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TMI Blog2018 (4) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee deserves to be dismissed. Adjustment to the international transactions relating to export of goods - MAM selection - TNMM or CUP method - rejecting the TNMM method in the present year - Held that:- ransfer Pricing Officer has proceeded to examine the issue on the basis of TNMM method. He has ordered for updated data of comparable. Thereafter, when even on the basis of updated data, the international transaction was found to be at arm’s length, he laconically held that CUP method would be preferred. The DRP had summarily upheld the change from TNMM to CUP method without assigning any cogent reason whatsoever. By no means it is justified to keep on finding a method for addition by trial and error method. Accordingly, we hold that there was no justification in rejecting the TNMM method applied by the assessee as in the preceding year. Since as per the same computation the assessee’s margin was found to be at arm’s length, we set aside the order of authorities below and decide the issue in favour of the assessee. Adjustment to the international transaction relating to corporate guarantee - Held that:- DRP has carefully examined the issue and passed a reasonable o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort of goods: 1 : I The Assessing Officer / Dispute Resolution Panel has erred in making an upward adjustment of ₹ 13,55,73,433/- to the total income of the Appellant by holding that the international transaction relating to the export of goods entered into by the Appellant with its Associated Enterprise was not at arm's length. 1 : 2 The Assessing Officer / Dispute Resolution Panel erred in rejecting the Transactional Net Margin Method (TNMM) which was determined by the Appellant as the most appropriate method as per the provisions of section 92C(1) of the Income-tax Act, 1961. 1 : 3 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the international transaction relating to the export of goods entered into by the Appellant with its Associated Enterprise was at arm's length and hence no adjustment in respect thereof was called for and the stand taken by the Assessing Officer / Dispute Resolution Panel in this regard is misconceived, erroneous and incorrect. 1: 4 The Appellant submits that the Assessing Officer be directed to delete the upward adjustment of ₹ 13,55,73,433/- mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961. 3 : 3 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no disallowance u7s. 14A of the Income-tax Act, 1961 was called for and hence the stand taken by the Assessing Officer/ Dispute Resolution Panel in this regard is misconceived, erroneous and incorrect. 3 :4 The Appellant submits that the Assessing Officer be directed to delete the additional disallowance u/s. 14A so made by him and to re-compute its total income and tax thereon accordingly. 3. The grounds of appeal for assessment year 2013-14 reads as under: 1 : 0 Re.: Adjustment of ₹ 13,16,87,917/- to the international transaction relating to export of goods: 1 : I The Assessing Officer / Dispute Resolution Panel has erred in making an upward adjustment of ₹ 13,16,87,917/- to the total income of the Appellant by holding that the international transaction relating to the export of goods entered into by the Appellant with its Associated Enterprise was not at arm's length. 1 : 2 The Assessing Officer / Dispute Resolution Panel erred in rejecting the Transactional Net Margin Method (TNMM) which was determined by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that considering the facts and circumstances of its case and the law prevailing on the subject no disallowance u7s. 14A of the Income-tax Act, 1961 was called for and hence the stand taken by the Assessing Officer/ Dispute Resolution Panel in this regard is misconceived, erroneous and incorrect. 3 :4 The Appellant submits that the Assessing Officer be directed to delete the additional disallowance u/s. 14A so made by him and to re-compute its total income and tax thereon accordingly. 4. The assessee has also filed common additional grounds for both the assessment years. The common additional ground reads as under: On the facts and in the circumstances of the case and in law, the action of the Assessing Officer ( AO ) of making reference to the learned Transfer Pricing Officer ( TPO ) without giving any opportunity of being heard, is in violation of the provisions of section 92CA of the Income-tax Act, 1961 and needs to be quashed. The Appellant submits that the reference made to the TPO is not in accordance with law and hence the Order passed pursuant to the illegal reference is bad in law. 5. Regarding the admission of additional ground, the ld. Counsel of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of any of the provision or that of natural justice. However, the ld. Departmental Representative submitted that the decisions referred by the ld. Counsel of the assessee relate to a situation where the assessee has objected before the Assessing Officer that a particular transaction is not an international transaction. However, the ld. Departmental Representative submitted that in the present case, there is no objection whatsoever by the assessee that any of the transactions considered as international transaction have been wrongly done by the Assessing Officer. Hence, the ld. Departmental Representative submitted that there is no merit whatsoever in the additional ground raised by the assessee. 10. We have carefully considered the submissions and perused the records. In this regard, we may gainfully refer to the provision of section 92CA which reads as under: Reference to Transfer Pricing Officer. 92CA. (1) Where any person, being the assessee, has entered into an interna- tional transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee. (3A) Where a reference was made under sub-section (1) before the 1st day of June, 2007 but the order under sub-section (3) has not been made by the Transfer Pricing Officer before the said date, or a reference under sub-section (1) is made on or after the 1st day of June, 2007, an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires: Provided that in the circumstances referred to in clause (ii) or clause (x) of Explanation 1 to section 153, if the period of limitation available to the Transfer Pricing Officer for making an order is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to have been extended accordingly. (4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether any income arises and/or is affected or potentially arises and/or is affected by the International Transaction would certainly be a factor to determine whether or not it is necessary or expedient to refer the matter to the TPO. In case no objection is raised by the assessee to the applicability of Chapter X then the prima facie view of the Assessing officer would be sufficient before referring the transaction to the TPO for determining the ALP. However where an objection is raised about the applicability of Chapter X by an assessee then the requirement for taking a decision after taking on board the objection becomes necessary. In the absence of it being considered at this stage, the same could only be considered by the DRP and as pointed out above, if considered at the very threshold by the Assessing Officer it could save an elaborate exercise of determining the ALP which may turn out to be entirely academic. It is for the above reason that grant of personal hearing before referring the matter to the TPO has to be read into Section 92CA(1) in cases where the very jurisdiction to tax under Chapter X is challenged by the assessee. Admittedly the aforesaid exercise of conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Transfer Pricing Officer has to be read into section 92CA(1) in cases where the jurisdiction to tax under Chapter X has been challenged by the assessee. It was further expounded that in case no objection is raised by the assessee to the applicability under Chapter X, then the prima facie view of the Assessing Officer would be sufficient before referring the matter to the Transfer Pricing Officer for determination of the AMP. We find that the above exposition and the facts of the present case clearly show that the additional ground raised by the assessee cannot be sustained. It is not at all the case of the assessee that there is any objection to the applicability of Chapter X of the I. T. Act. Hence, on the anvil of the above said Hon'ble jurisdictional High Court decision, this additional ground raised by the assessee deserves to be dismissed. 14. Furthermore, a reading of the CBDT Instruction referred above, provides for three situations where the Assessing Officer must provide an opportunity of being heard to tax payers before recording his satisfaction or otherwise. These situations are as under: (a) where the taxpayer has not filed the Accountant s report unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Sale of finished goods 430776529 347689679 TNMM 2 Purchase of Raw Material (Marcoat) 10373706 3993282 TNMM 3 Purchase of Finished goods 756157 7116652 TNMM 4 Investment in Equity capital 5057 - 5 Investment in Preference capital 6902250 - 6 Advance given 414400 - 7 Corporate Guarantee $25,00,000 (value of guarantee as on 31.03.2012) 12,85,50,000 - Determination of ALP : Export of finished goods: ₹ 43,07,76,529/- Purchase of raw materials (Marcoat) ₹ 1,03,73,706/- Purchase of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso attached in its submission in transfer pricing study report. Segmental profitability statement reflects the following operating results: (Rs. In lakhs) Operating Revenues 4458 2864 Operating cost 3864 2492 Operating Profit 594 373 Return on Total Cost (%) 15.37% 14.96% On the basis of the above, the assessee claimed that the transactions as reported should be treated as at Arm s Length Price. 20. The TPO asked the assessee to provide an updated margin of comparables selected in earlier year, i.e., India Glycols Limited and E.I.D. Parry (India) Limited. The updated PLI come to 6.5% while the PLI of the assessee was 15.21%. Hence, the assessee submitted that the transaction is at arm s length. 21. At this point, the Transfer Pricing Officer noted that during the course of assessment proceedings based on the submissions made by the assessee, it was observed that the average sale price at which goods were sold to A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the variation in the prices charged to the AE and non-AE however, the assessee could not quantify the adjustment on account of various differences between the International transactions and Comparable uncontrolled transactions as per clause (ii) to Rule 10B(l)(a) of the Income tax Rules, 1962. The assessee's submission on external CUP is of no use since internal CUP ie sales price to non-AE is considered as a CUP. - The assessee's relied on OECD guidelines has been considered which also supports the above contention of making accurate adjustments to eliminate the effect of such differences. Similarly, the assessee's reliance on the above decision has been considered which emphasize on the variation in the features of the products and geographical locations. However, in the assessee's case since there is no variation in the products sold to the AE and non-AE, the above judgement is not applicable in this case. This office has considered the prir.es for the same products from the AE and non-AE as CUP. 23. The Assessing Officer proceeded to make the computations accordingly and arrived at an adjustment of ₹ 13,55,73,433/- to be made to the internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd all the relevant records have been perused. We find that the first objection of the ld. Counsel of the assessee is that in the preceding years, for three years transactional net margin method was used to bench mark the international transaction. In the present assessment year, the Transfer Pricing Officer noted that the assessee has adopted transactional net margin method for determining the arms length price for export of finalised goods to the Associate Enterprises. During the course of assessment proceedings, the Transfer Pricing Officer proceeded with the same and also asked the assessee to provide an updated margin of the comparable selected. The updated margin was given to the Transfer Pricing Officer. From the computation of updated margin also, the PLI of the assessee come to 15.21% which was higher than the PLI of the two comparable companies. Hence, from this analysis of updated comparables also, the transaction was found to be at arm s length. At this juncture, the Transfer Pricing Officer changed his tracks. He observed that no verifiable data has been provided to substantiate the method used. He further held that CUP would be a more appropriate method to bench mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth price, in the manner as may be prescribed; 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. ii. Rule 10C of the Income-tax Rules, 1962 ( Rules ) states that: (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction provides the most reliable measure of an arm's length price in relation to the international transaction. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:- (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch person, or such other relevant factors. Section 92C(2) provides that it is only the appropriate method as referred to in section 92C(1) which can be applied for determining arm s length price in the prescribed manner. The choice of method on the basis of which arm s length price is determined has to be exercised on the touch stone of principles governing selection of most appropriate method set out in section 92C(1). The legislature does not provide for an order of preference of method of determining of arm s length price. Now once an appropriate method for determining the arms length price has been chosen and accepted by the Revenue consistently over a number of years, there has to be some cogent reason to make it departure from the consistent method. We do not find that any case has been made out by the Transfer Pricing Officer or the DRP that there was an error committed earlier when the TNMM method was chosen and approved. The Transfer Pricing Officer while justifying the change stated that in T.P. report assessee has bench marked the transaction under TNMM, no verifiable data has been provided to substantiate the method used. Hence, from the above discussion, we find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to ₹ 75,051,543/-). 31. The assessee has bench marked this transaction using the credit rates of AE at 2% and the assessee at -2.25% resulting in spread of -0.25%. The Assessing Officer proceeded to reject the assessee s submission. He went on to detail about the comparison about the bank guarantee and corporate guarantee and concluded as under: 7.8 In this regard, attention is invited in the case of Glenmark Pharmaceuticals Ltd. in ITA No. 5031/Mumbai/2012 dated 13.11.2013 (A.Y. 2008-09), the Hon ble ITAT has held that the naked quote rates applicable to the bank guarantee can be made comparable to the corporate guarantee only after downward adjustments (Para 22). In view of the above, a downward adjustment to be naked quotes of the rates of bank Guarantee has been done in this year, while benchmarking this transaction. It is seen that the bank guarantee rates vary generally between 2% to 3% giving an average of about 2.5%. Accordingly, it would be appropriate to charge 2.25% as arm s length rate of guarantee. 32. Against the above, the assessee appealed before the DRP. 33. The DRP proceeded to consider the definition of international transaction u/s. 92B of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the TRP and the DRP granted part relief directing as under: 8.8 In view of the above detailed discussion, the action of the A.O. in applying Rule 8D is upheld. However, the DRP has noted that while marking the disallowance u/s.14A, credit has not been given for the income already offered to tax of ₹ 4,86,322/- in the computation of income. During the course of the DRP proceedings, a copy of computation of income was filed in support of the claim made by the assessee company. Thus, DRP has taken note of the fact that this has led to double addition. Accordingly, the A.O. is directed to again verify the facts from the original record and given credit of ₹ 4,86,322/- for the suo-moto disallowance made in the computation of income and further, addition should be made only for the balance amount. 38. Upon careful consideration we find that it is now decided by various high courts including the Hon'ble Jurisdictional High Court that no disallowance u/s.14A is required when no exempt income has been earned. 39. In the present case, the assessee s contention is that it has not earned any dividend income from its subsidiary company in India. As regards the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961, the expenditure is to be duly certified by the prescribed authority, which in this case is Secretary, Department of Scientific and Industrial Research in Form No. 3CL. Further, the DRP has noted that the certificate of approval in Form 3CM, which gives in-principle approval to the R D facility is also not on record. 8.4 In the absence of the statutory approvals in Form 3CL/Form 3CM, the A.O. has rightly denied the benefit of weighted deduction u/s. 35(2AB) of the I. T. Act, 1961. Accordingly, this ground of objection the assessee is rejected and no directions are being issued to the A.O. on this issue. 44. Against the above order, the assessee is in appeal before us. 45. We have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that the said certificate could not be produced before the authorities below as the same was received late. The ld. Counsel of the assessee sought to file the same before us as additional evidence. 46. Upon careful consideration we note that the assessee has made additional submissions, which needs to be verified at the Assessing Officer s level. Hence, we remit this issue to the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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