9911796707
TMI Blog2015 (7) TMI 492X X X X Extracts X X X X X X X X Extracts X X X X ..... any reason to interfere with the order of the CIT(A) on this issue and the revenue’s ground of appeal on this issue is rejected. As regards the basis comparability adopted by the TPO i.e. the product comparability as against the functional comparability adopted by the assessee is concerned, it is stated by the learned counsel for the assessee that the very same issue had arisen in the case of related party to the assessee i.e. M/s.GE BE Pvt. Ltd. wherein issue is decided in favour of assessee. Depreciation on plant and machinery purchased from Elpro International Ltd. - Held that:- This issue had first arisen in the assessment year 1998-99 and had come up to the Tribunal for adjudication and the Tribunal had set aside the issue to the AO for verification of the claim of the assessee. It is submitted by the learned counsel for the assessee that the AO had made disallowance of depreciation in the orders passed u/s 143(3) r.w.s. 254 for the assessment years 1998-99 and 1999-2000 and the appeals against the same are pending before the CIT(A). He submitted that all the details were furnished before the CIT(A) for the assessment years 1998-99 and 1999- 2000 and therefore this issue is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 58,87,090/- not received during the relevant financial year; (ii) telecommunication expenses of ₹ 68,41,559/-; and (iii) income of ₹ 27,25,570/- from trading activity. (i) He observed that as regards the sum of ₹ 58,87,090/- the assessee's auditor has qualified Form 56F to the tune of ₹ 58,87,090/- stating that the approval is sought from the competent authority. The assessee was asked to produce proof in this regard to substantiate their claim but since assessee could not produce the said evidence, the AO did not consider the sum of ₹ 58,87,090/- as export turnover for the purpose of computation of deduction u/s 10A of the Act. (ii) Further, the AO observed that the expenses of ₹ 68,41,559/- incurred for telecommunication expenses are attributable to the delivery of the product or software outside India and therefore should be reduced from the export turnover. The assessee contended that if the same is excluded from the export turnover, then it should be excluded from the total turnover as well. The AO, however, did not agree with the assessee's contention and held that the telecommunication expenses of ₹ 68,41,559/- attributab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by the assessee to those employees on their retirement which does not quality for deduction u/s 32 and that the CIT(A) had confirmed the said disallowance. Therefore, following the orders of his predecessor, the AO disallowed the claim of depreciation for the relevant assessment year also. As regards the transfer pricing adjustment is concerned, he followed the order of the TPO and made the transfer pricing adjustment of ₹ 43,09,86,678/-. 5. Aggrieved by the order of the AO, assessee preferred an appeal before the CIT(A) who granted partial relief to the assessee. Against the relief given by the CIT(A), the revenue is in appeal before us, while assessee is in appeal against the confirmation of the addition made by the AO. 6. As regards the transfer pricing adjustment, brief facts are that the assessee, which is a contract manufacturer of medical equipments and components, is also rendering engineering services to the Group companies. During the relevant financial year, the assessee had entered into the following international transactions: · Import of raw materials for contract manufacturing activity: ₹ 43,89,45,267/-. · Purchase of fixed assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting as compared to the assessee and on account of this, prices are hiked up increasing their margin vis-à-vis tax-payer. The TPO, however, rejected the assessee's objection, holding that the assessee itself had adopted 'cost plus method' as the most appropriate method and that no new fact or evidence is brought on record by the assessee to show that CPM ceased to be the most appropriate method or to justify switch over to a less direct method i.e. TNMM. He held that the CPM is the most direct method after CUP method to determine pricing when an enterprise manufactures and sells to affiliates. He held that arms length sales price is determined by adding the normal 'gross mark' up on cost to the costs incurred. Thus it is affected only by the 'cost of production' while TNMM is influenced by a lot of other factors such as operational efficiency. He, therefore, held that CPM is the most appropriate method. Thereafter, he examined the impact of advertising and marketing on the margins earned by the comparable companies and held that the average spending on advertisement, marking and distribution (functions not per formed by the assessee) by the comparable companies range between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee-company, we do not see any reason to interfere with the order of the CIT(A) on this issue and the revenue's ground of appeal on this issue is rejected. 10. As regards the basis comparability adopted by the TPO i.e. the product comparability as against the functional comparability adopted by the assessee is concerned, it is stated by the learned counsel for the assessee that the very same issue had arisen in the case of related party to the assessee i.e. M/s.GE BE Pvt. Ltd., in ITA No.850/Bang/2010 dated 06/12/2013. The learned Departmental Representative, however, supported the orders of the AO/TPO. 11. On perusal of the order of the Tribunal in the case of M/s.GE BE Pvt. Ltd. (cited supra) we find that M/s.GE BE Pvt. Ltd., is a contract manufacturer of medical equipment and that it also entered into similar international transactions with its AEs which are reproduced at para.4 of the order of the Tribunal. In the said case also, the assessee therein, had adopted CPM as the most appropriate method for determining the ALP and had adopted comparables involved in manufacture of automobile parts on contract basis. The TPO therein was of the view that since the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s mark-up on cost. The Assessee's gross mark-up on cost was 16.24% and therefore it was claimed that the price received from the AE by the Assessee in respect of the international transaction was at Arm's length. 33. The TPO accepted the methodology adopted by the Assessee viz., CPM as the MAM. The profit level Indicator (PLI) chosen by the Assessee viz., Gross profit on cost was also accepted by the TPO. The TPO was of the view that the comparable chosen by the Assessee were not from the Medical equipment industry segment and in terms of Rule 10B(2) (a) the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the specific characteristics of the property transferred or services provided in either transaction. The TPO therefore was of the view that product comparability is very important. The TPO referred to para 2.18 of the OECD guidelines on Transfer Pricing wherein it is provided that although broader product differences can be allowed in the resale price method, the property transferred in the controlled transaction must still be compared to that being transferred in the uncontrolled transaction. The guidelines also l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 Avg. 46.55% The adjustment and consequent addition to the ALP was made by the AO. 37. The CIT(A) confirmed the reasoning of the TPO on all the above objections of the Assessee. On the question of product comparability being important the CIT(A) agreed with the view of the TPO. However with regard to the objection of the Assessee that the comparable companies chosen by the TPO do not have export sales, the CIT(A) found merit in the argument advanced by the Assessee. He found that 2 out of the three companies chosen by the TPO viz., Centenial Surgical Sutures Ltd. And South India Surgical Company Ltd., had only 6.79% and 17.74% export sales to total sales. The CIT(A) found that the TPO selected these two companies as comparable based on the quantitative filter of export earnings without providing any minimum threshold level of such earnings. The CIT(A) also found that the Assessee was a 100% EOU and any comparison of its gross margins with companies having an insignificant proportion of export sales is not likely to yield meaningful results. He also found that the TPO has consistently adopted the quantitative filter of export revenue to operating revenue being greater than 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of ACIT Vs MSS India (supra) reported in 009-TII-67-ITAT-Pune-TECHNICAL SERVICES dated 29.5.2009 is relevant. In this case, the ITAT had observed that a method chosen cannot be discarded unless there are compelling reasons for the same. While this ruling has been given in the context of the TPO changing the method during the TP audit, it would, in all fairness and equity, be equally applicable to the assessee as well. The ruling of the Pune, ITAT in the case of MSS India Pvt. Ltd. (supra) at para 22 of the order is as under : " The consideration as to which method will be more beneficial to the revenue authorities is certainly not germane to the selection of most appropriate method. While there is no particular order or priority of methods which the assessee must follow, and no method can invariably be considered to be more reliable than others, on a conceptual note, transactional profit methods (i.e. Transactional Net Margin Method and Profit Split Method) are treated as methods of last resort which are pressed into service only when the standard methods, which are also termed as 'traditional methods', (i.e. Comparable Uncontrolled Price Method, Resale Price Method and Cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd methods. In any event, any preference of one method over the other method must be justified by the Transfer Pricing Officer on the basis of cogent material and sound reasoning. (Para 22)." 40. Of course the facts of the case in MSS Ltd. are little different from that of the facts in the instant case. In the case of MSS India, internal comparability analysis was available whereas it is absent in the case of the assessee. Further, in that case, the TPO had noted that CPM cannot be applied as the relevant data for applying the method was not available in the Prowess database or Capitoline database and thus resorted to TNMM. In the instant case, it is not the case of either the assessee or Revenue that relevant data is not available for applying a particular method. Hence it is all the more necessary to select the MAM based on the principles and the Rules enacted, rather than on other considerations. Therefore the principles enunciated in the case of MSS Ltd. (supra), that changingthe MAM is not tenable unless there are cogent reasoning for the same is squarely applicable to this case. 41. A reference can also be made to the provisions in the Act which deals with selection of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the Most Appropriate Method ('MAM'). While doing so, the appellant has observed in the TP Study, at page 22, as under : " Cost Plus Method The cost plus method ("CPLM") evaluates the arm's length character of a controlled transaction by referencing the gross profit mark up realized in comparable uncontrolled transactions. The arm's length price for the controlled transfer is the controlled taxpayer's cost of producing the property involved in the transaction, plus an amount equal to those costs multiplied by the appropriate profit mark up. One ordinarily uses the cost plus method to determine arm's length pricing for manufacturing, assembly, or other activities relating to the production of goods sold to related parties. As with the resale price method, comparability under the cost plus method is particularly dependent upon the similarity of functions, risks, and contractual terms. Again, close physical similarity of the products involved in the controlled and uncontrolled transactions is not ordinarily necessary to establish the comparability of the manufacturers' gross profit mark-ups, although substantial differences in the products may indicate significant functional di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olled transaction, application of the most appropriate method rule involves a careful balance in which the following factors may be taken into account to assess the relative accuracy of the identified methods: i. The extent to which the comparability factors (characteristics of the property or services, functional analysis, contractual terms, economic circumstances and business strategies) of uncontrolled transactions or entities are similar to the controlled transactions or entities, given the type of comparability that is required under each pricing method; ii. The availability and reliability of financial and other information that is known about the comparable; iii. Reliability and accuracy of the comparability adjustments; and iv. Reliability of presumptions as well as deficiencies in data and presumptions." 44. The OECD Guidelines on Transfer Pricing in Para 2.2 also lays down similar approach to be adopted for choosing MAM. It lays down as follows: "2.2 The selection of a transfer pricing method always aims at finding the most appropriate method for a particular case. For this purpose, the selection process should take account of the respective strengths and weak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year between the time of his TP Study and the assessment / appellate proceedings, such a change can happen only if there are any changes in facts, functionalities or availability of data. 46. In the instant case, the assessee has not made out any case or adduced any evidence to demonstrate that there has been any change in the facts, functionalities or availability of data. Nor is it the assessee's case that any of these have been taken wrongly in the TP Study that warrant a change of method has become necessary. The only reason for seeking change of method is that the comparables chosen by the TPO are different from that chosen by the assessee and that the functional profile of the comparables are different. While the aspect of functional difference has been discussed in the later part of the order, we can conclude here that the change of method sought by the assessee is not in tune with the Indian TP Rules, which finds support in the UN TP Manual. 47. The next aspect to be seen is as to whether in the case of a contract manufacturer MAM is Cost Plus Method. The UN Practical Transfer Pricing Manual for developing countries, 2012, in Para 6.2.20.2 and 6.1.3.3 lays down sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uter components, sells its products to FS, its foreign distributor. UT1, UT2, and UT3 are domestic computer component manufacturers that sell to uncontrolled foreign purchasers; (ii) Relatively complete data is available regarding the functions performed and risks borne by UT1, UT2, and UT3, and the contractual terms in the uncontrolled transactions. In addition, data is available to ensure accounting consistency between all the uncontrolled manufacturers and LCO. As the available data is sufficiently complete to conclude that it is likely that all material differences between the controlled and uncontrolled transactions have been identified, the effect of the differences is definite and reasonably ascertainable, and reliable adjustments are made to account for the differences an arm's length range can be established. 6.2.21.2. Example 2 The facts are the same as in Example 1 except that LCO accounts for supervisory, general, and administrative costs as operating expenses, which are not allocated to its sales to FS. The gross profit mark-ups of UT1, UT2, and UT3, however, reflect supervisory, general, and administrative expenses because they are accounted for as costs of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of Sec.92C(2) of the Act read with Rule 10C(1) & (2) make it clear that MAM has to be determined on the basis of parameters laid down therein. One can therefore conclude this discussion by holding that as a general rule CPM would be the MAM in the case of Contract Manufacturers but that would be subject to the satisfaction of the parameters laid down in Rule 10C(1) & 2 of the Rules. 48. In this regard, we will examine the parameters laid down in Rule 10C(1) and 2 of the Rules, which have been already quoted in pre-Para 41 of this order. Rule 10C(1) states that the MAM shall be the method which is best suited to the facts and circumstances of each particular set of international transactions. As explained in earlier paragraphs and fortified by the UN TP Manual Guidelines, in case of contract manufacturers like the assessee, CPM is the MAM. Rule 10C(2) enumerates six factors that shall be taken into account in selecting the MAM. Out of these six factors, while there is no dispute in four of the factors, the objection of the assessee needs to be analysed in the light of Rule 10C(2)(d) and (e). It is the contention of the assessee the comparables chosen by the TPO, being fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essories for medical diagnostic imaging equipment. Such components are incorporated by the Affiliates into equipment which are in the nature of capital goods. Hence, on the analysis of product comparability, the comparables chosen by the ld. TPO are not comparable with the products of GE BE as the comparison is primarily between consumables versus equipments. > Accordingly, comparables chosen by the ld. TPO also do not manufacture the same or similar products and hence would need to be rejected even if the product comparability criterion is considered to be relevant to the application of the CPM. Even otherwise, the set of comparables chosen by the TPO are functionally not comparable, being engaged as they are in marketing and distribution functions, while not being predominantly contract manufacturers. > Assuming without admitting, that even if the ld. TPO comparables are to be considered for the purposes of comparability analysis by applying CPM as appropriate method, the appellant submits as follows : - That there are significant differences in the functions performed by these comparables primarily with respect to the additional marketing and the selling function, vis-&agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted as under : Analysis considering alternative approach using TNMM > Further, without prejudice to our submissions above, the appellant submits that if one were to argue that : - the adjustments mentioned above are not to be considered; or - that the comparables used in the TP Study do not have the desired degree of comparability for applying CPM as the most appropriate method. - then alternatively it would be appropriate to use the Transactional Net Margin Method ('TNMM') as the appropriate method instead of considering adhoc adjustments or rejecting the comparables used in the TP Study." A careful perusal and analysis of the assessee's submissions before the CIT (Appeals) (supra) clearly places the assessee's stated position as one that accepts CPM as the MAM, provided certain adjustments are made for the differences in the marketing and selling functions, based on the actual expenses incurred by the companies. We, therefore, clearly find that it is before the Tribunal that the assessee has changed its stand, stating that TNMM is the MAM and that it would be absurd to consider CPM to be the MAM. TNMM was broached as an alternative approach only during the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en CPM may not be the right method. The conclusions of the CIT(A) in this regard are found to be correct in the present case. The TPO in the present case has given due weightage to functional similarity also. The argument on behalf of the Assessee by placing reliance on para 1.41 of the OECD guidelines which provides that comparability even where products are different can be undertaken but the functions undertaken should be similar is not applicable in the present case as the TPO has considered both product as well as functional similarity of comparable. The difference in functions performed between the Assessee and the comparable, if any, calls only for adjustments to be made, which in the present case can be quantified. Therefore the claim of the Assessee that the comparable chosen has to be rejected cannot be accepted. 51. The argument on behalf of the Assessee that Indian Accounting Standards do not give clear cut requirement for disclosure of gross profits and therefore there will be difficulty in computation of the cost of production and gross profit is again an argument in the air without any specific instance having been pointed out referable to the three comparable comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... figure of 8%. In view of the difference in functions, the assessee is entitled to adjustments which are reliable and accurate, as stipulated in Rule 10C(2)(e) of the Rules. If such adjustments are provided on actual basis, the difference in the functional profile with the comparable companies gets quantified as provided in Rule 10B(1)( c ) (iii) as applicable to Cost Plus Method (CPM). In the absence of such adjustment, a mere application of CPM on comparables with different functional profile will not be in tune with the TP Rules. Therefore, as CPM is adopted as the MAM, the assessee should be allowed adjustment on actual basis, which will reliable and accurate, as stipulated in Rule 10C(2). Needless to add, the TPO will afford opportunity of hearing to the assessee with leave to file detailed submissions in this regards, if necessary. Thus the issues raised in Grounds 1 to 7 by the assessee are treated as partly allowed for statistical purposes." 13. We find that the CIT(A) has granted adjustment to marketing and selling, finances based on actual expenditure incurred by the comparable companies and also working capital adjustment which has resulted in the adjustment at 'nil'. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit of the section even in cases where the sale proceeds are received beyond the period of time prescribed under the said provision. The only condition is that the sale proceeds would have to be received. If the sale proceeds are not received within 6 months period, all that the assessee has to do is to make a request to the competent authority for extension of time. Of course, he has to make all efforts to receive the sale proceeds from the foreign buyer expeditiously. Granting to extension of time is the discretion of the competent authority. But once such a discretion is exercised and the time is extended, the assessee would be entitled to the benefit of the same. 9a. The statute does not prescribe any time-limit within which the application is to be made for such an extension of time and the period within which the competent authority has to pass an order. The object behind this provision appears to be that once the sale proceeds are received in India though late and the authority vested with the power to extend the time, exercises the discretion, the assessee should be entitled to the benefit. In that view of the matter, the Tribunal was justified in setting aside the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act should be accepted. The learned Departmental Representative, on the other hand, relied upon the judgment of the Hon'ble Supreme Court in the case of Liberty India Ltd. reported in (2009) 317 ITR 0218. 15. Having regard to the rival contentions and the material on record, we find that the Special Bench of the Tribunal in the case of Maral Overseas Ltd. (cited supra) has considered the applicability of the decision of the Hon'ble Supreme Court it the case of Liberty India (cited supra) and at paras.78 to 80 has held as under: "78. Section 10B sub-section (1) allows deduction in respect of profits and gains as are derived by a 100% EOU. Section 10B(4) lays down special formula for computing the profits derived by the undertaking from export. The formula is as under :- Profit of the business of the undertaking Export turnover X Total turnover of business carried out by the undertaking 79. Thus, sub-section (4) of section 10B stipulated that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, not-with-standing the fact that sub-section (1) of section 10B ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84 ITR 584 had approved the principle laid down in the Special Bench decision in International Research Park Laboratories v. ACIT (supra). In the assessee's own case the I.T.A.T. in the preceding years, after considering the decision in the case of Liberty India held that provisions of section 10B are different from the provisions of section 80IA wherein no formula has been laid down for computing the eligible business profit. 80. In view of the above discussion, question no. 2 is answered in affirmative and in favour of the assessee. Accordingly, the assessee is eligible for claim of deduction on export incentive received by it in terms of provisions of section 10B(1) read with section 10B(4) of the Act. " 16. We find that the co-ordinate bench of the Tribunal in the case of GE BE Pvt. Ltd., has considered the decision of the Special Bench in coming to the conclusion that the Tribunal's order in the assessee's own case for assessment year 2002-03 is not applicable for the assessment year before us. Therefore respectfully following the decision of the co-ordinate bench, we allow this ground of appeal of the assessee. 17. As regards the issue of depreciation on plant and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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