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TMI Blog2016 (11) TMI 1660X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeding B 15 Crores a reference was made by the ld. Assessing Officer to the Transfer Pricing Officer (TPO) u/s.92CA of the Act. The international transactions undertaken by the assessee during the relevant previous year were as under:- Sl.No Nature of Transaction Amount (B) 1 Import of raw material 1,67,41,477 2 Import of shade cards 15,26,327 3 Exports of threads 241,16,32,540 4 Import of Machinery/ Purchase of computer software 2,50,42,305 5 Payment of reality 27,97,89,894 6 Payment of mangement services fees 5,98,86,162 Payment of commission on exports 7,84,20,835 7 Reimbursement of expenses paid 13,54,24,482 8 Reimbursement of expenses received 11,71,300 Total 300,96,95,322 5. In its Coats India division, assessee was manufacturing various types of sewing threads and selling it to its Associated Enterprises situated in sixty three countries. Assessee had adopted Internal Transactional Net Margin Method (hereinafter referred to as ''TNMM'') to bench mark its international transactions with its Associated Enterprises. In other words assessee made a comparison of margin earned on export of threads to Associated Enterprises with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposal on the above line was given to the assessee by the ld. Assessing Officer, assessee chose to move the Dispute Resolution Panel (DRP). Argument of the assessee before DRP was that Associated Enterprise to which thread were sold, was an intermediary in a supply chain, whereas Non Associated Enterprises represented end customers. Further as per the assessee delivery of products to Non Associated Enterprises were through Air. Assessee also submitted that prices charged on Associated Enterprise were fixed considering the bulk purchases they were making. Assessee also brought to the notice of the DRP, directions of the Co-ordinate Bench for assessment years 2002-03 to 2004-05, 2006-07 & 2007-08 (ITA Nos. 2207, 2212, 2213/Mds/2007 & 19 & 2032/Mds/2011, dated 21.12.2012). As per assessee for these years Tribunal had remitted the issue of fixing the Arms Length Price of the international transactions back to the file of the DRP. 8. DRP after considering the above arguments of the assessee held that Tribunal had in its order dated 21.12.2012 for assessment years 2002-03 to 2004-05, 2006-07 & 2007-08 upheld application of CUP method. As per DRP, Tribunal had directed assessee to fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities did not fall in a class of its own. Reliance was placed in the decisions of Pune Bench in the case of Amphenol Interconnect India (P) Ltd vs. DCIT, (2014) 107 DTR 337, Mumbai Bench of this Tribunal in the case of Intervet India Pvt. Ltd vs. DCIT (2010) 38 DTR 422 and that of Chennai bench of the Tribunal in the case of Mainetti India (P) Ltd vs. ACIT, (2012) 77 DTR 60. Further, according to him, geographical difference of the countries where Associated Enterprise and Non Associated Enterprise were functioning made the comparison attempted by TPO incorrect. Reliance was placed on the decision of Pune Bench in the case of Cummins India P. Ltd vs. Addl. CIT, (2015) 119 DTR 0182. 10. Per Contra, ld. Departmental Representative strongly supporting the orders of the authorities below submitted that by virtue of the decision of Co-ordinate Bench in the case of Delphi TVS Diesel Systems Ltd (supra) the lower authorities were justified in preferring CUP method over TNMM selected by the assessee. 11. We have considered the rival contentions and perused the orders of the authorities below. The question before us is whether CUP method was rightly adopted by the lower authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt market conditions especially when the assessee has not compared local sales to export sales of Associated Enterprise in the Transfer Pricing Documentations. The TPO rejected the ALP determined by the assessee on TNMM on account of export of threads as well as CUP method adopted for export of grey cotton canvass. This Tribunal in its findings recorded at para 11 and 12 of its order had observed as under:- "11. We have heard the submissions made by the respective parties. We have also perused the orders passed by the authorities below and the documents referred to. During the course of submissions, a query was put to the learned counsel for the assessee as to why only internal comparables were given to the TPO for determining cup method. The counsel for the assessee stated that at that time only internal comparables were available. He further submitted, now if required, external comparables can be placed on record for determining the international pricing under CUP method. A perusal of the order of the CIT(A) shows that the same is sketchy and non-speaking. The findings of the CIT(A) in assessment year 2002-03 are reproduced 1234. herein below:- "I have carefully conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CUP method on a representatives sample of 52.68 % of the turnover The A.O/TPO asked the appellant company to apply the CUP method to the entire turnover of Grey Cotton Canvas by taking only those products which has also been sold to AE's and Non-AEs. 7.4 The learned representatives contended that the CUP method could not be applied to all transactions as the appellant company was in the process of closing down its canvas division and hence the assessee was disposing off the stock at a discounted price. The appellant submitted that transactions of distress sales entered into by the appellant could not be regarded under normal circumstances and thus the workings already submitted by the appellant hold good. The A.OI TPO applied the CUP method to the entire turnover and has arrived at a transfer pricing adjustment of Rs. 48,71,239 . 8. I have carefully considered the facts and submissions put forth by the appellant's representatives. It is clear from the facts that the appellant had applied the CUP method only to 52.68% of the transactions being exports of grey canvas in arriving at the ALP. The appellant when asked by the TPO was unable to apply any appropriate meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disposal shall stand excluded, while computing the limitation for the Department to pass an assessment order." 12. In view of the above, we are of the considered opinion that the matter requires fresh adjudication. The order passed by the DRP is in subsequent years to the order of CIT(A), the orders passed by CIT(A) in assessment year 2002-03 to 2005- 06 will have bearing in later years. We, therefore, remit the matter back to the CIT(A) for the assessment years 2002-03 to 2005-06 and DRP for the assessment years 2006-07 and 2007- 08 for deciding the matter afresh by passing a detailed and speaking order. The CIT(A)/DRP while adjudicating the matter afresh shall inter-alia, take into account external comparables while determining the international pricing. The counsel for the assessee has made a statement at the Bar that the assessee would provide details of international comparables. The CIT(A)/DRP shall also take into consideration the different market conditions. The market conditions does not mean geographical condition alone but also includes the size of the market, demand and other relevant factors influencing the market conditions as a whole''. 12. In our opinion, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions. In our opinion, when uncontrolled comparables are available internally on some of the items which was sold to Associated Enterprise then such comparables would form a separate class of its own. TPO had considered forty nine thread types for which there were internal uncontrolled transactions available for comparison. TPO had not made an adjustment for any of the other varieties of thread sales made by the assessee to its Associated Enterprise. Nevertheless, we do find that atleast for eight items among these forty nine thread types, mentioned at Sl. No.27,28,30,35,37,38,39 & 44, there was negative differences adjustment which were ignored by the TPO, in the work out at annexure A of its order. When a class of items are considered for adjustment, the negative effect of some of the items therein cannot be ignored. As for contention of the assessee is that there were geographical difference between supplies made to Associated Enterprise and Non Associated Enterprise, there is a clear finding by the ld. DRP that assessee was catering to Asian countries and Associated Enterprise were located in Sri Lanka, Mauritius, Pakistan and Egypt and Non Associated Enterprises were lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consistently incurring huge losses. Relying on the Bangalore Bench Tribunal decision in the case of Gemplus India Pvt. Ltd vs. ACIT (ITA No.352/Bang/2009), ld. TPO held that payment on account of mangement services unless not shown to be commensurate with the volume and the quality of services rendered could not be allowed. He held the Arms Length Price of each services as 'Zero' and recommended an adjustment of B7,84,20,835/-. 17. When a proposal on the above lines was made to the assessee, assessee chose to move to ld. DRP. Argument of the assessee before ld. DRP was that its Associated Enterprise was identifying the requirements of the products, reaching out to other entities and assisting it in procuring orders, obtaining licenses, permits etc., for the countries where it was procuring orders. Assessee also placed reliance on para 7.14 OECD guidelines. It also stated that the Associated Enterprise was providing rolling forecast and benefits was derived by the assessee through accelerated growth in export sales. As per the assessee, consolidation of demand from various countries reduced the cost of production and helped efficient sourcing and lowering of risk. 18. However, ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pacific House, 70, Wellington Street, Glasgow G2 6 VB (hereinafter referred to as "the Agent") of the other part. WHEREAS the parties had signed an agency agreement dated ] st April 2001 on certain terms and conditions WHEREAS consequent to the introduction of certain "New Products" for export. and the prospect of introduction of further varieties, the parties now desire to amend the agency agreement dated 1st April 2001 to include the "New Products" on the following revised terms and conditions. NOW IT IS HEREBY AGREED / MODIFIED AS FOLLOWS 1. The definition of "Products" set out under Definitions in the principal Agreement is hereby deleted and substituted by the following: Existing Products:- Shall mean yarn and sewing thread or all types, whether in finished or semi-finished form, but excluding "Corespun" products of all kinds. New Products:- Shall mean the "Corespun" variety of sewing threads , whether in finished or semi-finished form together with any new varieties of sewing threads which may be added by agreement of the parties ill writing. Products :- Shall mean existing products and new products together. The Parties further agree to retain/ amend the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TCA. When the supplies were all to group concerns, we cannot fathom what marketing services could have been done by M/s. TCA. No doubt, Hon'ble Delhi High Court in the case of M/s. EKL Appliances Ltd (supra) had held that legitimate business needs of the assessee should be understood from the point of a prudent businessman and it was not for the Assessing Officer to dictate what the business needs. There can be no quarrel on this view taken by the Hon'ble Delhi High Court. Nor can there be any quarrel on the view taken by the same Court that ld. TPO should not question how to conduct the business. These judgments cannot in our opinion be extra-polated to mean that there rested no onus on the assessee, to show the business purpose for which payments were effected by it. Commercial necessity of a payment is something which is well within the power of an assessee to decide considering its business interest. However, it cannot say that such commercial necessity or expediency has to be presumed. Assessee was bound to show the agency services rendered by M/s. TCA which it failed to do. Mere raising of bills cannot give rise to presumption of rendering any services. As already noted by u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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