9911796707
TMI Blog2021 (2) TMI 327X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction of purchase of traded goods, on erroneous facts and reasons based on conjectures and surmises. 3. The Ld. TPO as well as the DRP and consequently the AO have grossly erred in law and on facts and in the circumstances of the case in erroneously: 3.1.1. Rejecting the scientifically run search process of the assessee without any reasons 3.1.2. Rejecting the assessee's comparables for the trading segment of the assessee without giving any cogent reasons 3.1.3. Carrying out a fresh search process, and not giving the assessee such search process used against the assessee, which is against the principle of natural justice 3.1.4. Cherry Picking the comparables 4. The Ld. TPO as well as the DRP and consequently the AO have grossly erred in law and on the fact of the assessee's case in considering Transaction Net Margin Method (TNMM) as the most appropriate (MAM) method for benchmarking international transaction of purchase of traded goods on an entity level. 5. The Ld. TPO as well as the DRP and consequently the AO have grossly erred in law and on facts in choosing new comparable companies which were different from the assessee both in the type of nature of activiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the use of RPM and adopted TNMM as the Most Appropriate Method. The TPO selected 7 comparables with an average OP/OI of 10.09% and made an adjustment of Rs. 70,61,839/- vide order dated 28.01.2016 only in respect of the transaction of purchase of the added goods. The other international transactions were held to have been conducted at ALP by the TPO and hence no corporate tax adjustment was in dispute. The assessee raised objections before the DRP and the DRP vide directions dated 12/8/2016 disposed of the same. The assessment order dated 30/08/2016 was passed thereby assessing loss of (-) Rs. 5,61,90,150/-. 4. Being aggrieved by the assessment order, the present appeal is filed by the assessee before us. 5. As regards Ground No. 2, relating to rejection of RPM for purchase of traded goods, the Ld. AR submitted that the assessee imported traded goods for subsequent sales to third parties in India without any value addition, RPM was considered as the most appropriate method (MAM). The RPM is considered as the most appropriate method in the transactions involving purchase made from an associated enterprise and resale to a non-associated enterprise, and there is very little or no v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the functional as well as other differences between the tested party and the comparable companies while preparing the TP study which is reproduced here below:- "Since, the above criteria were largely quantitative in nature, we applied qualitative criteria and manually checked each company on functions performed, assets employed and risk assumed analysis to be similar to that of the tested party." The Ld. AR submitted that the reasons given by the TPO for rejection of RPM as most appropriate method for benchmarking purchase of traded goods are very general in nature and are not relevant to the facts of the assessee's case. The TPO has heavily relied on the OECD Guidelines 1995 which cannot be resorted to when the income tax law gives clear instruction on selection of most appropriate methods. The TPO has alleged the things which are not even claimed by the assessee. Some of the comments are mere repetition of what has been said earlier in the order. In effect, the whole order seems to be copy-paste of some other assessee without application of mind on the facts of the assessee's case. Such as multiple year data, provision for doubtful debts etc. are not relevant in the case of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fected by external factors surrounding the companies. It is a trite law that for the international transaction of purchase of traded goods from AE and reselling to third party without any value addition, the most appropriate method shall be RPM. Various courts across the country have also appreciated this and upheld the same. Some of the rulings are as below: * MATRIX CELLULAR INTERNATIONAL SERVICES PVT LTD [TS-1116-HC- 2017(DEL)-TP] * Yamaha Motor India P Ltd [TS-546-HC-2016(DEL)-TP] * Luxottica India Eyewear P Ltd [TS-532-HC-2015(DEL)-TP]- * Topcon Sokkia India Pvt. Ltd [TS-340-ITAT-2020(DEL)-TP] * Alcoa India Private Ltd [TS-1219-ITAT-2019(DEL)-TP]- * Acer India Pvt. Ltd [TS-188-ITAT-2020(Bang)-TP]- * Ecolab Food Safety & Hygiene Private Limited [TS-748-ITAT-2019(Mum)- TP]- * Swarovski India Pvt. Ltd [TS-711-ITAT-2019(DEL)-TP]- * A.O. Smith India Water Heating Pvt Ltd [TS-997-HC-2018(KAR)-TP]- The Ld. AR submitted that the purchase of traded goods is a part of direct cost of the assessee thus should be benchmarked at gross profit level only. The Ld. AR relied upon the decision in case of Rosemount Tank Gauging India Pvt Ltd [TS-1136-ITAT-2019(PUN)-TP]. The Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finally, the assessee selected 3 comparables with an average gross profit margin of 29.89%. The assessee has not furnished complete details of the companies which have been excluded on the basis of a different functional profile. The assessee has selected 3 companies but these companies are engaged in a wide variety of activities even in their trading segment. For example, as per the information given in the assessee's TP study, Batliboi Ltd. is engaged in trading in various types of machine tools. Similarly, Greaves Cotton is engaged in the business of various types of engines, gensets, agro equipment and construction equipment. Kirloskar Oil is also engaged in a wide variety of activities. The DRP was right in holding that the RPM requires stricter comparability whereas TNMM is more tolerant of functional differences. Merely, stating that the RPM is most appropriate method does not serve the purpose of selecting the comparability method. It should be more useful centric and should be meaningful while arriving at the appropriate ALP. Even if the assessee has applied qualitative criteria and manually checked each company on functions performed, still it lacks the actual functiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the TPO has not considered that the Transactional Net Margin Method is mostly applied in the cases where, the tax payer enters into a transaction of purchase/sale of raw material, consumables or any other supplies with its associated enterprise where there is further processing or value addition before selling the final product, and not for the transactions relating to simple distribution of traded products involving no or little value addition and affecting only the gross profit margin of the selling company. In the present case, the assessee imported traded goods for subsequent sales to third parties in India without carrying out value addition, therefore, the RPM has been considered as the most appropriate method for the purpose of benchmarking the transaction of purchase of spares and accordingly the TNMM should not be applied. The Ld. AR relied upon the following judicial pronouncements of the various courts which held that RPM method overrules the TNMM method for benchmarking the transaction of purchase and resale of traded goods. * Luxottica India Eyewear P Ltd [TS-532-HC-2015(DEL)-TP]- * St Jude Medical India Pvt Ltd [TS-67-ITAT-2016(HYD)-TP]- The Ld. AR reiter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the search process of the assessee cannot be rejected without cogent reasons. 12. The Ld. DR relied upon the order of the TPO and the order of the DRP. 13. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that out of 6 quantitative filters used by the TPO for the new search process, 5 filters are same as that of the assessee which has been used for obtaining the comparables in its TP study report. But while not taking into account one filter and rejecting the same, the TPO has not given any proper reasons as to why the said filter is not applicable. The TPO was not right in rejecting the said filter as the same is very much relevant for the search process of the assessee for arriving at the correct margin. Hence, Ground No. 3.1.1 is allowed. 14. As regards to Ground No. 3.1.2, relating to objection to rejection of assessee's comparables, the Ld. AR submitted that the TPO rejected the assessee's comparables stating functionally not similar. The assessee has chosen companies trading in tools and equipments for large industrial diesel engines that generate high/medium speed to be used in industrial applications, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RP is not correct since the profile of the companies excluded is given in TP Study report. The detailed calculation of PLI is also given in the TP Study report only. The relevant extract of annual reports of these companies was also furnished before TPO/ DRP. Thus, the Ld. AR prayed that the assessee's 3 comparables be included in the final list of comparables. 15. The Ld. DR relied upon the order of the TPO and the order of the DRP. 16. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the detailed calculation of PLI is also given in the TP Study report only. The relevant extract of annual reports of these companies was also furnished before TPO/ DRP. The assessee has chosen companies trading in tools and equipments for large industrial diesel engines that generate high/medium speed to be used in industrial applications, making them functionally similar to the assessee. Having rejected the assessee's comparables on the basis of functionally dissimilar, the TPO subsequently stated in its order that the basis of rejecting the three comparables selected by the assessee namely Batliboi Ltd., Kirloskar Oil Engines L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll related to the business of the assessee as assessee is admittedly engaged in the trading of spare parts used in engine based power plant which cannot be equated with the engine used in auto sector. Thus, all the comparables taken by the TPO are not at all comparables to the assessee company and shows that product criteria applied (if any) and the search process followed has not been on a scientific basis for obtaining companies comparable to the assessee's trading segment and thus do not satisfy the criteria of Rule 10(B)(2) of the Income Tax Rules. The Hon'ble Delhi High Court in case of Li & Fung (India) Pvt. Ltd [2019-TII-169-HC-DEL-TP ] while following Rampgreen Solutions upheld the ITAT ruling in which it was held that a higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable arm's length price. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in profit level indicator must trigger further investigations/analysis. The Ld. AR submitted that the product criteria used by the assessee is correct which is evident from the fact that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to assessee's our objections for TPO's comparables which are primarily involved in manufacturing activity, the Ld. AR submitted that even if the gross profit ratio of these comparables is compared with the GP ratio of the assessee for benchmarking the transaction of purchase of traded goods, since RPM is the MAM then also the assessee would be at ALP. Thus even if comparables obtained by the TPO are retained but the RPM method is applied for benchmarking, then also the international transaction of purchase of traded goods shall be at ALP, as GP margin of comparable i.e. 36.93% is less than the GP margin of the assessee i.e. 43.21%. 22. The Ld. DR relied upon the order of the TPO and the order of the DRP. 23. We have heard both the parties and perused all the relevant material available on record. From the perusal of records it can be seen that the Ld. AR has contended that none of the comparables chosen by the TPO satisfy the comparability criteria of Rule 10(B)(2) and accordingly the contention of the Ld. AR that these comparables should be rejected appears to be genuine. But further, the Ld. AR contended that even if comparables obtained by the TPO are retained but the RPM met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. Thus, the same is not used for carrying out the normal business operations of the assessee or for undertaking international transactions, and it is to be treated as non-operating in nature. The amortization of goodwill, which was the difference between the costs of actual physical/tangible assets purchased and the price paid for acquiring a running business represents an intangible asset purchased. Goodwill is an intangible rather invisible asset which cannot be brought into FAR analysis while comparing the financial results of the entities since the contribution of intangibles cannot be computed. The purpose of TP analysis is to compare the like with like. 24.1 The Ld. AR submitted that any exceptional item which effects the comparisons in an open market are required to be ignored/ excluded in case of Federal Mogul Automotive Products India Pvt. Ltd [TS-110-ITAT-2015-DEL-TP], the Delhi ITAT upheld the exclusion of extraordinary provisions and nonoperating items for computing the PLI. The Ld. AR further submitted that mergers, acquisitions, demergers, spin-off, business reorganizations etc. are extra ordinary events and effect the normal profitability of the company, thus n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n stating that since the deprecation on goodwill is claimed on year after year, therefore this expenditure is cease to be extra ordinary in nature. In this regard, the Ld. AR submitted that the allowability of depreciation u/s 32 in the computation of taxable income under Chapter IV for Profits and Gains of Business and Profession of the Act, is different from the computational mechanism for the determination of arm's length price (including PLI) given in Chapter X - for Special Provisions in relation to avoidance of tax under the Act, these being special provisions. Thus, claiming of depreciation on Goodwill (intangibles) accounted for due to a Business purchase under Sec 32 of the Income Tax Act cannot change the extra ordinary nature of Goodwill amortized in the Audited Financials as per the Companies Act, which is used for the computation of ALP (including PLI) under Chapter-X of the Act, as these are mutually exclusive. 24.3 The Ld. AR submitted that the assessee had also objected the treatment of goodwill as operating before the ITAT in AY 2013-14 wherein the Tribunal did not adjudicate this ground since the assessee had got the entire relief of TP adjustment without adjudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o not been accepted by TPO by referring to the provision of (i) safe harbour rules (ii) provisions of section 32 of the Income Tax Act. In this regard, it is to be noted that, Rule 10B(3)(ii) of the Rules mandates adjustment for material differences. In the present case, since reliable internal financial data for carrying out the comparability adjustments is available and the materiality and purpose of such adjustment are discussed at length above, the aforesaid adjustments are warranted as per Rule 10B(3) to establish the reliability of the results. A comparison of the percentage of depreciation expense incurred by the comparables as compared to their total expense (Depreciation/Total OC) vis-a-vis that of the tested party is done. The comparison shows that in case of trading and ancillary service companies, the asset base is very low, since manpower is the largest operating expense component. Thus, the high % in the tested party, is abnormal and on investigation based on FAR reveals a non-operating asset, the consequent effect of which in the PLI must be adjusted for a meaningful comparison. 24.4 Without Prejudice, to the assessee's objections to the comparables selected in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purposes of determining PLI of tested party for comparisons for TP analysis does not have any bearing to support the case of the assessee. Therefore, this contention of the assessee fails. As regards to without prejudice argument of the Ld. AR has submitted the calculation of PLI of the assessee after treating the amortization of goodwill as non-operating as well as operating in nature. As against the average PLI of the comparables of 10.09%, assessee PLI of the assessee is 9.08% which is within +/-5% range as per the proviso to Sec 92C of the Act. Thus these submissions of the Ld. AR are more practical in nature and are accepted and it appears that the goodwill written off of Rs. 1,99,27,211/- is an extraordinary expense which affects the normal profitability for the period in which it is amortized and should be adjusted for computing the PLI of the assessee company after taking into account whether the assessee claimed for depreciation or not on the goodwill. Therefore, we remand back this issue to the file of the TPO/AO for proper verification in light of the above findings. Needless to say, the assessee be given opportunity of hearing by following principles of natural ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondingly delete the excess adjustment of Rs. 6,47,538 (i.e. Rs. 70,61,839/- minus 64,14,301/-) as per due process of law and facts. Thus, Ground No. 7 is partly allowed. 30. As regards to Ground No. 8 relating to quashing of order passed by the AO/TPO/DRP, the Ld. AR submitted that the order is based on conjunctures and surmises and is against transfer pricing regulations and rules and same may be quashed. The Ld. AR submitted that the TPO observed in the order that the assessee has given certain arguments in support of retaining persistent loss companies. But the Ld. AR submitted that this issue was never dicussed in the assessment nor assessee filed any submissions for objecting use of this filter. Rather no comparable of the assessee was persistent loss making, thus, the TPO's allegations are baseless. The Ld. AR further submitted that the TPO while supporting the use of current/single year data filter alleged that taxpayer has used multiple year data, which is totally wrong fact as the assessee himself used the current year data filter. The TPO reproduced the submission in support of multiple year data alleging that the same has been filed by the assessee, which is grossly inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se and thereafter passed an order in terms of section 92CA sub-section (3) thus the matter ought to go back to the Transfer Pricing Officer. However, the Hon'ble High Court dismissed this ground and does not allow the 2nd chance of inning to TPO and upheld the ITAT order. The Mumbai ITAT in the case of Supermax Personal Care Private Limited v. ACIT [I.T.A. No. 1840/Mum/2017] follows the above view of Hon'ble Mumbai High Court in the case of CIT v. M/s. Maersk Global Service Centre (I) Pvt. Ltd. [ITA No. 692 & 693 of 2012]. 31. The Ld. DR relied on the order of the AO/TPO and submitted that its valid order. 32. We have heard both the parties and perused the material available on record. The TPO while deciding the filters has given his own reasons and the same does not make an order bad in law or non-est & void-ab-initio in totality. The case laws cited before us are not applicable in the present case as the assessee's factual aspect has been rightly pointed out by the TPO in the order which are not denied in toto by the Ld. AR and also not brought on record any contrary facts to that effect. Thus, the contention of the Ld. AR appears to be not correct. Hence, Ground No. 8 is dism ..... X X X X Extracts X X X X X X X X Extracts X X X X
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