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TMI Blog2019 (11) TMI 1190X X X X Extracts X X X X X X X X Extracts X X X X ..... and again accentuated that the requirement under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to in the manner as prescribed. Obligation under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly determined as stipulated. The contention, that the foreign/AEs be considered as a tested parties for determining the ALP of the international transaction, having no statutory sanction, is sans merit and hence jettisoned. Similar view of not accepting foreign/AE as a tested party has recently been taken in Bekaert Industries Private Limited Vs DCIT [ 2019 (4) TMI 1786 - ITAT PUNE] . Thus, we are of the considered opinion that no infirmity can be found in the view canvassed by the authorities below in rejecting foreign/Associated Enterprises as tested parties. Once we come to the conclusion that the international transaction of import raw material was not correctly benchmarked by the assessee and the TPO was justified in rejecting such ALP determination, we hold that the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of gross margins for determining the ALP under the TNMM as numerator as against the operating profit margin taken by the TPO. We have set out Rule 10B(1)(e) supra . It can be seen that sub-clause (i) provides for the computation of net operating profit margin realized by the assessee from an international transaction. D etermining the operating profit under the TNMM - Depreciation has to be necessarily considered as part of operating costs in the process of determining the operating profit under the TNMM. As such, there can be no question of excluding depreciation from the ambit of operating costs for the purposes of determining operating profit. At this stage, it is pertinent to note that as against Rule 10B(1)(e) specifically providing for adoption of operating margin under the TNMM, rule 10B(1)(b) and 10B(1)(c) containing mechanism for determining the ALP under the Resale Price method and Cost Plus method specifically provide for adopting the gross margin. The contention, therefore, raised by the assessee that the numerator in the formula as per rule 10B(1)(e) should have been Gross margin rather than the operating margin as applied by the TPO, is bereft of any force and henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case the same is found to be correct, then no addition should be made to that extent. With reference to certain other provisions, the ld. AR submitted that it represented certain purchase of goods made during the year for which bills were actually received in the subsequent year. It was stated on receipt of such bills, the amount of provision was reversed. AO is directed to verify this contention as well. In case, the same is found to be correct to the effect that the purchases were made during the year and debited to the provision, then of course no addition should be made provided such provision has been reversed in the subsequent year on the receipt of bills. Qua the remaining provision for which there is no evidence, the same is liable to be disallowed in the absence of the assessee furnishing any justifiable reasons. X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer (TPO). Then he referred to Notification No.196/2005 dated 09-09-2004 as per which again only the JCIT, Mumbai could act as TPO for Pune jurisdiction. He took us through Notification No. 262/2006, dated 14-09-2006, which expanded the number of authorities eligible to act as TPO covering not only the JCIT but also the DCIT or the ACIT for the Pune jurisdiction. He referred to Notification No. 231/2007 dated 22-08-2007 again providing for the JCIT or the DCIT or the ACIT to act as the TPO for the Pune jurisdiction. Referring to the Notification No. 59/2014 dated 03-11- 2014, the ld. AR invited our attention towards the Additional Commissioner of Income-tax having also been roped into to act as TPO in addition to the JCIT/DCIT/ACIT. In view of the fact that the Additional CIT has been authorized to act as TPO only w.e.f. 03-11-2014, the ld. AR submitted that the transfer pricing order passed in the case of the assessee on 28-01-2014 by the Additional CIT was violative of the mandate of the Circulars/Notifications and the same should be quashed. The ld. DR strongly objected to the same. 5. We have heard the rival submissions and gone through the relevant material on record. Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x (JCIT). At this stage, it would be significant to note the definition section 2 of the Act - which starts with the words : `In this Act, unless the context otherwise requires', which means that unless there is a different meaning given in the respective section, the meaning given to the terms and expressions in section 2 shall prevail. Section 2(1C) defines `Additional Commissioner' to mean `a person appointed to be an Additional Commissioner of Income-tax under sub-section (1) of section 117'. In the like manner, section 2(28C), as inserted by the Finance (No.2) Act, 1998 w.e.f. 1.10.1998, defines `Joint Commissioner' to mean `a person appointed to be a Joint Commissioner of Income-tax or an Additional Commissioner of Income-tax under sub-section (1) of section 117'. 8. When we turn to the definition of `Transfer Pricing Officer', it transpires that the same refers to `Joint Commissioner' and not the `Joint Commissioner of Income-tax'. Whereas the `Joint Commissioner of Income-tax' is an authority u/s 116(cca) of the Act, the `Joint Commissioner' as defined in section 2(28C) is a term which encompasses two income-tax authorities, namely, Joint Commissioner of Income-tax [being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Transactional Net Marginal Method (TNMM) and claimed that these transactions were at ALP. The TPO rejected the selection of two AEs as tested parties in the international transaction of Import of raw materials because of the absence of any verifiable data for computation of the ALP and unverifiable contentions put forth on behalf of the assessee. He thus aggregated both the transactions of Import of raw material and Export of finished goods and benchmarked them on a collective basis by taking assessee itself as the tested party. The TPO selected three domestic companies as comparable with their average adjusted Profit Level Indicator (PLI), after capacity utilization adjustment, at (-) 22.62%. The assessee's PLI of (-)27.96% led to the transfer pricing adjustment of ₹ 3,83,29,479/-. The Dispute Resolution Panel (DRP) echoed the draft order incorporating the transfer pricing adjustment as proposed by the TPO. Aggrieved thereby, the assessee is in appeal before the Tribunal. 11. We have heard the rival submissions and gone through the relevant material on record. The assessee reported 13 international transactions. The international transactions of Import of raw materials an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that no exception can be taken to the view canvassed by the TPO in rejecting the same and proceeding with determining the ALP in his own way. 13. Notwithstanding the above, it is relevant to note that a tested party is a party in whose hands a transaction between the two related enterprises is tested vis-à-vis other comparable uncontrolled transactions for ensuring that is not structured in such a way so as to deprive the Indian exchequer of the rightful tax due to it. Under the TNMM, it is the profit rate of the tested party which is compared with that of the comparables for ascertaining if the profit from the transactions between the related parties has been declared in India at arm's length. In case, profit rate of the tested party turns out to be less on a comparative analysis, then subject to other provisions, an upward increase in the profit of the Indian entity is made pro tanto. Now the question arises as to whether the foreign/Associated Enterprise(s) can be considered as tested party or only the Indian entity, which has recorded the transaction in its books of account, can be so considered? 14. For this purpose, we need to visit the provisions of the Chapter- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction.' 15. The term `enterprise' under the TNM method, and for that matter all other methods, has been used to indicate the assessee in whose hands the benchmarking of the international transaction is done and the term `associated enterprise' has been used to denote the foreign/AE, being the other related party to the international transaction. It is so borne out from rule 10B(1)(b)(i) under the Resale price method, which provides that : `the price at which property purchased …. by the enterprise from an associated enterprise is resold…is identified'. As this method is usually applied in the hands of the party purchasing the goods and then reselling it, there remains no doubt that the term `enterprise' has been used for the Indian assessee purchasing the goods for resale and the term `associated enterprise' has been used for a seller foreign/AE. Coming back to the TNM method, rule 10B(1)(e)(i) provides that the net profit margin `realised by the enterprise' from an international transaction entered into `with an associated enterprise' is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing provisions is, inter alia, to see that there is no profit shifting from the Indian taxation base by means of the foreign/AE charging more than that charged by comparable independent cases, which fact is ensured by determining the ALP of the international transaction. If foreign/AE has, in fact, charged more, then its profit rate will shoot up and the corresponding profit of the Indian enterprise will be squeezed. In that scenario, a comparison of the profit rate of the foreign/AE will run contrary to the mandate of the provisions. Whereas, we were required to determine if the profit charged by the foreign/AE is not more than that charged by uncontrolled comparables by seeing the profit rate of the Indian enterprise, we will end up doing a futile exercise of rather viewing the profit rate of the foreign/AE, if such foreign/AE is taken as a tested party for the purposes of comparison with the profit rate of the comparables. Suppose the foreign/AE has charged more, then its profit rate will turn out to be higher, which when compared with the lower rate of profit margin of foreign comparables, will show the transaction at ALP, calling for no transfer pricing adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... %, which in arm's length situation should have been 20%. If we apply TNM method by taking the assessee as a tested party, it would call for making transfer pricing addition to the extent of reduction in the price mutually manipulated by the Foreign/AE and the assessee/Indian enterprise because of their association. On the other hand, if we take the foreign/AE as a tested party, it would show a rosy picture of its OP/Sales at 23%, being higher than that of foreign or Indian comparables, not necessitating any transfer pricing addition. In fact, it is this arrangement between the related parties which is sought to be curbed by the transfer pricing legislation. Going with the foreign/AE as a tested party in non-arm's length situation, would invariably show skewed results not requiring any transfer pricing addition, defeating not only the language but also the purpose and intent of the transfer pricing provisions. 18. Essence of the matter is that it is the profit margin of the Indian enterprise and not that of the foreign AE, which should be compared with the comparables to see if any increase in the total income of the enterprise chargeable to tax in India, is warranted on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. AR submitted that apart from export to AEs amounting to ₹ 18,18,38,027/- the assessee also made domestic sales amounting to ₹ 30,94,32,823/- in the 'Manufacturing' segment of trucks. It was, therefore, prayed that the internally comparable position, namely, the profit margin from domestic sales should have been considered as benchmark. This argument was opposed by the ld. DR. 21. Having heard the rival submissions and perused the relevant material on record, it is seen that the assessee exported finished goods under this segment to its AEs situated in USA and Brazil. What the assessee is now contemplating for comparison is its sales made in India from the manufacturing facility set up in India. It goes without saying that the efforts and the costs entailed in selling goods by an Indian party in India are quite different from the costs entailed in selling goods abroad. In this regard, it is pertinent to note that the mechanism for determination of the ALP u/s.92C has been set out in Rule 10B. Rule 10B(2) provides that for the purpose of rule 10B(1), the comparability of international transaction with an uncontrolled transaction shall be judged with reference to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Pr. CIT Vs. Amphenol Interconnect India (P) Ltd. (2019) 410 ITR 373 (Bom.) has upheld the exclusion of certain comparables by the Tribunal, inter alia, on the basis of geographical differences and timing differences etc. In the hue of the foregoing discussion, it is held that the argument of the assessee for adopting profit on sales made in India to non-AEs as a comparable instance for determining the ALP of international transactions including exports made to the AEs in Brazil and the USA, cannot be countenanced for lack of the provision by the assessee of any data offloading the effect of such geographical differences in the profit margins. 23. The next argument of the ld. AR was that the TPO ought to have considered the gross margins of the assessee as well as the three comparables chosen by him because of under-utilization of the installed capacity by the assessee as well as the comparables. 24. It is observed qua this issue that TPO determined the unadjusted PLI of comparables at 9.01%, 12.41% and 17.88% respectively. Thereafter, he carried out the capacity utilization adjustment in the comparables' margin and then finally determined the average adjusted PLI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition in this regard was put across to him. 27. The second fold of the argument in this regard was that the TPO should have taken gross margin of the assessee and comparables, that is, before the effect of depreciation etc. We do not find any force in the contention of the ld. AR urging the adoption of gross margins for determining the ALP under the TNMM as numerator as against the operating profit margin taken by the TPO. We have set out Rule 10B(1)(e) supra. It can be seen that sub-clause (i) provides for the computation of net operating profit margin realized by the assessee from an international transaction. Sub-clause (ii) is the computation of net operating profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction. Sub-clause (iii) of Rule 10B(1)(e) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above, is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. It is this adjusted net profit margin of the comparable compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct in law, in directing the inclusion of DEPB in turnover and depreciation in net profit for the purpose of profit margin of comparables and assessee?" The Tribunal in that case held that depreciation was includible in arriving at the total operating costs. Affirming the view of the Tribunal, the Hon'ble High Court held that: `So far as depreciation is concerned, we find that the analysis done by the Tribunal to include DEPB benefit to hold it to be an operating revenue to determine operating profit, would be equally applicable in case of depreciation for the purposes of holding it to be an operating expenses to determine operating costs.' From the foregoing discussion, it is manifest that depreciation has to be necessarily considered as part of operating costs in the process of determining the operating profit under the TNMM. As such, there can be no question of excluding depreciation from the ambit of operating costs for the purposes of determining operating profit. At this stage, it is pertinent to note that as against Rule 10B(1)(e) specifically providing for adoption of operating margin under the TNMM, rule 10B(1)(b) and 10B(1)(c) containing mechanism for determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO has computed the transfer pricing adjustment qua all the transactions carried out by the assessee with reference to the base of 'Total costs', also inclusive of costs relevant for transactions with the non- AEs, we cannot approve such a point of view. 31. Our view in holding that no transfer pricing adjustment can be made on transactions with the non-AEs is supported by the judgment of the Hon'ble Delhi High Court in CIT VS. Keihin Panalfa Ltd. (2016) 381 ITR 407 (Del), in which it has been held that the transfer pricing adjustment can be made only with reference to the international transactions and not the transactions with the non-associated enterprises. Similar view has been espoused by the Hon'ble Bombay High Court in CIT vs. Thyssen Krupp Industries India Private Ltd. (2016) 381 ITR 413 (Bom). In view of the above discussion, it is clear that the transfer pricing adjustment cannot be made with reference to the non-AE transactions, but, the same has to be confined only to the international transactions. Since the TPO/AO has proposed/made the addition on the basis of transactions even with non-AEs, we set aside the impugned order and send the matter back to the fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave not been properly considered by the authorities below. In view of the fact that the assessee has placed on record certain documents evidencing the purchase of fixed assets, which is albeit not complete, we consider it expedient to set-aside the impugned order on this count and remit the matter to the file of AO/TPO for examining such evidence and ascertaining if such evidence really documents the purchase of fixed assets. To the extent, the evidence, namely, invoices etc. for the purchase of the fixed assets are available, there will not be any question of making transfer pricing addition. However, to the extent of non-availability of invoices and other accompanying documents supporting the purchase of fixed assets, the transfer pricing addition would be called for, but not to the value of purchase of such fixed assets but only to the extent of depreciation on such fixed assets claimed in the computation of total income. At the same time, no further claim of depreciation on such assets will be entertained in next years as well. With the above remarks, we direct the AO/TPO to decide this issue afresh after allowing reasonable opportunity of hearing to the assessee. 36. The only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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