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TMI Blog2018 (5) TMI 1374X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation and clarification before the DRP for adjudicating the issue. The issue raised vide grounds of appeal No.2 and 3 is allowed for statistical purposes. Transaction of import of finished goods - Held that:- Re-sale Price Method is the most appropriate method to be applied in such circumstances since the assessee is purchasing finishing goods from its associated enterprise at a price, which in turn, re-sells to the unrelated enterprises. The Assessing Officer / TPO is thus, directed to apply RPM method and determine the margins of assessee and of the comparables. The assessee has filed the working of assessee’s margins and the margins of comparables which may be verified and in case the same is within +/- 5% range, no transfer pricing adjustment needs to be made in the hands of assessee. Reasonable opportunity of hearing shall be given to the assessee. The ground of appeal No.4 is allowed as indicated above. Transfer pricing adjustment made in respect of transaction of export of packing materials - transaction of export of spools to associated enterprise - Held that:- The assessee had exported packing material in the shape of spool to its associated enterprise, on which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as erred in enhancing the income of the appellant by ₹ 5,73,57,820 by holding that the international transactions pertaining to import of raw materials is not at arm's length. While doing so, the AO has inter-alia erred in: - holding that the mark-up earned by the Associated Enterprises ('AEs') in line with the Group Transfer Pricing Policy cannot be considered for determining the arm's length price under the Cost Plus Method ('CPM'); - disregarding the appellant's contention that even if adjustments are to be made to the prices of import of raw materials, then the same cannot exceed the profit earned by the AEs on such supply of raw materials; - disregarding the profit level indicator of 'cash profit as a percentage of sales' considered by the appellant in an alternate benchmarking analysis for substantiating the arm's length nature of the import of raw materials, wherein the external comparables where identified and the cash profit of such external comparables was compared with that earned by the appellant's relevant manufacturing segment; - not restricting the transfer pricing adjustment only to the transactions betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transactions, and the additions made by the AO be deleted. The above grounds are without prejudice to each other. 3. The assessee has also raised additional ground of appeal which read as under:- 6. Additional Grounds for transfer pricing adjustment pertaining to Import of Raw Material On the facts and in the circumstances of the case and in law, the Learned Assessing Officer ( AO') / Transfer Pricing Officer ( TPO‟) pursuant to the directions of the Dispute Resolution Panel ( DRP‟) has erred in making an adjustment of ₹ 5,73,57,820/- by holding that the international transaction pertaining to import of raw materials is not at arm's length. While doing so, the Ld. AO has, inter-alia erred in: i. rejecting the appellant‟s contention regarding Associated Enterprises ( AEs‟) to be taken as the Tested Party for the transaction pertaining to import of raw materials; ii. accepting comparable companies which are functionally not comparable to the appellant‟s manufacturing business segment; iii. adopting the profit level indicator of operating profit as a percentage of total cost instead of operating profit as a percentage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... why several transactions should not be aggregated. In respect of import of raw materials, the TPO noted that the assessee had imported raw materials worth ₹ 47,99,29,822/- from its associated enterprises. The assessee had selected CPM method for benchmarking international transactions. The cash profit margin earned by comparables was 5.31%, whereas the assessee s PLI was 4.23% and it was claimed that the same was at arm's length. The TPO noted that the assessee company was incorporated in the year 2000 and it was not in the initial period of production and depreciation expenses though, notional but were part of expenditure, hence the said deprecation could not be ignored while working out the profitability of assessee. Therefore, PBIT / total cost was to be the correct method to ascertain the profitability of assessee company. The assessee was asked to submit working of benchmarking by adopting PLI as PBIT/total cost. The assessee filed submissions and the assessee s cash markup was (-) 2.95%, whereas the markup of comparables was 4.22%. The TPO noted difference of 7.14% and by adopting the said parameter, the TPO worked out the cash profit markup at ₹ 5,97,38,149/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their capacity of manufacturer to the assessee was fair and reasonable. It was also contended that the same was lower than normally charged in third party transactions and hence, the transfer pricing approach should be accepted at arm's length price. The assessee filed additional evidence before the DRP on 23.08.2012 in support of its contention that the associated enterprises had earned markup of 7% on raw materials supplied by it. It was further submitted that the assessee with the help of its associated enterprises had been able to collate some fresh evidence to demonstrate appropriateness of the price charged by associated enterprises to the assessee for the products. Request was made for admission of additional evidence. The DRP observed that the assessee had filed additional evidence on 23.08.2012 when the case was getting time barred on 30.09.2012. It further commented that the evidence was found to be about the profit earned by foreign party. In view of non-availability of adequate time to verify the additional evidence of such nature, the DRP declined to admit the additional evidence filed by the assessee. The DRP further noted that the TPO had given reasons for changi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke the PLI after depreciation. Before the DRP, additional evidence was filed to prove why foreign party should be taken as tested party. The DRP asked for remand report, which was received on 17.09.2012 but the DRP rejects the additional evidence on the ground that it was filed too late. The learned Authorized Representative for the assessee stressed that the DRP erred in not adjudicating the additional evidence when remand report was called for. He further pointed out that in any case, the DRP proceedings were continuation of proceedings and should have accepted and adjudicated on the additional evidence. Referring to the provisions of section 144C of the Act read with Rule 6 of DRP Rules, the same talks of admission of additional evidence. He further pointed out that DRP had no power to reject additional evidence and also referred to provisions of Rule 46A of the Income Tax Rules, 1962 (in short IT Rules ) and even if the same were applied, then also additional evidence had to be admitted. The learned Authorized Representative for the assessee in this regard further submitted that in any case, where remand report was called for and there was no violation of Rule 46A, clauses (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d was taken during TP stage and because of certain reasons, evidence could not be filed before the TPO but was filed by way of additional evidence before the DRP, which merits to be accepted. He then, relied on the ratio laid down by the Mumbai Bench of Tribunal in M/s. Nivea India Pvt. Ltd. Vs. DCIT in ITA No.121/M/2013, relating to assessment year 2007-08, order dated 21.08.2017 for the proposition that additional evidence filed before the Assessing Officer needs to be accepted. The learned Authorized Representative for the assessee also pointed out that no adjustment on this count was made in any of earlier years, wherein similar benchmarking was accepted. In respect of additional ground of appeal No.6 raised by the assessee, the learned Authorized Representative for the assessee stressed that in case the matter was remitted back, then additional ground of appeal raised therein, was on without prejudice basis. 12. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below. 13. We have heard the rival contentions and perused the record. The question which arises before us is in respect of adjustment made on account of internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its order, however, rejects the same, since it was filed at a later stage. The assessee however, stresses that where DRP proceedings are continuation of proceedings before the Assessing Officer / TPO and in view of the provisions of the Act, the additional evidence which has been filed by the assessee before DRP needs to be admitted, considered and adjudicated by the DRP. The DRP has no power to brush aside the said additional evidence. Simili in this regard was drawn to the provisions of Rule 46A of the IT Rules, wherein power was enshrined upon the CIT(A) to admit the additional evidence. In Rule 46A of the IT Rules, there was negative covenant i.e. the assessee had to satisfy why the additional evidence which was being filed before the CIT(A) was not filed before the Assessing Officer. Thereafter, there is mechanism provided i.e. additional evidence needs to be forwarded to the Assessing Officer for its comments and after receiving the same, additional evidence has to be admitted, considered and adjudicated upon by the CIT(A). The assessee however, points that on the other hand, no such negative covenants are available in DRP Rules. 14. In order to adjudicate the issue, l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it thinks fit; or (b) cause any further enquiry to be made by any income tax authority and report the result of the same to it. Under sub-section (8), it is provided that DRP may confirm, reduce or enhance the variation proposed in the draft order; however, it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiries and passing of the assessment order. In case of any difference of opinion in the members of DRP, then opinion of majority of the members would be binding as per sub-section (9). Further sub-section (10) provides that every direction issued by DRP shall be binding on the Assessing Officer. Under sub-section (11), no direction shall be issued unless opportunity of being heard is given to the assessee and the Assessing Officer, where direction would be prejudicial to the interest of assessee or interest of revenue, respectively. Under sub-section (12), no direction shall be issued after nine months from the end of the month in which the draft order was forwarded to the eligible assessee. Under sub-section (13), on receipt of direction issued under sub-section (5), the Assessing Officer shall in conformity with the dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons for such permission. Thereafter, the DRP after hearing eligible assessee or his Authorized Representative within specified time, issue such directions as it thinks proper, which have to be communicated to the parties. As per rule 10(2), it is provided that while hearing objections, the Panel shall not be confined to the grounds set forth in the objections, but shall have power to consider any matter or ground arising out of proceedings. 18. Reading the provisions of section 144C of the Act with special reference to sub-section (6), wherein it is provided that the DRP has to issue directions after considering the evidence furnished by the assessee as per clause (c) and in view of the proviso under the said Rule (4) of DRP Rules, wherein it is provided that the assessee can rely upon any additional evidence other than evidence submitted before the Assessing Officer. The requirement is only to file the same in a separate Paper Book along with an application stating reasons for filing such additional evidence. Under sub-rule 9, the DRP has the power to call for and even permit the additional evidence. In the totality of the above said facts and circumstances, we hold that wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ider the evidences furnished by the assessee, which is so provided in section 144C(6)(c) of the Act. In case such evidence is furnished before the Assessing Officer / TPO, then the same is covered in clause (e) of section 144C(6) i.e. records relating to draft order and after considering the additional evidence, the DRP has to comment upon the same and dispose of the objections of eligible assessee. Such a proposition has also been laid down by the Hon ble Bombay High Court while deciding Writ Petition filed by Vodafone India Services (P.) Ltd. Vs. Union of India in Writ Petition No.1877 of 2013. The said proposition has been applied by the Delhi Bench of Tribunal in BG Exploration Production India Ltd. Vs. JCIT (IT) (supra) in holding that directions of DRP in admitting additional evidence filed before it does not suffer from any infirmity. While deciding the powers of DRP in refusal to consider additional evidence filed before the DRP, the Tribunal held that where additional evidence was filed by the assessee and the DRP obtained remand report, then it erred in not considering the same on incorrect appreciation of relevant provisions of law. 19. Coming to the facts of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP for adjudicating the issue. In view thereof, the issue raised vide grounds of appeal No.2 and 3 is allowed for statistical purposes. 20. Now, coming to the ground of appeal No.4 i.e. transaction of import of finished goods. 21. Brief facts relating to the issue are that the assessee was importing trading material from its associated enterprises only when projected customer orders were to be executed in a particular manner which were in excess of projected production of specific items in the said month. Thus, the import of trading material was only for the purpose of meeting customer schedule and timely deliver the entire quantity of the orders accepted. The assessee before the TPO pointed out that the associated enterprise sold the said material at concessional / same CIF price vis- -vis charged by associated enterprise to outside unrelated Indian customers; however, the landed cost increased due to freight, customs duty and other related expenses. Hence, there was marginal loss of ₹ 4,24,343/- in the trading segment. The assessee also filed percentage of trading sales to total sales and the arithmetic mean of profit margin earned by the comparable trading companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presentative for the assessee stressed that gross profit margin level should be compared with the margins of comparable concerns and if the same were +/-5% range, then the same should be accepted. The assessee however, stresses that RPM method was the most appropriate method in the aforesaid circumstances. In this regard, reliance was placed on the ratio laid down by the Hon ble Bombay High Court in CIT Vs. L Oreal India P. Ltd. in Income Tax Appeal No.1046 of 2012, judgment dated 07.11.2014. He further pointed out that margins of assessee and of comparables by applying RPM method may be verified by the Assessing Officer / TPO. 24. The learned Departmental Representative for the Revenue placed reliance on the orders of Assessing Officer / TPO/ DRP. 25. We have heard the rival contentions and perused the record. The transaction which is under consideration is import of finished goods, wherein the claim of assessee is that while making delivery of its products to its customers in case there is shortfall in production of specific items in a particular month, then the said items are imported from its associated enterprise for meeting the customers schedule and making the timely d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then question which arises is the most appropriate method to be applied. In the totality of the above said facts and circumstances, Re-sale Price Method is the most appropriate method to be applied in such circumstances since the assessee is purchasing finishing goods from its associated enterprise at a price, which in turn, re-sells to the unrelated enterprises. The Assessing Officer / TPO is thus, directed to apply RPM method and determine the margins of assessee and of the comparables. The assessee has filed the working of assessee s margins and the margins of comparables which may be verified and in case the same is within +/- 5% range, no transfer pricing adjustment needs to be made in the hands of assessee. Reasonable opportunity of hearing shall be given to the assessee. The ground of appeal No.4 is allowed as indicated above. 27. The ground of appeal No.5 raised by the assessee is transfer pricing adjustment made in respect of transaction of export of packing materials. 28. The learned Authorized Representative for the assessee pointed out that the said issue is covered in assessee s own case by the order of Tribunal in appeals filed by assessee in ITA Nos.1093 1094 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... astic on which the steel tyre cord is wound and packaged. These spools are reusable. These were used for the supply of goods made by the assessee as well as other companies of this group engaged in manufacturing of similar products. The goods being manufactured by the assessee company are an import substitution and therefore, foreign group companies do supply similar products to the Indian consumers. As the spools are reusable and has no utility to the buyers, as a measure to benefit local group companies, wherever possible, are involved in collection of empty spools for free from buyers for the packaging of their own products and its export in case the same are in excess of their requirement. The Assessing Officer made the addition on the basis of the order of the TPO u/s.92CA(3) of the Act on export of spools. Spools are reusable and have a considerable value and therefore the arrangement by which the assessee company gets the same free by only making expenses relating to cost of collection, is beneficial to the business of the assessee. The collection of spools, therefore is incidental but for the purpose of the business. The assessee has not involved in the process in an activi ..... 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