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TMI Blog2019 (12) TMI 1154X X X X Extracts X X X X X X X X Extracts X X X X ..... te to remit this aspect of assessee s contention to the file of learned CIT(A) to consider the same and give a finding thereupon. Needless to add the assessee should be granted opportunity of being heard. - Matter remanded back to CIT(A). X X X X Extracts X X X X X X X X Extracts X X X X ..... levant year and has instead subsequently gone on to uphold the comparables provided by TPO. 3. Without prejudice to Grounds of Appeal no.2 , the learned CIT (Appeals) has erred on facts and in law in not taking cognizance to the various inconsistencies in search done by TPO, which were pointed out by the appellant , and gone on to uphold the TPO's search to make the adjustment to the ALP. 4. Without prejudice to Grounds of Appeal nos. 1 to 3, the learned OT(Appeals) has erred on facts and in law in not appreciating the fact that the appellant is a low risk consignment manufacturer and that the comparables are full-fledged manufacturers. 5. Without prejudice to Grounds of Appeal nos. 1 to 3, the learned CIT(Appeals) has erred on facts and in law in applying the margins of fullfledged manufacturers without making any Working Capital or Risk adjustment to bring it in line with that of low risk consignment manufacturer. 6. The learned CIT(Appeals) erred in not considering the fact that from A.Y. 2005-06 cowards till A.Y. 2008-09, the TPOs and the CIT(Appeals) had calculated the profits at 6%.on the cost actually incurred by the appellant, and that in order to maintain consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who is neither a registered shareholder nor a beneficial shareholder of the lender company 10. Since facts are identical we are referring to facts and figures from assessment year 2009-10. 11. The assessee was incorporated in 1984 as a wholly-owned subsidiary of US company. The prime goal of this undertaking was a fully integrated Indian subsidiary capable of manufacturing and exporting assemblies and power suppliers for high-volume program to Cherokee international LLC Tustin USA. In the TP study the taxpayer showed following international transactions for the financial year 2008-09 with its associated enterprises (AEs). Sr. No. Nature of the transaction Details of AE Amounts (Rs.) Method adopted by the assessee 1 Purchase of Raw Material (on free of cost basis) Cherokee International Corporation & Cherokee China Power Supply 65,334,933 External IN MM 2 Sate of Finished Goods Cherokee International Corporation Limited 98,337,700 External TNMM 3 Advances received against future sales Cherokee International Corporation 722,764 CUP TPO discussed the transfer pricing study report filed by the appellant before him. He quoted the Function, Asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the operating margins of the final set of comparables was 2.58% against the operating loss of the assesses of (10.45)%, the assessee has concluded in its TP study report that all of its international transactions at arm's length price. 13. The assessing officer rejected the benchmarking of the assessee. According to the comparability analysis done by the Transfer Pricing officer the Transfer Pricing adjustment came to ₹ 2,48,75,146/-in the above. In the Transfer Pricing adjustment the assessing officer has rejected the following contention of the assessee for A.Y. 2009-10. "as the assessee is a captive manufacturer of the parent company which supplies raw material to the assessee. Here the manufacturing activity has been shifted by the parent company to India to take advantage of the low labour cost and other manufacturing cost in India. Hence, the profit earned by the parent company on account of locational savings should be attributable to the Indian entity. The profit of 6% on cost is as per the mutual agreement between the assessee and is associated enterprise. Now, assessee has agreed that its profit should be 6% of expenses incurred by it that is total cost les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a particular period of time. 8. In the instant case, correctness of the method followed by the assessee hinges upon the nature of agreement entered into with AE. Though, the assessee claimed that it has applied a mark-up of 6% on the costs, as per TNMM, whether such mark-up can be based on an estimated cost is required to be proved by referring to the agreement whereas the assessee could not furnish the agreement and did not place sufficient proof to support his logic of arriving at "standard cost". Since assessee is a contract manufacturer and 5% of the raw materials are purchased on its own to manufacture the endproduct, there is some element of risk involved, having invested on the plant and machinery, infrastructure etc., to carry on the activity of manufacture. While considering the reasonableness of the reward all these factors have to be cumulatively taken note of. As rightly pointed out by the tax authorities, in the case of a contract manufacturer it is unthinkable for a manufacturer to agree, in writing, to carry on the business so as to end up in losses. Assessee having not taken actual cost into consideration, TPO/Assessing Officer, as well as the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee for assessment year 2009-10 on the principal of consistency. The tribunal held as under :- 2. The assessee company is engaged in the business of manufacturing, designing, developing and assembling of power supplies and related simcustom design development of power supplies, transformers, toroidal cores, and current transformers control boards. It entered into following international transactions: S.No. Name of the AE Nature of Transaction Amount in Rupees for A.Y 2008-09 Method adopted 1. M/s. Cherokee International, Tustin USA Purchase of raw materials 9,09,54,952 TNMM 2. -do- Sale of finished goods 13,31,66,657 TNMM 3. -do- Purchase of Plant and machinery NIL TNMM Total 22,41,21,609 2.1 While determining the ALP the TPO has adopted a mark up of 6% on the on the cost incurred by the assessee which include purchase of raw material of ₹ 9,09,54,952/-. The said raw material was supplied by the AE of the assessee free of cost. Thus, TPO calculated the TP adjustment of ₹ 2,33,24,680/- as per following calculations: ALP margin to be earned by the assessee 6% ALP of the assessee 106% of the expenditure ₹ 14,76,33,337 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO in the said year was exclusion of value of raw material received by the assessee from its AE which was free of cost. It was submitted that the TPO in the said year has adopted this approach after considering the submissions of the assessee and by way of a speaking order. It was further submitted by Ld. AR that assessee has accepted the view point taken therefore, did not file any appeal against the impugned order passed by Ld. CIT(A) by which addition of ₹ 1,78,64,680/- has been upheld. Thus, it was submitted by Ld.AR that the order of Ld.CIT(A) being in accordance with the course of action adopted by Department in respect of immediate preceding year, (A.Y. 2007-09) should be upheld. 5. We have heard both the parties and their contentions have carefully been considered. We have carefully gone through the order passed by TPO in respect of A.Y 2007-08. Ld. CIT(A) has calculated the TP adjustment in accordance with the course of action adopted by the Department in respect of immediate preceding year i.e. for assessment year 2007-08. In our view Ld. CIT(A) did not commit any error in determining the arm's length price. The impugned transaction is in accordance with the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned CIT(A) which was accepted by the ITAT. In the present assessment year there is no mention whatsoever about this claim of the assessee in the order of learned CIT(A). All the assessee's arguments before learned CIT(A) were confined to selection of comparables and certain other adjustments. Learned CIT(A) has upheld the order of Assessing Officer on the rejection of comparables of the assessee, and learned CIT(A) upheld the search and consequential computation by the Assessing Officer. 21. However, we agree that this contention of the assessee deserves consideration provided the facts for the present assessment year are in conformity with the earlier assessment years. Furthermore as noted above this aspect has not at all been considered at the level of learned CIT(A). In the interest of justice, we deem it appropriate to remit this aspect of assessee's contention to the file of learned CIT(A) to consider the same and give a finding thereupon. Needless to add the assessee should be granted opportunity of being heard. 22. As regards other grounds raised by the assessee challenging the learned CIT(A)'s order confirming the order for transfer pricing adjustment, we find that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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