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TMI Blog2020 (12) TMI 1189X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any reason except by making general observations like that the data provided by the assessee was insufficient, the evidences were sketchy and that quantitative details were not available. We are not in agreement with the summery dismissal of the objections of the assessee in this regard. Contention of the department that relevant details were not filed is wholly incorrect as we have gone through the voluminous evidences and data supplied by the assessee before the TPO as well as the Ld. CIT (A) in this regard. In a such situation, it is our considered opinion that the entire transfer pricing exercise needs to be done afresh by the TPO and, therefore, we restore the issue of transfer pricing adjustment to the file of the TPO for fresh analysis and verification for deciding the issue afresh after duly considering the detailed workings, arguments and evidences filed earlier by the assessee in this regard. The TPO is also directed to give proper opportunity to the assessee to present its case prior to passing a detailed order as per provision of law. - ITA Nos. 5444, 5445/Del/2016 - - - Dated:- 27-11-2020 - Shri R.K. Panda, Accountant Member And Shri Sudhanshu Srivastava, Jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arithmetic Mean Price/Margin Within 5%Range Of Transfer Price Import Of Raw Materials, Components And Consumables TNMM using Operating Profit/Operating Cost as PLI 60,75,17,457 6.60% 6.76% NA Import Of Machinery From Manufactured Stock TNMM using Operating Profit/Operating Cost as PLI 61,28,139 6.60% 13.56% NA Import Of Machinery From Purchased Stock CPM using Gross Proifit/ Cost of goods sold as PLI 4,10,11,392 6.70% 17.32% NA Payment Of Royalty CUP method 52,74,122 3% 3.38% NA Reimbursement Of Expenses By AEs No benchmarking required 14,84,001 cost recharge NA NA Reimbursement Of Expenses To AEs No benchmarking required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scientific transaction-by-transaction analysis carried out by the Appellant which was consistent with the Indian transfer pricing regulations prescribed under the Income Tax Act, 1961 and Income Rules 1962. Further the Learned TPO erred in law in re-determining a price of the impugned international transactions, without appreciating that the circumstances necessitating such re-determination as mentioned in sub-section (3) of section 92C did not exist. 4. Without prejudice, the Hon ble CIT (A) and Learned TPO have erred on facts and in law in undertaking a fresh transfer pricing analysis using the Appellant as the tested party ignoring the fact that it was only the first year of operations for the Appellant. Further, the Hon ble CIT (A) and the Learned TPO committed another mistake by arbitrarily selecting a fresh set of 99 companies as comparable (simply assuming them to be somewhat comparable), without properly evaluating/screening these companies which in reality were completely noncomparable (for reasons such as being functionally different, having persistent losses, having significant related party transactions and /or even dealing in noncomparable products). 5. Wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nel expenses etc.) to an ad-hoc 50 percent without giving any cogent basis for such determination. 9. That the Hon ble CIT (A) and Learned TPO has erred in not giving due cognizance to the fact that during the subject year approximately 85 percent of the Appellant s purchases comprised of imports from AEs which were considered necessary and expedient by the Appellant to fulfill its contractual obligations even amidst such business exigency. The Hon ble CIT (A) and Learned TPO failed to acknowledge that the Appellant incurred significant non-recurring costs (in the form of statutory levy on imported goods, such as basic customs duty amounting to INR 2 crores (approx.) and freight amounting to INR 6.5 crores (approx.) which also need to be excluded while determining the net operating margin of the Appellant for the purpose of the transfer pricing analysis. 10. Without prejudice to ground no. 9, the Hon ble CIT(A) and Learned TPO have erred on facts and circumstances that the Appellant was under strict contractual obligation with its domestic customer to supply goods (i.e. wiring harness) on a Just-in-Time basis. The Hon ble CIT(A) and the Learned TPO failed to acknow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred on facts and circumstances of the case by initiating the penalty proceedings under section 271(l)(c) of the Act against the Appellant, which is bad in law. 2.5 Likewise, in assessment year 2010-11, the return of income was filed declaring a loss of ₹ 2,87,03,378/- which was subsequently revised declaring a loss of ₹ 3,39,77,500/-. After a reference was made to the Transfer Pricing Officer, an adjustment of ₹ 20,91,32,446/- was made on identical lines as in Assessment Year 2009-10. The assessee s appeal before the Ld. CIT (A) was dismissed in this assessment year as well and against this dismissal of the appeal, the assessee is before the Tribunal challenging the dismissal by raising the following grounds of appeal :- 1. That on the facts and in law, the Learned Deputy Commissioner of Income-tax, Circle - 6(1), New Delhi (hereinafter referred to as Learned AO ) erred in assessing the income of the Appellant for the assessment year 2010-11 at ₹ 100,595,210 (after adjustment of brought forward losses amounting ₹ 75,954,460) as against the returned loss of Rs. (33,977,500). Grounds relating to Transfer Pricing Matters 2. The Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vy on imported goods, such as basic customs duty and freight) which also need to be excluded while determining the net operating margin of the Appellant for the purpose of the transfer pricing analysis. 7. The Hon ble CIT (A)/Learned TPO erred in computing the operating margins of the Appellant and has erroneously considered certain item of income/ expenses arising from the ordinary course of business, as non-operating in nature. 8. The Hon ble CIT (A)/Learned TPO has erred in not allowing benefit of 5 percent range as provided under the proviso to Section 92C(2) of the Act. 9. The Hon ble CIT (A)/Learned TPO has erred in the facts and circumstances of the case and in law in rejecting the Appellant s claim to use multiple year data for computing the ALP, and instead used single year updated data to conclude the price of the transaction. 10. The Learned AO erred in not allowing the set off of brought forward depreciation/loss pertaining to AY 2008-09 amounting to ₹ 2,14,09,236 against the assessed income for the current year. 11. Learned AO erred in giving lower credit of the TDS by ₹ 77,754 and fail to give credit of fringe benefit tax deposited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be calculated then due adjustment on account of each such factor needed to be quantified and allowed. It was further submitted that if it is not so done, then the operating margin of the assessee would not be a true indicator of the assessee s transfer price. It was submitted that it was due to these reasons that the assessee preferred the use of the AE as the tested party. 3.2 It was submitted that explanations along with relevant evidences had been submitted before the TPO but the TPO had subjectively brushed aside all the submissions of the assessee and had rejected the assessee s claim for use of the AE of the tested party for the determination of arms length of its international transactions. It was further submitted that the TPO had introduced a set of 99 comparable without proper evaluation. It was submitted that most of the 99 companies selected by the TPO were non-comparable for various reasons such as being functionally different, having persistent losses, having significant related party transactions etc. 3.3 The Ld. AR drew our attention to a chart placed at page 3 of the written submissions and submitted that this working for the adjusted operating margin of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50% which has no basis. It was submitted that even the Ld. CIT (A) had not dealt with the assessee s submissions in the correct perspective and that he had chosen to ignore the detailed submissions made by the assessee in this regard. 3.5 The Ld. AR also drew our attention to another chart at page 4 of the written submissions wherein it has been depicted that the excess import duty paid by the assessee due to increased imports was at ₹ 1,98,14,011/-. The said chart is also being reproduced herein under for ready reference:- Particulars Amount (Rs) Basic custom duty paid by the appellant (A) 2,37,96,210 Imported goods as % of total raw material consumption in case of appellant (B) 85% Imported goods as % of total raw material consumption in case of comparable companies (C) 14.22% Adjusted import duty (D = A*(C/A) 39,82,198 Excess import duty paid (A-D) 1,98,14,011 3.6 Likewise, the Ld. AR submitted that due to strike and labour unrest t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amely Motherson Sumi, Suparjit Engineering, Minda Corporation and Remson Industries having an average mean margin of 7.57%. The Ld. AR drew our attention to a chart at page 12 of the written submissions having a reject/accept matrix wherein it has been stated that 7 companies were having high related party transactions, 13 companies were having insufficient information for undertaking the required analysis, one company was a persistent loss making company and 74 companies were having non-comparable products. The Ld. AR submitted that in assessment year 2010-11, i.e. the subsequent assessment year, the TPO had selected only 5 companies as comparables as against 99 companies selected for this year. 3.10 The Ld. AR also submitted that the assessee should be allowed the benefit of working capital adjustment. 4.0 With respect to ITA No. 5445/Del/2016 for assessment year 2010-11, the Ld. AR submitted that the arguments advanced by him for assessment year 2009-10 would also apply mutatis mutandis in assessee s appeal for assessment year 2010-11 and that for the sake of brevity, the arguments were not being repeated. The Ld. AR submitted that the issues in assessment year 2010-11 bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OECD Transfer Pricing Guidelines and the US regulations provide some guidance for selection of the tested party. The OECD Guidelines on transfer pricing state that the least complex of the transacting entities shall be selected as the tested party for the purpose of undertaking benchmarking analysis. The relevant extract of the OECD Transfer Pricing Guidelines is as under: 3.18 ..The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis. 6.1 We note that the TPO has not pointed out any deficiency in either the functional analysis undertaken by the assessee for the purpose of selection of tested party or in the reliability of data furnished by the assessee for undertaking benchmarking analysis taking the associated enterprise as the tested party. Accordingly, no cogent reason has been provided by the TPO for rejection of the associated enterprise as the tested party. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plex of the controlled taxpayer and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. xxx xxx xxx 11. After due consideration of all the facts, we agree with the view that gross margins of DCIL need to be compared with gross margins of comparable uncontrolled transactions or unrelated enterprises entering into such transactions 6.5 Further, the Delhi Bench the Tribunal in the case of Ranbaxy Laboratories Ltd. vs. Addl. CIT (ITAT Delhi) 299 ITR 175, too, has held that tested party should be the one which is least complex in the international transactional transaction, as under: 58. We have also given careful thought to the other submissions of Shri Vohra. The tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one parly to the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. It is also true that generally le ..... X X X X Extracts X X X X X X X X Extracts X X X X
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