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TMI Blog2021 (4) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs. 10,81,45,504/- (114176586-6031082) out of Rs. 11,41,76,586/- u/s. 92CA of the I.T. act, 1961, made by the Transfer Pricing Officer/Assessing Officer, ignoring the fact that the TPO had applied TNMM method in respect of international transaction as entered into by the assessee with its AE's. 2. The Ld. CIT(A) erred in treating market research expenses of Rs. 58,03,853/- as revenue expenditure as against capital expenditure treated by the A.O.as the benefit of the survey report was for long-term benefit of the assessee's business. The ground of assessee's cross-objection read as under: - On the facts and in the circumstances of the case, the ld. CIT(A) erred in not granting benefit of (+/-) 5 percent available under the Proviso to Section 92C(2) of the Income tax Act, 1961 (Act) to the international transaction of Import of Crude Degummed Soyabean Oil from the Associated Enterprise (AE), on the ground that the internal third party contract and the daily rate quoted in world Oil Market (WOM), which was used up as the Comparable Uncontrolled Price (CUP) for the purpose of benchmarking, is a 'single or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spute arose with respect to benchmarking of import transactions of crude degummed soyabean oil and sunflower seed oil. It was noted that the assessee imported crude oil for captive consumption in production of refined oil. It had also sold degummed soyabean oil to unrelated entities in India. Since no specific shipment could be indentified with consumption in manufacturing or resale in local market, Ld. TPO opined that CUP was not most appropriate method (MAM) but TNMM would be more appropriate to benchmark the transactions as done in earlier years. Accordingly, applying certain filters, Ld. TPO identified 33 comparable entities having mean margin of 3.02% on sales. The assessee opposed adoption of TNMM by submitting that except for AYs 2005-06 to 2007-08, these transactions were accepted using CUP method. The Ld. CIT(A) accepted CUP as MAM in AY 2006-07. However, the same could not convince Ld. TPO, who finally applied TNMM and reworked assessee's segmental accounts and arrived at operating margin of 2.07% as against 3.02% reflected by comparable entities. Accordingly, an adjustment of Rs. 1141.76 Lacs was proposed which was incorporated by Ld. AO while framing assessment on 23/12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled for tolerance range of +5%. Resultantly, the additions to the extent of Rs. 60.31 Lacs were confirmed. Aggrieved as aforesaid the revenue is in further appeal before us by way of ground no.1. On the other hand, the assessee, in its cross-objections, is seeking benefit of tolerance range of +5% under CUP method since the benefit of the same has been denied by learned first appellate authority. 4.3 The expenditure of Rs. 58.03 Lacs on market research, as disallowed by Ld. AO, was deleted by following appellate orders for AYs 2005-06 to 2007-08. Aggrieved, the revenue is before us by way of ground no.2. Our findings and Adjudication 5. The learned AR supported the adoption of CUP method by submitting that this method has been accepted in earlier as well as subsequent Assessment. Further, the benchmarking analysis carried out by the company was in accordance with provisions of Section 92C(1) read with rule 10B(1)(a) and having regards to benefit of tolerance range as available under second proviso to Section 92C(2) of the Act. It was also submitted that since the assessee was in possession of valid internal as well as external CUP, the said methodology was most appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the show cause notice issued by TPO, the assessee contended that it had correctly used the CUP method, that in the earlier two years TPO had accepted the said method for determining the ALP, that the rates of CUP with regard to import of crude oil could not be compared to rates of merchanting trade of the same commodity. The TPO observed under the TP Regulation ALP of a transaction could vary year to year depending upon economic conditions and comparability of the provisions, that CUP rates, applied by the assessee, were not exactly identifiable, that the same commodity was transacted at different rates in MTA, that assessee was not able to provide the resale margin of the crude oil sold in the local market, that soyabean meal was sold at a different rate as compared to the export to the AEs. 8.During the appellate proceedings, the FAA directed the TPO to submit a remand report. The TPO issued a show cause notice and proposed operating profit margin of Rs. 2.92 crores to be applied on the operating income of Rs. 806.56 crores as against assessee's operating loss of Rs. 56.01 crores. After considering the submission of the assessee, the TPO re-worked the operating margin of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat non operating expenses, resulting from abnormal items, were correctly accounted for, that the contention of the TPO was not factually correct, that the TPO had allowed, while considering the claim for reduction of operating expenditure, due to unutilised capacity as abnormal depreciation on tangi-ble assets, that he had adopted 50% of the total expenditure, that he had considered the optimum capacity at 60% and not 100% that he had arrived at abnormal expense of 50% of total expenses by the assessee as against 70%. The FAA allowed Rs. 3.81 crores under the head power and fuel, repairs and maintenance of building plant and machinery to the extent of 5/7th of the expenses and observed that the loss would be reduced by Rs. 2.72crore.The FAA allowed Rs. 5.46 crore under the heads salary and wages(5/7th of the expenses) further reducing the loss by Rs. 3.90 crore. Deferred Revenue expenditure of Rs. 1.05 crore was also allowed, increasing the loss by the same amount. The FAA re-worked the segment account to determine the ALP and arrived at the conclusion that there was a difference of Rs. 43.07crore to the operating cost of the assessee. He observed that if the difference was to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reworked the ALP of international transaction of import of goods in manufacturing activity as under: Rupees Adjusted operating expenses of the assessee shown in (E) above. 7,90,44,26,285 105% of the above (applying +/- 5% as per Proviso to Section 92C(2)-Arms length operating cost-(F) 8,29.96,47,599 Total Operating expenses of the assessee as per (B) above 8,33,51,92,616 Difference to be adjusted towards international transctions of import of goods from AEs assessee (F-B)assesseeG (3,55,45,017) International transactions of goods imported from AEs - (H) 138,28,94,614 Arms length price of international transactions of goods imported from AEs assessee (H-G)assesseeI 134,73,49,597 On the basis of above adjustment, the import price of goods was determined at Rs. 3.55 Crore as against Rs. 48.65 Crores determined by the TPO.As a result, the assessee got a relief of Rs. 45.09 Crores. 9.Before us,the DR relied upon the order of the TPO. The AR argued that the assessee had acquired DALDA brand from HLL, that the said acquisition would take some years to fructify, that the assessee had to be extra ordinary costs in that regard, that it had to incur significant star ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries India Pvt. Ltd.(ITA No. 2201 of 2013),the honorable Bombay High Court has held that for making adjustment as per the provisions of chapter X of the act transaction with AEs of an assessee had to be considered. We would like to reproduce the relevant portion of the judgement of Thyssen Krupp Industries India Pvt. Ltd. (supra) "We find that in terms of chapter X of the Act, the determination of the consideration is to be done only with regard to income arising from international transactions on determination of ALP. The adjustment which is mandated is only in respect of international transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE. The adjustment is beyond the scope and ambit of chapter X of the Act. We find that while reworking the adjustment, the FAA had taken the margin at the rate of 2.36%.We find tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept this plea. Therefore, without delving much deeper into the issue, we direct Ld. TPO to apply TNMM but restrict the adjustments only to the extent of international transactions carried out by the assessee and not to entire segment of manufacturing activity. The Ld. TPO is directed to verify the computations made by the assessee and decide accordingly. The benefit of tolerance range of +5%, as provided in law, would be available to the assessee. Consequently, the revenue's ground, to that extent, stands allowed which would render assessee's cross-objection infructuous. 10. So far as the issue of market research expenses is concerned, we find that this issue is squarely covered in assessee's favor by the decision of this Tribunal for AYs 2005-06 to 2007-08 (ITA Nos.4336/M/2009 & ors, common order dated 18/05/2016). In view of this uncontroverted fact, this ground stand dismissed. 11. The revenue's appeal stands partly allowed. The assessee's cross-objection stand dismissed as being infructuous. Assessment Year 2009-10 12. Similar are the facts in AY 2009-10. While benchmarking the import transactions under TNMM, Ld. TPO proposed an adjustment of Rs. 4649.92 Lacs which was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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