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TMI Blog2013 (8) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... nces 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s carried out with M/s O S Metal Import GMBH, Germany. 4. The return of the assessee was processed u/s 143(1) and consequently a notice u/s 143(2) dated 18.10.2004 was served upon the assessee on 27.10.2004. During the course of the assessement, the Assessing Officer made a reference u/s 92CA(1) of the IT Act to the ACIT(TP), Hyderabad. The TPO had rejected the assessee's TP methods and applied TNMM on the export transactions of the assessee and had arrived at an ALP adjustment of Rs.1,82,56,357/- to the sales of the assessee to M/s O S Metal Import GMBH, Germany 5. Aggrieved the assessee company filed an appeal before CIT(A)-III. The Learned CIT(A)-III in his order dealt only with the question on whether the M/s O S Metallimport GMBH, Germany was an AE of the assessee company and made the following observations while concluding that M/s O S Metal Import GMBH, Germany was NOT an AE : "2.5. I have duly considered the submissions of the Id. AR and of the TPO. The provisions of transfer pricing regulations provided in Chapter X of the Act can be invoked only in respect of international transactions between two or more "Associated Enterprises", which have been exclusively defined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cribed under the Act or by the Board. No such relationship of mutual interest has been prescribed by the Board till date. Hence, TPO has no authority to invoke the provisions of clause (m) of Sec. 92A(2) in the case of the appellant". 2.10. In view of the above discussion, I am of the opinion that the appellant company and M/s.O S were not the associated enterprises in terms of Sec.92A of the Act. Hence, the provisions of transfer pricing in Chapter X of the Act cannot be invoked at the threshold. The appellant cannot be penalized for making a mistake in filing the statutory report in Form No.3CEB. Whether the mistake of ignorance of law was on the part of the auditors of the company or by any executive of the company, is immaterial. It is a trite law that any non-taxable income cannot be brought to tax even if it is offered for tax by the assessee himself. It is the duty of the Assessing Officer to levy the correct tax as per the provisions of the Act. AO/TPO has erred in invoking the transfer pricing regulations in the present case. The aforesaid grounds raised by the appellant are allowed. 6. The Learned CIT(A)-III further held that given the M/s O S Metallimport GMBH, Germa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny specific designation. Under the circumstance, it shows that all those directors have role in the functioning and in the affairs of the company during the previous year. Further, when the assessee 'company has admitted that Mr. WolfgangOrmeloh was a full time director in their case and moreover they have not denied such finding given by the TPO that Mr. W olfgangOrmeloh was looking after the purchases of raw material from abroad and also was looking after the sales made by the company in European market, it clearly shows that the said Mr. Wolfgangormeloh was acting as an Executive Director in the case of above company. Under the circumstance and having regard to the provisions of such clause (e), in my view, the said O M Metal Import GMBH, has to be treated as an AE vis-a-vis the above company, in this case. 6. As may be seen, in that clause there is no reference to entire goods manufactured. Thus, it cannot be said that as per the said clause, 100% of goods manufactured shall have to be sold to the said enterprise. In fact, having regard to provisions of said clause, in a case where substantial proportion of goods manufactured by and enterprise is sold to the other enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , GMBH, Germany as an AE of the Alumeco India Extrusion Ltd. 7. Nowhere mentioned that prescribed authority is CBDT or ACT. It is wrong interpretation by the CIT or AR that relationship of mutual interest has been prescribed by the Board till date. 9. The Learned AR submitted that there was no AE relationship between the assessee company and M/s O S Metal Import GMBH, Germany as per Section 92A(2) and hence there can be no application of TP provisions in the assesse's case. Without prejudice to this fact, the Learned AR also submitted in detail to the effect that the TP methods used by the assessee company for both import (CUP) and export (CPM) were correct and showed clearly that the assessee's transactions were at arms'-length. The learned AR relied on the decision of ITAT Mumbai 'E' Bench in the case of Sanchez Capital Services (P) Ltd. vs. ITO,3(3)(2) (2012) 26 Taxmann.com 61 (Mum.). 10. We have heard both Parties. 11. All the grounds, except Ground 6 which is a general Ground, solely revolve around the issue whether M/s O S Metal Import GMBH, Germany is an Associated Enterprise (AE) of the Appellant company M/s Alumeco India Extrusion Ltd. 12. The Learned CIT(A) in h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that S.92A conditions were satisfied and there is an AE relationship. Rather, the specific facts and circumstances of the case have to be analysed in order to conclude whether or not an AE relationship actually exists. 17. The Revenue's appeals being ITA Nos. 613 614/Hyd/09 for both the assessment year's 2003-04 and 2004-05 are allowed for statistical purposes. ITA No. 845/Hyd/11: Assessee appeal - A.Y. 2005-2006 18. With respect to the assessee's appeal there are 6 Grounds. Grounds 1 and 6 of the assessee's appeal are general in nature and do not require adjudication. 19. Grounds 2 3 : 2. The learned CIT(A) is not justified in law in coming to the conclusion that there is Associated Enterprise (AE) relationship on the assumption that Mr. Walfgang Ormeloh is a full time director and was acting like an Executive Director in the appellant company which is contrary to the facts. Learned CIT(A) ought to have appreciated that there is no AE relationship triggering as per provisions of Sec. 92A(1) and (2) of the Act during the year. 3. The learned CIT(A) ignored the findings given by the then Ld. CIT(A) in A.Y. 2003-04 and 2004-05 that there was no AE relationship between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchased a substantial quantity of raw material from the German company as well as exported a substantial quantity of finished goods to the German company it clearly shows there was a mutual beneficial interest and hence this clause was satisfied. The Learned CIT(A) also pointed out that S.92A(2) starts with the phrase "For the purposes of sub-section(1), two enterprises shall be deemed to be associated enterprises If, at any time during the previous year" andhence if the clauses under S.92A(2) are satisfied at some point during the year it is enough to create a deemed AE relationship. Section 92A(2)(i) states that "the goods or articles manufactured or processed by one enterprise are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise". The assessee has to establish that the assessee company has exported goods to other parties on similar prices and conditions. Furthermore, 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 G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are attracted and thereafter decide the issue. Hence, this revenue appeal is also set aside to the AO to decide after adjudicating the assessee's appeal. 29. Hence this appeal of the Revenue being ITA No. 941/Hyd/11 is allowed for statistical purposes. ITA.No.1475/Hyd/2010 - Assessee's Appeal - A.Y. 2006-07 30. There are 6 grounds before us which are as under. Grounds 1 and 6 are general in nature and do not need adjudication. "1. The Ld. Assistant Commissioner of Income Tax (ACIT) is erroneous in law and on the facts of the case. 2. The Ld. ACIT is not justified in law in rejecting the Most Appropriate Method (MAM) adopted by the assessee- company as Cost Plus Method (CPM) for determining the Arm's Length Price in respect of international transactions of export sales of Rs.50,17,96,267/-. 3. The Ld. ACIT is not justified in adopting transaction net margin method (TNMM) for computing Arm's Length Price in respect of export sales of Rs.50,17,96,267/- without considering the fact that appellant is a BIFR referred loss making company. 4. The Ld. ACIT has considered comparables without performing functions, assets and risks analysis (FAR analysis). The FAR analysis of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of the instant case as discussed above, it was to be held that the TPO had no mandate to have recourse to external comparables when, in the instant case, internal comparables were available, which could be applied for determining the arm's length price of international transactions with AEs. Therefore, the Assessing Officer/TPO was directed to determine arm's length price of international transactions with AEs by making internal comparison of the net margin earned by the assessee from the international transactions with associated enterprises and the profit earned by the assessee from the international transactions with unrelated parties." 35. There is also merit to the assessee's argument that it is a sick company in BIFR and hence has economic conditions and business circumstances which are unique to it. It would seem erroneous to compare such a loss-making company, at least without non-trivial adjustments, to various other companies performing activities in the same domain via external TNMM especially when readily available internal transactions are there as a benchmark. 36. Finally, we note that the TPO has tried to dismiss the internal CPM for incorrect allocation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egards Ground 5, we direct the AO to compute and arrive at the total income after providing appropriate adjustment of brought forward losses. 43. In the result, the appeal being ITA No. 1475/Hyd/10 is partly allowed for statistical purposes. ITA.No.2070/Hyd/2011 - Assessee's Appeal - A.Y. 2007- 2008 44. There are 8 grounds before us which are as under. Grounds 1 and 8 are general in nature and do not need adjudication. "1. The Learned Asst. Commissioner of income Tax (A.O.) is erroneous in law and on the facts of the case. 2. The Ld. A.O. is not justified in law in rejecting the Most Appropriate Method (MAM) adopted by the assessee- company as Cost Plus Method (CPM) for determining the Arm's Length Price in respect of international transactions of export sales of Rs.87,18,91,410/-. The Ld. A.O. ought to have accepted CPM adopted by the appellant as the MAM. 3. The Ld. A.O. is not justified in adopting Transaction Net Margin Method (TNMM) for computing Arm's Length Price in respect of export sales. 4. The Ld. A.O. is not justified in law in considering inappropriate comparables without performing functions, assets and risks analysis (FAR analysis) and consequently arri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead with rule 10B. 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 " The Supreme Court has also held TNMM to be the most appropriate method in the case of Service PE- "in our view apart from the orders passed by the TPO/AO the said method (TNMM) is the appropriate method in the case of service PE as the TNMM apportions the total operating profit arising from the transactions on the basis of sales, costs, assets etc" Hon 'ble A-Bench of Hyderabad also considers TNMM is mot appropriate method in the following decisions. 1. Qual core Logic Ltd" Hyderabad in ITA No. 893/Hyd/2011 for the Asst. Year 2005-06 date of pronouncement 31/05/2012 2. M/s. Four Soft Ltd. Hyderabad in ITA No. 1495/Hyd/2010 for the Asst. Year 2006-07 date of pronouncement 09/09/2011 Further, the learned D.R. relied on the following decisions in support of his contention. 1. Director of I.T. (International Taxation Anr. V. Morgan Stanley Co. Anr. (2007) 292 ITR 416. 2. ITA.No.893/Hyd/2011 in the case of M/s. Qual Core Logic Ltd. Hyderabad vs. DCIT, Circle 16(3), Hyderaba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit earned by the assessee from the international transactions with unrelated parties." 49. We heard both parties. We find that internal CPM is justified and appropriate in arriving at the proper ALP than applying external TNMM and comparing it with different transactions of other companies. 50. We also find merit in the assessee's argument that it is a sick company in BIFR and hence has economic conditions and business circumstances which are unique to it. 51. The assessee pleaded that companies with less forex earnings should be removed and also brought to our notice the following decisions:- (1) DCIT, Mumbai vs. M/s. Indo American Jewellery Ltd. Mumbai (2010) 41 SOT 1 (Mum.) (2) M/s. CRM SDervices India (P) Ltd. (2011) TII-86-ITAT- Del-TP (3) Deloitte Consulting India Pvt. Ltd. vs. DCIT, Circle 1(2) ITA.1084/Hyd/2010. (4) ACIT, Range 7 (2) vs. M/s. Rhoida Chemicals India Pvt. Ltd. ITA.No.4201/Mum/2007. 52. We are of the opinion that it would seem erroneous to compare such a loss-making company, at least without non-trivial adjustments, to various other companies performing activities in the same domain via external TNMM especially when readily available in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour for statistical purposes 57. As regards Ground 3, we have provided detailed reasoning in Ground 2 as to why internal CPM is the Most Appropriate Method and not external TNMM. Hence this ground is held in favour of the assessee. 58. As regards Ground 4, this ground does not need adjudication as the external TNMM application is held incorrect and internal CPM is to be adopted in the assessee's case. 59. As regards Ground 5, We have already adjudicated this issue in Grounds 2 and 3 and hence this ground is allowed in favour of the assessee. 60. As regards Ground 6, it is clear that any adjustments during the computation of the arm's-length price should be restricted only to the international transactions and not to the entire turnover of the assessee. It is illogical to make additions to local transactions based on TP adjustments and any such addition to entire transactions of the assessee will go against the principle and the provisions of TP under the Indian IT Act. Our view finds support on various decisions which are as follows :- (1) ACIT vs. Givaudan Flavours (India) P. Ltd. 45 SOT 35 (Mum.) (2) Starlite vs. DCIT 201-TII-28-ITAT (Mum.) 61. In the case of Li ..... X X X X Extracts X X X X X X X X Extracts X X X X
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