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TMI Blog2020 (2) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... n such transaction for determination of ALP would be cost plus method as the AE has undisputedly charging price from the assessee after making some markup on the cost price. In such a case, the question arises is whether the change of margin/markup by the AE on the cost price is at arm s length or not and the exercise of determining the ALP is confined only to the markup charged by the AE from the assessee. Therefore, the transactions of purchases made from MCT to the tune of ₹ 46,62,68,683/- has to be tested by applying cost plus method as MAM because for the A.Y. 2011-12 and 2012-13, the TPO while passing the order dated 29/01/2016 has accepted the CPM as MAM for determination of ALP in respect of international transaction of purchasing of raw material from the AE. When there is no change in the facts and circumstances for the year under consideration then the TPO/AO is not permitted to take a different stand and view which is contrary to the view taken for the A.Y. 2011-12 And 2012-13. It is also undisputed legal proposition that res judicata does not apply to the income tax proceeding, however, the income tax authorities have to maintain rule of consistency. Once the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R PER: VIJAY PAL RAO, J.M. This appeal by the assessee is directed against the assessment order dated 24/10/2018 passed U/s 143(3)/144C(13) of the Income Tax Act, 1961 (in short, the Act) in pursuant to the directions of the Dispute Resolution Panel-1, New Delhi (in short, the DRP) dated 27/08/2018 passed U/s 144C(5) of the Act for the A.Y. 2014-15. The assessee has raised following grounds of appeal: 1. The ld. A.O. has erred on facts and in law in making transfer pricing adjustments of ₹ 6,70,13,030/- in respect of purchase of raw material from associated enterprise following the direction of Dispute Resolution Panel (DRP). 1.1 The ld DRP has erred on facts and in law in upholding the order of TPO in determining the Arm s length price (ALP in respect of purchase of raw material from AE on Transitional Net Margin Method (TNMM) instead of Comparable Uncontrolled Price Method (CUP)/Cost Plus Method (CPM) adopted by the assessee by incorrectly holding that rates charged to the assessee and unrelated parties by the AE were not uniform and varying in nature ignoring that more than 95% purchases made from AE is supported by back to back invoice of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational transactions reported by the assessee are as under: No. Nature of transaction Method Value of transaction i. Purchase of raw material CPM/CUP 62,12,10,217 ii. Sale of finished goods CPM 3,29,43,803 iii. Business support services Other method 10,16,810 iv. Guarantee fee Other method 9,27,501 v. Reimbursement of expenses received Other method 1,34,45,669 vi. Reimbursement of expenses paid Other method 25,82,627 Since the dispute in the present appeal is only regarding the international transaction of purchase of raw material from two AEs, therefore, the other international transactions are not relevant so far as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d final assessment order on 24/08/2018 in pursuant to the direction of the DRP. 4. Before us, the ld AR of the assessee has submitted that the assessee applied CUP method for determining the ALP for purchases of polypropylene from its AE, MCT, Thailand. The ld AR has contended that the majority of the transactions are supported by back to back invoices of Exxom Mobil Chemical, Singapore. He has pointed out that the assessee got two benefits by making purchases from the AE one is on account of extended credit period of 90 days and second the assessee saved on account of anti-dumping duty @ 40.70 USD per ton. Had the assessee purchased raw material directly from Exxom Mobil Chemical, Singaporem it had to pay the anti-dumping duty. The AE is charging averaging margin of 2.5% on cost from the assessee. Thus, the ld AR has submitted that in view of the anti-dumping duty as well as extended credit period allowed by the AE 2.53% margin charged by the AE from the assessee is at ALP. In support of his contention, he has relied upon the decision of Chennai Bench of the Tribunal in the case of Salcomp Manufacturing India Pvt. Ltd. Vs ACIT (2016) 161 ITD 35 and submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, the purchases to the tune of ₹ 13,04,12,167/- from JPP are in respect of trading made by the AE as the same were purchased from unrelated party and these transactions are supported by back to back invoices. The ld AR has pointed out that the purchases of Polypropylene/Tafmer of ₹ 2,45,27,687/- and other consumable items were made out of the goods manufactured by the JPP. In respect of manufactured Polypropylene, the assessee applied CUP method to bench mark its transaction as the JPP has sold the same product to unrelated party. Thus, the ld AR has submitted that there is an internal CUP which is MAM for determination of ALP for purchases of Polypropylene manufactured by the AE. Similarly, in respect of the purchases of additives, consumables, lubricant oils etc., the assessee applied other method as these purchases are of specific grade as per the specification of the assessee. As regards the determination of ALP of purchase of Polypropylene and Tafmer from its AE JPP, the assessee applied CUP as MAM because all the purchases from JPP are supported by back to back invoices of corresponding vendors from whom JPP purchased goods. The JPP has charged average ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee would be 2.13%. Therefore, considering the correct facts and details even by applying TNMM and the comparable proposed by the TPO, no adjustment is called for. The ld AR has pointed out that the TPO initially proposed to select three comparable namely Arihant Gold Plast Pvt. Ltd., Formulated Polymers Ltd. and Polychem Ltd. If the average profit margin of these three entities is taken into consideration it comes to 2.97% as against the operating margin of the assessee at 2.13% which is within the tolerance limit of 3% provided in second proviso to Section 292C(2) of the Act. 6. On the other hand, the ld CIT-DR has submitted that the assessee has bench marked its international transaction by selecting its AE as tested party which is not inconsonance with transfer pricing rules as tested party for any controlled transaction is the least complex of the enterprises involved in the controlled transaction and does not own valuable intangible property or unique assets. When the foreign entity data are not reliable and verifiable being beyond the jurisdiction of the AO/TPO then the assessee is considered as least complex enterprises and bears lesser share of risk there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is not in strict sense is CUP because even if the price at which the AE of the assessee has purchased the material is considered as CUP then it is the purchase price in the hand of the AE would be considered as CUP and not the price after making certain markup. If the AE is making any markup on the cost of purchase and charged from the assessee then the appropriate method would be cost plus method. The cost plus method is applied only when the cost of international transaction in the hand of the supplier AE is verifiable without any doubt. Therefore, so far as the AE has supplied raw material to the assessee which represents the trading of AE being the purchases made from the third party, the MAM on such transaction for determination of ALP would be cost plus method as the AE has undisputedly charging price from the assessee after making some markup on the cost price. In such a case, the question arises is whether the change of margin/markup by the AE on the cost price is at arm s length or not and the exercise of determining the ALP is confined only to the markup charged by the AE from the assessee. Therefore, the transactions of purchases made from MCT to the tune of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand of the AE and there is no scope of any adjustment or addition of margin or markup charged by the AE from the assessee. Therefore, if we strictly apply the CUP for these transactions then whatever extra charges paid by the assessee to the AE would be considered as a price beyond arm s length and would result an addition. However, without going into the said controversy, since these transactions are in the nature of trading in the hand of the AE without any value addition, therefore, the same are required to be tested by applying CPM as MAM. 9. As regard the third transaction of purchases, these are the AE s own manufactured product and therefore, the ALP for the third transaction which includes various items of purchases of raw material and consumables, therefore, a separate exercise of transfer pricing analysis is required in respect of third international transaction with the JPP. The assessee has not given the details as which method the assessee has applied to test these transactions. Though the assessee has claimed that there are some sale by the AE to the third party as well as there are some purchases of the same product by the assessee from third party and theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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