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TMI Blog2015 (11) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation has been accepted by the TPO itself in all the other years. The conduct of the business and the products manufactured are identical in the year under consideration, when compared to the other years i.e. assessment years 2006-07, 2007-08 and 2008-09. In the entirety of the above said facts and circumstances, we are of the view that the adoption of TNMM method was the most appropriate method for benchmarking international transactions with its associate enterprises and we find no merit in the order of Assessing Officer in adopting RPM / CPM method to benchmark the international transactions with its associate enterprises. We hold that the TNMM method should be applied on aggregate basis for benchmarking international transactions of the assessee. Thus we hold that for benchmarking international transactions with its associate enterprises on aggregate basis, TNMM method should be applied and since the margins declared by the assessee are higher than the margins declared by the comparables picked up by the assessee in its TP study report and consequently, the international transactions entered into by the assessee with its associate enterprises being at arm's length price, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the international transaction of export of finished goods to associated enterprises and sales to third parties are not comparable; - selecting Cost Plus Method ('CPM') as most appropriate method by erroneously concluding that: (i) for manufacturing function, CPM is the most appropriate method without appreciating the facts in case of the Appellant; (ii) the Appellant has stated different reason for rejection of CPM in the TP report and before the learned TPO; and (iii) CPM being the traditional method is preferred over TNMM. - not appreciating the facts that the gross profit margin workings provided by the Appellant (submitted based on the specific request of the learned TPO) provides information on gross margin based on standard cost of production considered in Bill of Material for selected sample of products which is different than the actual/real profit earned by the Appellant and hence transfer pricing adjustment based on selected samples of Bill of Materials is not appropriate; - not appreciating the facts that the goods sold to third parties accounts for only 4% of the total sales of Export Oriented Unit (hereinafter referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue in ITA No.736/PN/2014 has raised the following grounds of appeal :- 1) On the facts and in the circumstances of the case, learned CIT(A)-IT/TP has erred in deleting the addition made by the Assessing Officer by disallowing the assessee's claim of bad debts amounting to ₹ 30,63,290/-. 2) On the facts and in the circumstances of the case, learned CIT(A)-IT/TP erred in holding that after the amendment to section 36(1)(vii) ( w.e . f. 01.04.1989), the assessee need not demonstrate to the tax authorities that the debt has become bad whereas the real objective of this amendment was to eliminate the dispute as to the year in which a bad debt was to be allowed. 3) On the facts and in the circumstances of the case, learned CIT(A)-IT/TP has not appreciated that even after the amendment w.e . f. 01.04 . 1989, the allowance is only in respect of 'bad debt' and 'not just a debt written off. 4) On the facts and in the circumstances of the case, learned CIT(A)-IT/TP is also factually not correct in holding that AO had not discussed any specific bad debt when the AO in his order had listed all the bad debts and had discussed each of them indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arate profitability i.e. operating margins over operating revenue in case of the EOU units and DTA units had been worked out at 15.29% and 8.4%, respectively and the weighted average arithmetical mean of the comparables was worked out at 9.21%. The TPO show caused the assessee that in view of the nature of international transactions undertaken, being different in their nature and scope, the aggregation for the purpose of benchmarking of international transactions should not be allowed. The TPO was of the view that the benchmarking done by aggregating the transactions mentioned in the first four heads of the table was not acceptable and therefore, the same was proposed to be rejected. The TPO thus, show caused the assessee in respect of import of finished goods for re-sale. The TPO observed that the transfer pricing study report submitted by the assessee did not contain the functional analysis in respect of the said international transactions. The explanation of the assessee that there was no change in the nature of terms and conditions of international transactions as in the earlier years, was not accepted by the TPO and the assessee was asked to give the details and separate profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch are incorporated under para 3 at pages 7 and 8 of the order of TPO. The TPO noted from the working of gross margins that for sample size of items, which are about 100 in number and are accounted for nearly 80% of total sales, the gross profit earned in respect of export to associate enterprises was at 44.71% and in case of non-associate enterprises, it was 53.78%. In view thereof, the TPO was of the view that cost plus method was the most appropriate method to be applied, in respect of the said transaction. 8. The assessee furnished written submissions which are incorporated under para 6 at pages 9 to 17 of the order of TPO. Vide para 6.2.2, the TPO first decides that the combined transaction approach as adopted by the assessee to benchmark the transaction along with other transactions, was not acceptable and was rejected. In respect of imports made from the associate enterprises and third parties, the case of the assessee before the TPO was that the items were not similar or same and there was difference in technical specifications and also difference in application of products, and hence, application of re-sale market price method was not warranted to determine the arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the submissions of the assessee that difference in the transactions and their non-compatibility, was not acceptable in the facts of the case. Further, either Rules or OECD guidelines also did not support assessee s contention. The contention of the assessee that application of CPM method was not warranted because finished goods exported to associate enterprises and sold to third parties were not similar in terms of technical specifications and end use application, was also rejected. The TPO in this regard observed that what was benchmarked was the production from the EOU units, which meant that products manufactured therein were for exports only. The market for the export of products was in the hands of assessee was to its associate enterprises as none of the exports from EOU units was to third parties. In other words, the associate enterprises used the EOU units of the assessee, as manufacturing base for certain types of resistors and trimmers. This was nothing but joint phase arrangement for manufacturing resistors and trimmers, which were in turn, were the end products itself, but to be used in the final products. Under the circumstances, the contention of the assessee that its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nchmarked. 11. The second issue which was considered by the CIT(A) was the application of most appropriate method. The CIT(A) after considering the approach of the assessee of aggregation of transactions and consequent rejection of TNM Method, held that in respect of manufacturing functions, CPM method was the most appropriate method. Then, the plea of the assessee that exports segment could not be compared with the domestic segment as it had sold the resistors technically of different specifications, was also not agreed upon by the CIT(A), in the absence of details that major components of sale to the associate enterprises as well as third parties consisted of different resistors, so as to make the gross margins. The contention of the assessee that exports segment and the domestic segment could not be compared because geographical difference, was also not valid. The CIT(A) noted that the assessee was not a contract manufacturer for associate enterprises, but operates as normal manufacturer and this being so if the assessee has lesser margins in exports segments than the domestic segment, same does not reflect Indian commercial realities. Hence, this argument of the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention was drawn to the TP Study report placed at pages 33 and 34 of Paper Book and it was pointed out that where the assessee has entered into various transactions which are functionally dissimilar, then the aggregation of transactions cannot be allowed. Further, the learned Departmental Representative for the Revenue relied on the order of CIT(A). 15. We have heard the rival contentions and perused the record. The issue arising in the present appeal in respect of transfer pricing adjustment is in relation to the application of most appropriate method for benchmarking the international transaction entered into by the assessee with its associate enterprises. The assessee during the year under consideration, had entered into various international transactions as under:- Sr No Nature of transaction Amount (Rs) Method applied 1 Import of raw materials 9,84,79,170 TNMM 2 Import of finished goods 1,25,03,453 3 Import of Capital Machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tems imported from associate enterprises, making an adjustment of ₹ 14,11,280/-. With regard to the export of finished goods to the group companies, the TPO noted that the assessee had earned gross profit margins from manufacturing and sale to non-associate enterprises at 53.78% as against the gross profit margins earned from manufacturing and export to associate enterprises at 44.71%. The difference in gross profit margins in the above two segments was proposed as an adjustment in the hands of the assessee by the TPO at ₹ 4.70 crores. The Assessing Officer incorporated the above said adjustment in the assessment order resulting in addition of ₹ 4.84 crores. The assessee is in appeal against the adjustment made by the TPO which have been applied by the Assessing Officer and has been upheld against the assessee by the CIT(A). 17. The principal objection of the assessee before us is that it had been consistently following the TNM Method for benchmarking its international transactions with its associate enterprises both in the preceding and succeeding years and except for the year under consideration, the TNM Method followed by the assessee by aggregating internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee before us is that in view of the above said facts and circumstances, there was no merit in deviating from the TNM Method applied by the assessee to benchmark its international transactions with its associate enterprises on aggregate basis. Undoubtedly, the doctrine of res judicata is not applicable to the tax proceedings, but at the same time, where there is no change in the facts in respect of a particular transaction and / or issue or proceedings, then it is the requirement of law that consistency should be maintained and the methodology adopted by the assessee for benchmarking its international transactions should not be disturbed. Where the Revenue from year to year has accepted the method adopted by the assessee for benchmarking its international transactions with its associate enterprises, in the absence of any reasons brought on record, there is no merit in deviating or taking stand contrary to the stand accepted in both the preceding and succeeding years, while benchmarking the international transactions in the hands of the assessee. In the absence of TPO or CIT(A) having been able to demonstrate as to how the facts of the present year are different from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP and second issue is in respect of the ALP adjustment made by the Assessing Officer. In this case, the ALP adjustment is made only to the export of tractors and in respect of other reported transactions the Assessing Officer has accepted the method adopted by the assessee as well as determination of the ALP as per the T.P. study filed by the assessee. The contention of the assessee is that it had exported tractors to AEs for last several years and the assessee has adopted TNMM method as the most appropriated method for determining the ALP in respect of the transaction of export of tractors to the AEs from A.Y. 2004-05. The said contention of the assessee has not been disputed before us by the Revenue. Admittedly, for all those assessment years starting from 2004-05 onwards and also for the A.Y. 2008 -09 the Assessing Officer has accepted the TNMM method as a most appropriate method for determining the ALP in respect of the sale of tractors by the assessee to the AEs. The assessee has filed the copies of the assessment order for the A.Ys. 2004-05 and 2005-06 which are placed in the Compilation (Page Nos. 282 - 285 of the P/B-2). The assessee has also filed the TPO s order for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the ALP. There cannot be two standards for the Assessing Officer one standard in one assessment year and different standard in the subsequent year without explaining how facts differ. It is seen that the TPO has gone on the turnover for rejecting the comparable of the assessee but in the preceding year A.Y. 2005 -06 the TPO had accepted the very same companies as comparable. If TPO desires to reject the comparable as there is a change in the parameters or FAR analysis then he should have brought on record how the parameters of the FAR are different in this year as compared to A.Y. 2005 -06. There is a merit in the contention of the assessee that the tractors segment is niche segment and there is no much difference in the turnover of the comparable entities selected by the assessee. 19. The TPO has expressed his reservation on the Escorts Ltd. and HMT Ltd. comparable selected by the assessee on the ground that those two companies have incurred losses. It is seen that in the A.Y. 2005 -06 those two companies has incurred the losses but in spite of the losses in that year, the TPO has not rejected those two companies as a comparable. We fail to understand why there is inconsis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect with regard to the four companies cited (supra) but still balance four companies are comparable to the assessee company and in the same business as no specific objection is noted by the TPO, those companies should be considered as comparable. The assessee states that net operating margins (NOM) of the balance four companies is within plus or minus 5% of the net operating margin of the export segment and hence, the transactions are at ALP. The assessee has filed the working on the above contention which is as under: Sr. No. Name of the company Net operating margin 1 Tractors Farm Tractor Ltd. 11.90% 2 Mahindra Mahindra Ltd. 8.65% 3 Punjab Tractors Ltd. 11.50% 4 International Tractors Ltd. 15.41% Average net operating margin 11.87% Net operating margin of export segment 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands covered in favour of the assessee by the decision of the ITAT, Pune in the case of Drill bits International Pvt. Ltd. (supra). In the said case the TPO had rejected TNMM method and had computed the ALP by adopting the CPM. The assessee explained that there are various differences in the two segments in the form of marketing functions, credit risk, types of customers, etc. etc. and hence, the CPM could not applied. The Tribunal held that considering the differences in the functions performed and the assets utilized, suitable adjustments are not possible to be made and hence, the said case CPM was not the most appropriate method for determining the ALP. The operating part of the discussion in the said decision is as under: 50. Considering the above submissions, vis- -vis the method i.e. CPM (cost plus method) adopted by the learned TPO to determine the ALP, which has been relied upon by the learned Departmental Representative, we find that the learned TPO while adopting CPM has failed to appreciate several material aspects of the issue as discussed above. In our view, the learned TPO was not justified in comparing the gross margin in export segment visa- vis gross margins i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts is justified because major time of the employees is devoted towards the domestic segment. We also find substance in the submission of the learned Authorised Representative that assessee has also to incur selling and administrative expenses, freight expenses, bank interests etc., which cannot be ignored as ultimately the income-tax is levied on net profit and therefore, comparison of the net profit of the domestic export segment is more proper. The assessee at page No. 141 of the paper book has given working of the net profit of the two divisions as per which, the net profit of the domestic segment is 13.04 per cent and that of the export segment is 12.55 per cent. We find that there is hardly any difference between two segments. We also find substance in the submission of the learned Authorised Representative that in respect of transaction with AE, the assessee also does not have to bear bad debt risks, product/warranty risks etc., hence some percentage of reduction should he given in the margin computed for the domestic segment for the above risk. 52. Considering the above material facts in totality, we are of the view that the learned TPO was not justified in adopting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estic market with the export market as there is a difference in the export segment and domestic segment on account of credit risks, marketing, warranty, etc. etc. We, therefore, hold that on principles as well as on the rule of consistency, the TPO/DRP are not justified in holding that the CPM is an appropriate method for determining the ALP in respect of export of the tractors to the AEs and we approve TNMM as a most appropriate method adopted by the assessee for determining the ALP. We also hold that even after excluding KAMCL the average operating profit margin of the 7 companies are at 5.71% as against the 11.70% of the export segment of the assessee company. The ALP declared by the assessee is well within the limit. We, accordingly, hold so. In the result, the Ground No. 4 is allowed. 21. While deciding the second issue of application of TNMM method, the Tribunal in turn relied on the ratio laid down by the Pune Bench of Tribunal in M/s. Drilbits International P. Ltd. Vs. DCIT (supra) and Alfa Laval (I) Ltd. Vs. DCIT (2014) 149 ITD 285 (Pune Trib.). Applying the above said ratio to the facts of the present case, we hold that for benchmarking international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Authorized Representative for the assessee pointed out that the CIT(A) had relied on the decision of Hon ble Supreme Court in Himasingka Seide Ltd. Vs. CIT (supra), which was relatable to assessment years 1988-89 to 1990-91, wherein the Hon ble Karnataka High Court was dealing with the old provisions of the Act. However, section 10B of the Act has been amended w.e.f. 01.04.2001 and it has now become a deduction and not exemption under the Act. In respect of reliance of the CIT(A) on the Circulars issued by the CBDT, the learned Authorized Representative for the assessee pointed out that the said Circulars were not binding upon the assessee and could not debar the assessee from claiming its deduction. The learned Authorized Representative for the assessee in this regard placed reliance on series of case laws filed in the Paper Book. 26. The learned Departmental Representative for the Revenue pointed out that admittedly, prior to 01.04.2000, the section speaks of exemption, but after its amendment, undoubtedly, it is a deduction allowable to the assessee under the Act. The learned Departmental Representative for the Revenue placing reliance on the ratio laid down by the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e while incorporating the provisions of Chapter VIA. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in ss.80C to 80U. S.80B(5) defines for the purpose of Chapter VI-A gross total income to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the content of the deduction which is allowable under s.10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. Thus ITAT was correct in holding that the brought forward unabsorbed depreciation and losses of the unit the Income which is not eligible for deduction under s.10A of the Act cannot be set off against the current profit of the eligible unit for computing the deduction under s.10A of the IT Act. 28. The said proposition of law has further been applied by the Hon ble Bombay High Court in C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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