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TMI Blog2019 (10) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. We find that assessee had also filed additional evidences before us by producing data from TIPS Data Base maintained by the Customs Department, for the purpose of comparability of the prices of import transactions carried out by the assessee vis- -vis comparable prices on the relevant date or nearer to the date of transactions. This according to the ld. AR covers 94.69% of the total value of import transaction from AEs, which according to the ld. DR covers only 70% of the total transactions. We hold that in either case, substantial amount of transactions gets covered using TIPS Data Base under CUP method. Hence, we admit the entire additional evidences filed by the assessee before us in this regard and deem it fit and appropriate to restore the entire issue to the file of the Ld. AO with the following directions:- (a) CUP should be adopted as MAM being the direct method and being a traditional transaction method which should be preferred over traditional profit method such as RPM and TNMM. (b) TIPS Data Base maintained by the Customs Department which has also been accepted by the Delhi Tribunal in the case of Tilda Riceland Pvt. Ltd. vs. ACIT [ 2014 (3) TMI 63 - ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. AO to decide the impugned issue in dispute before us in the light of additional evidences filed by the assessee together with list of forward contracts on cancellation of which foreign exchange fluctuation loss had been incurred by the assessee need to be verified by the ld. AO and, if it is found by the ld. AO, that the forward contract was indeed entered for trading purposes, then the exchange fluctuation loss should be allowed as deduction Addition of sundry creditor balances - unexplained credit and upheld by the ld. DRP - HELD THAT:- We find lot of force in the alternative argument made by the ld. AR that purchases made from the aforesaid parties involved were accepted by the ld. AO as genuine. Once the purchases have been accepted as genuine, there cannot be any question of disputing the closing balance of the sundry creditors of the very same parties by treating them as unexplained credits u/s.68 - assessee had furnished various evidences which had not been properly appreciated by the lower authorities and certain evidences were also submitted before us as additional evidence for the first time as detailed supra and these additional evidences require to be factuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be decided in this appeal is with regard to the transfer pricing adjustment of international transaction in respect of import of raw materials from associated enterprises (AEs) in the sum of ₹ 35,45,28,005/-. 3. The brief facts of this issue are that the assessee is engaged in manufacturing speciality chemicals, distribution of chemicals and undertaking sales promotion activities for overseas group companies wherein it earns indenting commission. 3.1. The assessee s business operations of manufacturing speciality chemicals can be divided into the following three areas: Paint and coating materials Packaging and building materials Performance chemicals and biocides 3.2. The assessee has its manufacturing plant at Taloja, Mumbai and Sriperumbudur, Chennai. The Taloja plant is used for manufacturing water based emulsion polymers for the decorative paints, textiles, construction, paper coatings and leather industries, and flexible packaging adhesives. The Sriperumbudur plant manufactures acrylic emulsion polymers largely used in manufacturing paints and coatings. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cost allocation 11,87,38,679 Reimbursements of expenses Not Applicable 2,46,77,756 Recovery of expenses Not Applicable 1,40,782 3.5. The ld. TPO sought to make an adjustment with regard to international transaction of import of raw materials for manufacturing made by the assessee from its AE. The ld. TPO accepted international transactions to be at arm s length in respect of export of manufactured finished goods, import of finished goods, export of traded goods, provision of support services, payment of interest on external commercial borrowing, purchase of software, availing of support services, reimbursements of expenses and recovery of expenses. 3.6. During the A.Y.2010-11, the assessee has imported raw materials from its AEs amounting to INR 140,89,43,936. Adopting the methodology used during AY 2007-08 to AY 2009-10, the assessee benchmarked the said transaction in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and has been accepted by the Learned Transfer Pricing Officers in the Orders passed from AY 2007-08 to AY 2009-10. 3.11 The assessee adopted Cost Plus Method (CPM) as the most appropriate method for benchmarking its international transactions. The ld. TPO has rejected CPM as MAM and applied Transaction Net Margin Method (TNMM) rejecting the comparables chosen by the assessee and by adopting fresh comparables. The ld. TPO rejected the CPM on the ground that assessee is a loss making concern. 3.12. The TPO worked out the Profit Level Indicator ('PLI') of the assessee using net operating margin calculated as Operating Profit/ Operating Income (OP/ Ol) as under: Particulars Amount (INR) Amount (INR) Operating income Net sales 4,58,11,94,993 Other operating income 3,38,84,690 4,61,50,79,683 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D 23.87% ALP Profit E=C*D 32,42,07,580/- ALP Cost F=C-E 1,03,40,14,374 Adjustment G=A-F 37,49,29,562 3.15. The ld. TPO did not disturb the arm s length determination of any of the other international transactions undertaken by the assessee as detailed above including export of finished goods. 3.16. Before the ld. DRP the assessee filed objections on the following issues. a. Transfer pricing adjustment on account of international transaction on import of raw materials from AEs amounting to ₹ 37,49,29,562/- b. Disregarding the economic analysis undertaken by the assessee using the CPM for determination of ALP c. Rejecting the companies adopted as comparable by the assessee for benchmarking its international transactions without providing any cogent reasons for the same. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICIS prices as a valid CUP nor rejected the same. The ld. DRP only rejected the aggregation methodology adopted by the assessee while calculating the ALP using the ICIS prices. The ld. DRP stated that set off approach of the assessee could not be accepted as no documents were produced to show that transactions were entered together and prices were negotiated on a combined basis. Further, the ld. DRP held that even if CUP is considered for some of the transactions, the adjustment would still persist to the extent of ₹ 1,29,19,187 (i.e. value of imports where the purchase price is higher than market price) and hence, this further supports the adjustment made by the TPO under TNMM. 3.21. The ld. DRP upheld the action of the ld. TPO/AO in rejecting assessee's comparable companies and applying TNMM using ld. TPO's set of comparables. However, the ld. DRP directed the ld. AO to rectify arithmetic mean of the comparable companies considered by the ld.TPO at operating margin (on operating revenue) of 22.37% and reduced the adjustment to ₹ 35,45,28,005/-. 3.22. Thus, the ld. DRP upheld the action of the learned AO in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total import transactions from its AEs for which comparable data is also available thereon. In this regard, the ld. AR filed additional evidences substantiating the comparison of import prices with TIPS Data Base prices which are available for 94.69% of the raw material imported from AEs. The ld. AR vehemently pleaded that under CUP method using TIPS Data Base, there were days wherein the prices of the assessee are favourable and there were days wherein the prices of the assessee are adverse when compared to comparable prices. He prayed that a portfolio approach should be adopted and no cherry picking could be done thereon by considering only those days where the prices of the assessee are adverse. The additional evidences in this regard giving comparative workings are enclosed in page 1051 of the paper book filed by the assessee. The ld. AR vehemently argued that the ld. DRP had accepted the fact of fluctuating prices both upwards as well as downwards for the same product during the year. The ld. DRP stated that difference in ALP by CUP method and by taking cherry picking of the transactions resulted in addition of ₹ 1.29 Crores. The ld. AR reiterate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. TPO had changed his stand by choosing TNMM as MAM which is in contrast to his own stand taken in earlier years wherein CPM was accepted as MAM. The ld. AR also placed on record the additional evidences before this Tribunal by providing comparable data by adopting CUP as MAM and by using TIPS Data Base which covers 94.69% of the total transactions in respect of import of raw materials from AEs as additional evidences and vehemently prayed for adoption of CUP as MAM and fairly stated that let this comparable data which is available for 94.69% of transactions be verified by the ld. TPO as to its veracity. By this process, the entire dispute would come to rest to real adjustment, if any, pursuant to such verification by the ld. TPO. The ld. AR again reiterated the fact that CPM was rejected by the ld. TPO only on the ground that assessee during the year had incurred loss from manufacturing business. The reason for the said loss was stated to be primarily on account of lower sales realization from supply of finished goods to a third party customer i.e., Asian Paints Ltd. and the same was not on account of import of raw materials from its AEs. The ld. AR placed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT reported in 44 SOT 391, Mumbai wherein it was held that Traditional Transaction Method such as CUP, CPM and RPM should be used, if data is available, over Traditional Profit Methods such as PSM and TNMM. The ld. AR also placed reliance on the decision of this Tribunal in the case of Sonata Software Ltd. vs. ACIT in ITA No.3514/Mum/2010 wherein it was held that TNMM and Profit Supply Method (PSM) are treated as methods of last resort which are pressed into service only when the methods i.e. CUP, Resale Price Method (RPM) and Cost Plus Method (CPM) cannot be reasonably applied. All these decisions were relied upon by the ld. AR to drive home the point that CUP should be accepted as the MAM in the instant case. The ld. AR also placed reliance on the decision of Delhi Tribunal in the case of Tilda Riceland Pvt. Ltd. vs. ACIT reported in 161 TTJ 213 wherein acceptability of prices from TIPS Data Base was engaged and it was also held that in any event what TIPS software does is to collect the data, compile the same in easy to refer format and make it available to the end user of such data online (www.TIPSaxim.com) or on electrical media, but this data nonetheless, is public data main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per reasoning before the lower authorities for incurrence of losses during the year in its manufacturing business that it was attributable to lower sales realization from Asian Paints Ltd. 5.7. With regard to adoption of CUP as MAM, the ld. DR objected that assessee had to be consistent with regard to one particular method to be adopted by him. He argued that the assessee cannot be given a complete leeway to choose different methods at different point in time for different assessment years before different forums. He stated that up to A.Y.201415, assessee had been applying only CPM as MAM. 5.8. The ld. DR reiterated the findings of the ld. DRP that the market price of raw materials was fluctuating on a day to day basis and hence, the set off as proposed by the assessee for using portfolio approach cannot be considered and the price prevailing on the day of transaction alone is to be considered. He argued that no evidences were produced by the assessee to show that the prices were initiated on combined basis for both import as well as export. 5.9. With regard to adoption of CUP as MAM using TIPS Data Base, the ld. DR argued that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realization from a third party customer i.e., Asian Paints Ltd., pursuant to MOU entered into by the assessee with Asian Paints Ltd., The reasoning given by the ld. AR in this regard for the incurrence of loss during the year are quite convincing and hence, we dismiss the rejection of CPM as MAM by the ld. TPO in the instant case. However, we find that assessee had given up the claim of CPM before the ld. DRP and had prayed for adoption of CUP in view of the fact that CUP being a direct method and the comparable data was available for almost 68% of the total value of import transactions using ICIS software. We find that this plea of the assessee was rejected by the ld. DRP for the reasons narrated hereinabove and the ld. DRP upheld the action of the ld. TPO in applying the TNMM as MAM. We find that the ld. DRP had categorically accepted the fact of fluctuating prices both upward and downward pricing for the same product at or near to the relevant date of transactions using CUP method. We find that ultimately the purpose of TP analysis is to benchmark the international transactions carried out by the assessee with AEs with comparable cases using any one of the prescribed methods. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ignore those transactions that are detrimental to them while benchmarking the transactions of the assessee with comparable cases. This has already been upheld by the decision of this Tribunal in the case of Boskalis International Dredging C.V vs. DDIT reported in 67 SOT 118 , which decision has been subsequently approved by the Hon ble Jurisdictional High Court reported in TS-1310-HC-2018 (MUM). 6.1. Based on the aforesaid directions, the ld. TPO is directed to work out the arm s length price and make adjustment thereon, if necessary in respect of import of raw materials made by the assessee from its AEs. Accordingly, the Revised ground Nos.1-7 raised by the assessee in respect of transfer pricing adjustment together with additional grounds thereon are allowed for statistical purposes. CORPORATE TAX ISSUES:- 7. The Ground No.8 raised by the assessee is with regard to action of the ld. CIT(A) confirming the addition of ₹ 1,24,008/- in respect of sundry creditors u/s.41(1) of the Act. During the course of assessment proceedings, the assessee was directed to produce the details of 11 sundry creditors aggregating to ₹ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we direct the ld. AO to delete the addition made u/s.41(1) of the Act in the sum of ₹ 1,24,008/-. Accordingly, the revised ground No.8 is allowed. 8. The revised ground Nos.9 10 raised by the assessee are with regard to the action of the ld. DRP upholding the disallowance of foreign exchange loss amounting to ₹ 26,13,86,459/-. 8.1. The brief facts of this issue are that the assessee is engaged in the business of manufacturing and trading of chemicals, imports and exports of raw materials, finished goods, traded products etc., The assessee has taken foreign currency loan for the purpose of business which was repaid during the year under consideration. In order to mitigate the risk of foreign exchange fluctuation, the assessee entered into forward exchange contracts with the bank. During the year under consideration, the assessee has incurred a foreign exchange fluctuation loss of ₹ 26,13,86,459/- on cancellation of forward contracts, which were claimed as deduction in the return of income filed by the assessee as the same were related to the business of the assessee. The assessee during the course of assessment proceedings gave a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. AO after verification of additional evidences that were filed by the assessee held that loss on cancellation of forward contract is not allowable by observing that the documentary evidences does not prove that the same were related to import / export transactions carried out by the assessee. The ld. DRP however, after considering the statements of the assessee and the remand report of the ld. AO together with the additional evidences filed stated that loss of cancellation of forward contracts in respect of traded goods should be allowed as deduction and accordingly, directed the ld. AO to verify other forward contracts also. Pursuant to the directions of the ld. DRP, the assessee submitted a letter dated 24/12/2014 submitting listing of forward contracts and some more sample copy of forward contracts including three sample copies already submitted in the form of additional evidences with the ld. AO and explained prices and charges of entering into forward contracts. The assessee duly submitted that these forward contracts were either entered for import / export transaction or it had been re-booked for extension for further period. However, in the final assessment order, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee together with list of forward contracts on cancellation of which foreign exchange fluctuation loss had been incurred by the assessee need to be verified by the ld. AO and, if it is found by the ld. AO, that the forward contract was indeed entered for trading purposes, then the exchange fluctuation loss should be allowed as deduction for the assessee. With these directions, the revised ground Nos. 9 10 and additional Ground (revised Ground No.23) are allowed for statistical purposes. 9. The revised ground Nos. 11 12 raised by the assessee is in respect of addition of sundry creditor balances of ₹ 21,43,13,273/- made by the ld. AO as unexplained credit and upheld by the ld. DRP. 9.1. During the course of assessment proceedings, the assessee was asked to establish identity / creditworthiness of the following list of creditors by the ld. AO:- Party name Amount* (in Rs) L2 31,557,521 Material GR/IR clearing 71,027,584 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) Others i.e. party name, address and amount due alongwith sample copy of recent invoices issued by the said sundry creditors to establish identity of the creditors. These documents are enclosed in pages 787 to 953 of the paper book filed before us. b) The ld. AO requested assessee to submit the written balance confirmation of more than 300 parties and to bring them in person to substantiate the identity of the parties involved. In response to the same, the assessee could not produce the confirmation from the parties or bring them in person after so many years. However, assessee submitted the full addresses and respective PAN of most of the parties to substantiate their identity. These details are enclosed in pages 960 to 968 of the paper book filed before us. 9.3. Inspite of having all these documents on record, the ld. AO in the final assessment order made an addition of ₹ 21,43,13,273/- in respect of sundry creditors for the reasons that the identity and creditworthiness of the parties were not proved by the assessee. 9.4. Aggrieved, assessee is in appeal before us. 9.5. We have heard the rival submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chases have been accepted as genuine, there cannot be any question of disputing the closing balance of the sundry creditors of the very same parties by treating them as unexplained credits u/s.68 of the Act. We find that the assessee had furnished various evidences which had not been properly appreciated by the lower authorities and certain evidences were also submitted before us as additional evidence for the first time as detailed supra and these additional evidences require to be factually examined by the ld. AO. Hence, we admit those additional evidences in the interest of justice and fair play and deem it fit and appropriate to remand this issue to the file of the ld. AO for denovo adjudication in the light of various evidences including the additional evidence submitted by the assessee. The assessee is also at a liberty to furnish further evidences, if any, in support of its contentions. Accordingly, the revised ground Nos.11 12 raised by the assessee are allowed for statistical purposes. 10. The revised ground Nos. 13 raised by the assessee is with regard to upholding the disallowance of legal and professional fees of ₹ 1,00,60,581/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.13 raised by the assessee is allowed for statistical purposes. 11. The revised ground Nos. 14 15 raised by the assessee is with regard to upholding the disallowance of interest of ₹ 47,04,000/- u/s.36(1)(iii) of the Act by the ld. DRP. The ld. AO observed that assessee had given loans and advances aggregating to ₹ 65,96,28,824/-. The entire details of loans and advances given by the assessee were submitted before the ld. AO vide letter dated 26/12/2013. The ld. AO observed from the said details that certain loans and advances were given interest free by the assessee. Accordingly, he show-caused the assessee as to why the interest paid on borrowed funds should not be proportionately disallowed to the extent of interest free advances given by the assessee. The ld. AO pursuant to the directions of the ld. DRP in the final assessment order made disallowance of ₹ 47,04,000/- on a proportionate basis to the extent of interest free advances amounting to ₹ 3,92,62,964/- and applied 12% interest thereon and worked out the disallowance of ₹ 47,04,000/- in the assessment. 11.1. Aggrieved, the assessee is in appeal before us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... import of raw materials from AEs and export of finished goods to AEs. 13.1. During the year under consideration, the assessee had imported raw materials amounting to ₹ 182,91,48,671/- for manufacturing specialty chemicals and exporting finished goods to its AEs amounting to ₹ 129,43,85,574/-. The assessee has segregated both the transactions and benchmarked the same applying CPM in its TP study as was done in earlier years. The ld. TPO as was done by him in A.Y.2010-11 rejected the CPM as well as alternate benchmarking done by the assessee using CUP method, and applied TNMM, benchmarked the transactions of import of raw materials and made an adjustment of ₹ 25,25,13,733/-. The ld. TPO used PLI of Operating Profit / Operating Revenue (OP/OR) under TNMM and rejected the companies adopted as comparables by the assessee in its TP study report and selected his own set of comparables. The resultant arithmetic mean of 14.96% was arrived and the same when compared to assessee s operating margin of 1.34% on income resulted in an adjustment of ₹ 25,25,13,733/- to the income of the assessee. This entire adjustment was made by the ld. TPO in the same m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudicated by us in A.Y.2010-11 supra wherein we have remanded the issue to the file of the ld. TPO with certain directions. The said decision would apply with equal force for this assessment year also except with variance in figures. We also find that for this assessment year i.e. A.Y.2014-15, assessee is able to provide comparable data using TIPS Data Base under CUP method for 98.25% of the transactions as against 94.69% transactions provided for the A.Y.2010-11. Accordingly, the grounds raised by the assessee in respect of import of raw materials are allowed for statistical purposes subject to aforesaid directions contained in A.Y.2010-11. 13.6. With regard to international transaction in respect of export of finished goods to AE during the A.Y.2014-15, the ld. TPO made an alternate transfer pricing adjustment of ₹ 21,07,34,721/- by applyingTNMM using Profit Level Indicator (PLI) of OP/OC (Operating Profit/Operating Cost) of the assessee and two comparables selected by him. However, the ld. TPO sustained the adjustment of ₹ 25,25,13,733/- arising on account of benchmarking of the import of raw materials as it was higher than the adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. The ground No.15 raised by the assessee is with regard to chargeability of interest u/s.234A of the Act. We find that return of income for the A.Y.2014-15 was filed on 29/11/2013 as stated by the ld. AO in the final assessment order in para 1 thereon. Since this return has been filed before the due date prescribed u/s.139(1) of the Act, there cannot be any levy of interest u/s.234A of the Act. Hence, we direct the ld. AO to cancel the chargeability of interest u/s.234A of the Act in the sum of ₹ 17,16,426/-. Accordingly, ground No.15 raised by the assessee is allowed. 14.1. The ground No.16 raised by the assessee is with regard to initiation of penalty proceedings u/s.271(1)(c) of the Act which would be premature at this stage to be adjudicated. 14.2. In the result, appeals of the assessee in A.Y.2010-11 and 2014-15 are partly allowed for statistical purposes. SA No.261/Mum/2019 (A.Y.2014-15) 15. Since the main appeal is disposed off herein the stay petition preferred by the assessee is dismissed as infructuous. 16. In the result appeals of the assessee in A.Y.2010-11 an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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