . .. The decision in a judgment of the Supreme Court cannot be assailed on the ground that certain Aspects were; not considered the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judgment of the Supreme Court's observation in Apparao' case as under: Mr. Rao then placed. reliance on yet another decision of this Court in the case of A-One Granites v. State of U.P. and Ors. [2001] 2 SCC 537 to which one of us (Pattanaik, J.) was a party. In that particular case the applicability of Rule 72 of the U.P. Minor Minerals (Concession) Rules, 1963 was one of the bone of the contention before this Court, and when the earlier decision of the Court in Prem Nath Sharma v. State of U.P. , was pressed into service. It was found that in Prem Nath Sharma's case the applicability of Rule 72 had never been canvassed and the only question that had been canvassed was the violation of the said Rules. It is in this context, it was held by this Court in Granite's case "as the question regarding applicability of Rule 72 of the Rues having not been even referred to, much less considered by Supreme Court in the earlier appeals, it cannot be said that the point is concluded by the same and no longer res Integra". This dictum will have no application to the case in hand on the question whether the judgment of this Court in Civil Appeal. No. 398 of 1972 can be held to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ITAT had decided the issue. In the case of DCIT v. Deloitte Consulting India Pvt. Ltd., the ITAT, Hyderabad Bench 'A' in ITA No.1082/Hyd./2010 has decided this issue as under :- 31. Next we deal with the issue with regard to the allowance of 5% deduction before computing the ALP. It is contention of the learned counsel for the assessee that the arithmetical mean of the comparable price should be reduced by 5% for determining the ALP. We have gone through the submissions and also the case law relied upon by him. He pointed out that the amendment made under section 92C of the Act would be applicable prospectively and not retrospectively. Whereas the learned Departmental Representative objected to the above proposition and submitted that under the proviso, no standard deduction has been provided to the assessee company. In our considered view, the tolerance band provided in the aforesaid provision is not to be taken as a standard deduction. If the arithmetic mean falls within the tolerance band, then there should not be any ALP adjustment. If it exceeds the said tolerance band, then ALP adjustment is not required to be computed after allowing the deduction at 5%. That mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des a tolerance band. It also suggests that there will be no TP adjustment in cases of marginal variation up to +/- 5% but substantial variation would result in appropriate TP adjustment. Learned CIT(Appeals) has explained the meaning of tolerance band which read as under : * "Whether there is an international transaction involving sale of a product or export of services, there would be a credit entry in the profit & loss account. By allowing a margin of (-) 5% for such a transaction, a taxpayer is permitted to have a credit entry which is not below 95% of the ALP so that profit from the transaction is not understated beyond the tolerance level of (-) 5%. * Whenever there is an international transaction involving purchase of a product or import of services, there would be a debit entry in the profit and loss account. By allowing a margin of (+) 5% under such a transaction, a taxpayer is permitted to have a debit entry which is not above 105% of the ALP so that profit from the transaction is not understated beyond the tolerance level of (+) 5%. 11.18.3 The decision rule contained in the proviso to the sec. 92C(2) of the Act containing a tolerance band is akin to a similar deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s within the range of alleged tolerance band then there may not be any adjustment but if it exceeds then ultimate adjustment is not required to be computed after reducing the arithmetic mean by 5%. The actual working is to be taken. Learned First Appellate Authority has considered this aspect elaborately in assessment year 2003-04 and after going through his order, we do not see any merit in the ground of appeal raised by the assessee in all these three assessment years. Considering all these decisions of ITAT Benches and pleadings on both the sides, we are of the view that this tolerance band provided in the proviso is not to be construed as a standard deduction. In this case, the TPO has adopted the arithmetic mean of several comparables for taking out a PLI which would be tested with the PLI of the assessee. If that arithmetic mean falls within the range of tolerance band then there may not be any adjustment but if it exceeds then ultimate adjustment is not required to be computed after reducing the arithmetic mean by 5%. The actual working is to be taken into consideration. Considering all these facts, the appeal of the assessee is also dismissed on this ground. 15. In the g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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