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TMI Blog2016 (3) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... elation to a transaction, when viewed in their totality, differ from those which would have been adopted by an independent enterprise behaving in a commercially rational manner.." was in effect adopted. This Court finds no infirmity in this approach. As a result, the first question framed is answered against the assessee and in favour of the revenue. As far as the second question, i.e the adoption of CUP method being contradictory with the ITAT's decision is concerned, there was no argument on behalf of the appellant. That apart, noticeably at the time of framing the question the Court recorded that it was framed at the insistence of the assessee's counsel. In view of the findings on the first question and in view of these facts, this question too is answered in favour of the revenue and against the assessee. - ITA 443/2013, ITA 451/2013 - - - Dated:- 29-2-2016 - S. Ravindra Bhat And R. K. Gauba, JJ. For the Appellant : Sh. C.S. Aggarwal, Sr. Advocate with Sh. Prakash Kumar, Advocate For the Respondent : Sh. P. Roy Chaudhuri, Sr. Standing Counsel ORDER Mr. Justice S. Ravindra Bhat 1. These two appeals by the assessee require resolution of common question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee s appeal, like for AY 2002-03, was allowed by the CIT(A) on 30.12.2009. The impugned common order of the Tribunal accepted the Revenue s contentions and restored the additions made by the AO pursuant to the TPO s determination. 5. The facts which are common for the specific questions of law framed by the Court are that for both the assessment years 2002-03 and 2003-04, the assessee had procured component level inputs for the manufacture of its products. The total raw material imported was to the extent of ₹ 57,77,00,221 of which the value of imports from Sumitomo Corporation was ₹ 49,86,69,729/- or 86.3% of the total import. It also constituted 37.5% of the total raw material consumed. This figure related to AY 2002-03. Likewise, for AY 2003-04, the facts were much the same and the transfer pricing adjustment leading to addition of ₹ 5.86 crores was recommended by the TPO. The AO, in his order dated 28.03.2006 noticed that there was no difference of facts between the previous year AY 2002-03 and the current year in question, AY 2003-04 in respect of supplies by Sumitomo Corporation and consequently directed addition of ₹ 97,44,630/-. The TPO had dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nent purchase and proceeded to apply an entirely different method, i.e. Comparable Uncontrolled Price (CUP) method for arriving at the net value of transactions. 7. Mr. C.S. Aggarwal, learned senior counsel points out that by virtue of Section 92C(1) and (3), statutory guidance in such matters is that the method most appropriate having regard to the nature of transaction or class of transactions or class of associated persons or functions is to be viewed. Thus, it is not open to the TPO/AO to segregate a set of transactions from a series or class of transactions, in the overall benchmarking exercise to arrive at the PLI. It is urged in this regard that the ITAT s decision, rejecting the assessee s contention that under TNMM, entity level margins have to be compared and that both imports and domestic purchases could be aggregated together is erroneous. Reliance is also placed upon para 3.10 of the OECD guidelines which, it is submitted, grants autonomy to the entity to adopt a portfolio approach as a business strategy where the tax payer bundles transactions for the purpose of earning appropriate return across portfolios rather than on a single product within it. These being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entirely different method, i.e. CUP. The assessee relies upon paras 3.6, 3.9 and 3.10 of the OECD guidelines in support of its contentions. It also relies upon certain rulings of different Benches of the ITAT to urge that such sequential segregation and setting portion of the TP exercise so to say, to break with the integrity is unjustified and unsupported by the text of the law, i.e. Section 92C of the Income Tax Act. The assessee also relies upon Rule 10E of the Income Tax Rules, which guide the proper approach of the TPO in such matters. In the present case, the reasons for addition of ₹ 1.36 crores for AY 2002-03 and addition of ₹ 97 lakhs for AY 2003-04 may be seen from the following extracts of the orders made by the TPO and AO respectively. 10. The TPO, for the first year (AY 2002-03) noticed that the assessee had sought to justify imports from Sumitomo Japan by relying upon an agreement of September 2000. That was an umbrella contract merely enabling supply to the assessee of certain components, materials and production testing equipments. The assessee was asked to disclose or provide particulars with respect to components sold to Sumitomo Corporation by D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vely high in Japan but it is more than effectively neutralized by large scale mechanization, ingenious management techniques, training, infrastructure etc. resulting in economies of scale High productivity, to a very large extent, compensates for the higher wages. The incremental Capital output ratio in Japanese economy is much better than that in India, i.e. 2.5 (appx) against 4.5 (appx) in India. Japanese industry is known all over the world for their quality management and high efficiency. Therefore, this contention of assessee is not very convincing and not corroborated by concrete facts and evidence. 7.2 It is true that in some cases the prices at which the assessee purchased components and spare parts from SCJ during the year under assessment have been compared with the rates at which purchases were made in the following year(s) from the local parties. Even so, the comparison is not unreasonable and the circumstances of the case. In fact assessee itself has used the data of previous two years while using TNMM for computation of ALP of international transactions. In the absence of information about any other comparables or costing of such components, it is reasonable to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Transactions with M/s. Sumitomo Corporation Japan (SCJ) During the year the assessee has imported raw material of ₹ 51.54 crores from Sumitomo Corporation Japan (SCJ) out of total import of raw material of ₹ 58.29 Crores. Total consumption of raw material has been shown at ₹ 138.43 Crores. It means that import from Sumitomo Corporation Japan are 88.42% of total import and 37.23% of total raw material consumed. It was found that during the proceedings of last year, the TPO has found that the said transactions with SCJ have not been reported as international transaction with associated enterprise in Form No.3CEB. The situation remains same this year as well, as international transactions with SCJ have not been incorporated in Form No.3CEB on the ground that share holding of Sumitomo Corporation Japan (SCJ) of 10.27% in assessee company is less than the required limit of 26% of share holding provided under IT Act to make SCJ the associated enterprise of the assessee. After considering assessee s plea and iddc0after giving detailed reasoning, the TPO in AY 2002-03 has held that international transactions undertaken with SCJ are covered by scope of Section 92B(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into. Rule 10B reads as follows: 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under subclause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; (d) profit split method, which may be applicable mainly in international transactions or specified domestic transactions involving transfer of unique intangibles or in multiple international transactions or specified domestic transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which- (i) the combined net profit of the associated enterprises arising from the international transaction or the specified domestic transaction in which they are engaged, is determined; (ii) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in subclause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction; (f) any other method as provided in rule 10AB. 14. The cumulative effect of various provisions of the Income Tax Act, notably Sections 92, 92C, 92D and 92E read together with Rule 10B and 10D is the obligation to discern, if in a given set of circumstances, the assessee has disclosed international transactions, as well as an ALP. The ultimate purpose of this exercise- the primary onus of which is upon the assessee, is to ensure that no amount which is otherwise to be designated or treated as income, under law, escapes assessment. The assessee's TP report is to be accurate and based on materials; its explanations for the queries raised by the TPO, convincing and reasonable. The underlying emphasis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such expenditure. Hence, the ALP is rightly determined at nil . As no expenditure would have been incurred, there is no necessity to apply a particular method to arrive at such conclusion. In fact, by all the five methods or any one of them, when applied to the fact that there is no necessity of payment, the result of nil ALP will come. 15. Sony Ericsson Mobile Communications India (P) Ltd v Commissioner of Income Tax (2015) 374 ITR 118 (Del) was a subsequent decision by another Bench of this Court, which reviewed the methodology that TPOs are to adopt while determining ALP. The said judgment held, inter alia, that: 137. The question of aggregation and disaggregation of transactions when the TNM Method or even in other methods is sought to be applied, must have reference to the strength and weaknesses of the TNM Method or the applicable method. Aggregation of transactions is desirable and not merely permissible, if the nature of transaction(s) taken as a whole is so inter-related that it will be more reliable means of determining the arm's length consideration for the controlled transactions. There are often situations where separate transactions are intertwined a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as follows: 147. Tax authorities examine a related and associated parties' transaction as actually undertaken and structured by the parties. Normally, tax authorities cannot disregard the actual transaction or substitute the same for another transaction as per their perception. Restructuring of legitimate business transaction would be an arbitrary exercise. This legal position stands affirmed in EKL Appliances Ltd. (supra). The decision accepts two exceptions to the said rule. The first being where the economic substance of the transaction differs from its form. In such cases, the tax authorities may disregard the parties' characterisation of the transaction and re-characterise the same in accordance with its substance. The Tribunal has not invoked the said exception, but the second exception, i.e. when the form and substance of the transaction are the same, but the arrangements made in relation to the transaction, when viewed in their totality, differ from those which would have been adopted by the independent enterprise behaving in a commercially rational manner. The second exception also mandates that actual structure should practically impede the tax authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the assessee, to justify its decision, the onus was clearly on the latter to afford a convincing and reasonable explanation. Such of the explanations that were forthcoming, were apparently unconvincing. What the assessee banks upon in its appeal to this Court is the unbending and inflexible acceptance of its TP exercise; according to its logic, a bundled or aggregated series or chain of transactions used in the TP report should remain undisturbed. Now, there can be no dispute that the AO would normally accept the figures given, if they do not show features that call for his interference. However, his job also extends to critically evaluating materials and in cases which do require scrutiny, go ahead and do so. In the process, at least in this case, the unusual features which remained unexplained by the assessee, influenced the TPO and the AO to resort to transfer pricing adjustment and determine ALP by adopting the CUP method for the procurements from Sumitomo Japan. The second test spoken of in Sony Ericcson (supra) i.e the form and substance of the transaction were the same but the arrangements made in relation to a transaction, when viewed in their totality, differ fr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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