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TMI Blog2021 (2) TMI 327X X X X Extracts X X X X X X X X Extracts X X X X ..... d over RPM - Since we have already answered the question as to which is the Most Appropriate Method (MAM) while dealing Ground No. 2 of the appeal and held that Resale Price Method taken by the assessee is not the Most Appropriate Method (MAM), the TNMM adopted by the TPO is correct. The contention of the assessee that there cannot be the consideration for diluting the standards of comparable transactions/entity, does not have practical approach as in the present case RPM fails the threshold of benchmarking while taking up the comparables which are not at all proper. Thus, the most appropriate method is TNMM as held by the TPO and the DRP. Hence, Ground No. 4 is dismissed. Rejection of search process of the assessee - HELD THAT:- 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 rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO has rightly pointed out that in assessee s FAR analysis, assessee has not depicted goodwill in assets employed. The reason given by the Ld. AR that because goodwill may result in increase in sales over the years but it certainly does not affect the operations which are required to be examined for 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 ₹ 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 af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances of the case in confirming the addition on account of arms length price under section 92CA(3) of the Income-tax Act amounting to ₹ 70,61,839/- on wholly illegal, erroneous and untenable grounds. 2. The Ld. TPO as well as the DRP and consequently the AO have grossly erred in law and on fact of the assessee s case in rejecting Resale Price Method (RPM) applied by the assessee as most appropriate method (MAM) for benchmarking the transaction 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 conseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also provides technical services in relation thereto. It also renders market support services and Project Management Services to its AEs. The assessee s group companies include Rolls Royce Plc. and Rolls Royce Singapore Pte. Ltd. The assessee has entered into several international transactions with its AEs. The TPO has made an adjustment in the international transaction of purchase of traded goods. The assessee benchmarked this transaction using RPM as the Most Appropriate Method. The TPO rejected 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 ₹ 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 (-) ₹ 5,61,90,150/-. 4. Being aggrieved by the assessment order, the present appeal is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) and stating that the assessee company had not adjusted all the functional differences and the differences in accounting practices between the international transaction and the comparables uncontrolled transactions, which may have materially affected the amount of gross profit. But the TPO has not given the specific reasons for the differentiation of functions between the tested party and the comparables chosen by the assessee, such that he has ignored the fact that the assessee company had already taken into account 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 OE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Open Solutions Software Services P Ltd [2020] 315 CTR (Del) 497 (PB 316) by following Chryscapital decision held that while adopting TNMM, comparability of controlled international transaction with the uncontrolled transaction has to be seen in the light of the functions performed, taking into account the assets employed and risks assumed by the parties as per Rule 10B(2). These parameters cannot and should not be relaxed even while employing a method like TNMM, where the compared net margins of profit may be arguably unaffected 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] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrect selection of comparables. From the perusal of the order of the TPO and the observations of the DRP it can be seen that in present assessee s case, in its search process the assessee selected engineering companies of various types and after excluding companies with insufficient financial information, the assessee was left with 97 companies. Thereafter, the assessee selected 37 companies with similar business activities/products. Thereafter, the assessee again excluded 24 companies on the basis of different functional profile. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rampgreen Solutions Pvt. Ltd. 2015- TII-33-HC-Delhi-TP, that comparability under TNMM may be less sensitive to dissimilarities between tested party and comparables, however there cannot be the consideration for diluting the standards of comparable transactions/entity . Thus the TNMM though more tolerant to the minor differences between tested party and comparables, but it cannot take into account the functional differences between tested party and comparables arising due to operating in a different industry. In this respect, the Ld. AR submitted 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions exceed 25% of sales The filter which was not taken into account by the assessee company is relating to rejection of companies that are affected by some peculiar economic circumstances. It was not lawful for the TPO to reject the search process of the assessee without cogent objections with respect to the choice of filters and consequently the search process carried out by the assessee. A similar view has been upheld in M/s Frigoglass India Pvt. Ltd Vs DCIT [ITA No. 463/Del/2013] and ACIT vs. MSS India (P.) Ltd [ITAT-2009 -32 SOT 132- PUNE], establishing that 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 appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Pvt. Ltd (TS-123-ITAT-2009 (Del), wherein it was held that, the AO cannot make arbitrary addition without giving any reasonable ground for disregarding assessee s transfer pricing analysis, such an arbitrary approach of the AO is not in accordance with law. Similar view was upheld in the decision of GE India Technology Centre Pvt. Ltd vs. DDIT (TS-768-ITAT- 2012 (Bang)-TP). The DRP in para 4.4 of its order alleged that the assessee has not furnished complete detail of companies which have been excluded on the basis of different functional profit. This allegation of the DRP 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the DRP. 19. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that since the search process given by the assessee is held as not correct by us in the abovesaid paras, hence, Ground No. 3.1.3 is dismissed. 20. As regards to Ground No. 3.1.4 Ground 5 relating to objections to TPO s comparables and cherry picking, the Ld. AR submitted that all the comparables taken by the TPO for benchmarking the transaction of purchase of traded goods is related to auto sector that is provision of breaking part services which is not at all 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 ITR 183 (Delhi) wherein the Hon'ble High Court upheld the importance of functional comparability for determination of ALP. Similar view has been upheld by Hon ble Delhi HC in case of PCIT vs. Open Solutions Software Services P Ltd. Thus, while under TNMM the sensitivity is reduced, the Ld. AR submitted placing reliance on Rampgreen Solutions Pvt. Ltd. (supra) that a trader of spare parts of engines used in the oil and gas industry cannot be compared with a manufacturer of engine parts which are used in an automobile. Thus, placing reliance on the decision of the Hon ble Delhi HC and without prejudice 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Extra ordinary items are not a part of the routine operations of the company, and therefore, cannot, by their very nature be expected to recur, such that they would be reflective of business cycles comparable to other companies chosen for benchmarking. Comparisons under the Transfer Pricing regime are to be carried out based on the FAR analysis. The assets employed in FAR means, physical assets/intangibles employed for operations. The Ld. AR submitted that as per the FAR analysis carried out in the TP Study. Assets employed, Goodwill has not been included, since it has not been used for regular business operations of the assessee. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been disregarded by him. However, finally TPO seems to be accepting that amortization of goodwill is non-operating in nature and nothing to do with the operations of the company are excluded from operating revenues. Thus, the Ld. AR submitted that the TPO has already accepted in its comments that amortization of goodwill is a non operating expense as per the discussion therefore, finally treating the same as operating is contrary stand of the TPO, one which is not in accordance with the law and prayed not to be upheld. The Ld. AR submitted that the DRP is wrongly relied upon Section 32 of the Act. The DRP rejected the assessee s objection 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on account of depreciation because depreciation represents assets employed . In assessee s FAR analysis, assessee has not depicted goodwill in assets employed because goodwill may result in increase in sales over the years but it certainly does not affect the operations which are required to be examined for the purposes of determining PLI of tested party for comparisons for TP analysis. The Ld. AR submitted that depreciation as percentage of cost or sales of assessee as compared with comparables clearly warrants adjustments and conveys that the assets employed by assessee are highly disproportionate to the comparables. However, this has also 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 reliabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputation of ALP (including PLI) under Chapter-X of the Act, as these are mutually exclusive. 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 adjudicating this. But the TPO has rightly pointed out that in assessee s FAR analysis, assessee has not depicted goodwill in assets employed. The reason given by the Ld. AR that because goodwill may result in increase in sales over the years but it certainly does not affect the operations which are required to be examined for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he trading segment, therefore the adjustment should be proposed by considering only the trading segment. The Ld. AR has given the working of TP adjustment by considering only the trading segment. The said working represent that if the TPO would have proposed the adjustment on the transaction of purchase of traded goods by considering only trading segment then the adjustment should be restricted to ₹ 64,14,301/- only instead of ₹ 70,61,839/- as originally proposed by TPO. Thus, the contentions of the Ld. AR appears to be genuine but the same needs verification. Therefore, we direct the TPO to verify the same and if it is proper then to restrict the TP adjustment to ₹ 64,14,301/- only and correspondingly delete the excess adjustment of ₹ 6,47,538 (i.e. ₹ 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re DRP, but DRP has not addressed the same in its order. Therefore, in view of above discussions it is evident that the TPO order has been made by non-application of mind, the Ld. AR prayed that the TP order, being bad in law, non-est and void-ab-intio, be quashed. In support of above prayer of quashed the order, the Ld. AR relied upon the judgment 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] wherein the Ld. DR alleged that Transfer pricing order has in a short and cryptic order as he did not identify the parties / instances as comparable. The Ld. AR also stated that Transfer Pricing Officer blindly and boldly refused to carry out the exercise 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 Globa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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