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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 ..... the international transactions pertaining to import of raw material, import of trading goods and export of packing material of the appellant do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act'). 2. Specific Ground for transfer pricing adjustment pertaining to import of raw material - On the facts and in the circumstances of the case, the Assessing Officer ('AO') pursuant to the directions of the DRP has erred in enhancing the income of the appellant by Rs. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pertaining to transaction export of packing material - On the facts and in the circumstances of the case, the AO has erred in proposing to enhance the income of the appellant by Rs. 4,31,274 by rejecting the benchmarking analysis conducted by the appellant for its international transaction of export of packing material. The Appellant prays that the book value of the said transactions be held to be the arm's length price of the 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 Rs. 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. rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l transactions computed by the assessee was same as recorded in the books of account. The TPO after perusing the details and documents filed by the assessee, was of the view that in respect of few international transactions, benchmarking done in the consequent determination of arm's length price was not acceptable. Show cause notice in this regard was given to the assessee as to why TNMM method should not be applied, as also 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s proposed. The Assessing Officer passed draft assessment order in this regard proposing the aforesaid adjustment, against which the assessee filed objections before the Dispute Resolution Panel (DRP). 8. Before the DRP, the assessee once again contended that it had considered associated enterprises as tested party and gross profit markup was 7% on standard cost charged by associated enterprises in 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er consideration, the assessee had imported raw materials, wherein the associated enterprises had charged the assessee cost plus markup. In the TP study report cost plus markup was adopted by taking into account the foreign associated enterprises as tested party or in case Indian company as its tested party, the PLI should be cash PLI i.e. profit before depreciation and interest. The TPO did take 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 rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey were in the nature of independent CA certificates to show what was the cost to associated enterprise and margins earned by the associated enterprise. Further, how markup was analyzed and benchmarked with reference to other shown companies to show that margins earned by associated enterprise were less than earned by other concerns and hence, are at arm's length. He stressed that the stand 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rises was fair and reasonable. Such a stand was taken by the assessee in TP study report and also before the TPO. The submissions of assessee are reproduced at pages 6 and 7 under para 7.1 of the TPO's order. However, the assessee claims that necessary evidence in this regard could not be furnished before the TPO, which was filed before the DRP. The DRP refers to the additional evidence 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. Thereaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or TPO, etc. (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. 15. Under sub-section (7), the DRP may before issuing any directions, (a) make such further enquiry, as 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 woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... call or permit additional evidence. It is provided in rule 9 of DRP Rules that where Panel deems fits necessary, then it may call upon or as the case may be, permit the eligible assessee to produce any document or examine any witness or file any affidavit to enable it to issue proper directions provided that Panel shall while permitting eligible assessee records its reasons 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer and on the basis of such guidance, the Assessing Officer passes final assessment order. In this chronology of events, the assessee after receiving the draft assessment order in which transfer pricing adjustments are proposed, is empowered to file additional evidence before the DRP, which is next authority in the sequence of events and the DRP has power to consider 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verification and in case an approach has been adopted from year to year, the same may not be disturbed unless and until there is change in facts and circumstances. Reasonable opportunity of hearing shall be provided to the assessee by DRP in this regard. Further, the assessee is directed to comply with the notices issued and submit information and clarification before the 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-à-vis charged by as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO, wherein it is said that when the assessee was importing raw materials, associated enterprise was charging 7% but when it was importing finished goods, it was charging 11% and then, he went on to apply trading markup of 11% to benchmark the arm's length price of international transactions undertaken by the assessee. However, the learned Authorized Representative 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 transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs in respect of distribution segment activity of the assessee, then the same should not be disturbed. 26. Now, coming to the facts of the present case before us, where the assessee was importing finished goods from its associated enterprise and without making any value addition was delivering the same along with other items to its customers in India, 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these materials from Bekaert group companies located outside India. In this background, the assessee company thought it prudent to establish a unit in India itself to meet the market requirement to the extent possible. Accordingly, plant was established at MIDC Ranjangaon Pune. Spools are packaging material made of either steel or plastic 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 considerab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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