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TMI Blog2021 (10) TMI 831X X X X Extracts X X X X X X X X Extracts X X X X ..... most appropriate method for determination of the arm s-length price, and the whole issue set-aside to the file of the learned assessing officer, the assessee may raise this issue before the learned transfer pricing officer at the time of three determination of the arm s-length price. Therefore this ground of appeal is also set-aside to the file of the learned assessing officer/transfer pricing officer where the assessee is at liberty to raise the above issue. The learned transfer pricing officer may examine the claim of the assessee after giving a proper opportunity of hearing. In the result additional ground raised by the assessee is allowed for statistical purposes. - ITA No. 441 and 5508/Del/2017 - - - Dated:- 12-10-2021 - Shri Amit Shukla, Judicial Member And Shri Prashant Maharishi, Accountant Member For the Assessee : Shri Nageswar Rao, Adv For the Revenue : Ms. Meera Srivastava, CIT DR ORDER PER PRASHANT MAHARISHI, A. M. 1. These are the two appeals pertaining to one assessee for different years involving common facts; therefore, those were argued together and disposed of by this common order. 2. ITA number 441/Del/2017 is filed for AY 2012- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / rejecting comparables by applying incorrect filters and comparability criteria. 6. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case by applying inappropriate filters for selection/ rejection of comparables. 7. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case, by wrongly selecting/ rejecting certain comparables in the final list of comparables and computing incorrect margins for these comparables. 8. Ld. AO/ TPO/ DRP have erred in law and in facts in considering gain/ loss foreign exchange fluctuations as non-operating in nature. 9. Ld. AO/ TPO/ DRP have erred in law and in facts in not granting adjustment for difference in capacity utilization of Appellant and comparable companies and adjustment for unabsorbed fixed asset cost of Appellant. 10. Ld. AO has erred by alleging that the Assessee has furnished inaccurate particulars of income, thereby proposing to initiate penalty proceedings under Section 271(1)(C) of the Act. The above grounds are independent and without prejudice to each other. The Appellant craves to leave to add, withdraw, amend or vary the above grounds of ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so modified the comparability analysis submitted by assessee using the transactional net margin method. He identified seven comparable companies who have the average operating margin of 6.92% on operating profit and computed the assessee s operating margin at (-) 2.99%. Since the operating margin of the assessee was lower than the operating margin of the comparable companies, he computed the arm s-length price of the Basmati rice sold and found that it is understated by a sum of ₹ 193,648,433/ and therefore this adjustment was proposed. 7. Based on this the draft assessment order was passed on 3 March 2016 incorporating the above adjustment. The total income of the assessee was assessed in the draft assessment order at the loss of ₹ 154,597,035 against the returned loss of ₹ 348,254,122. 8. The assessee filed an objection before the learned dispute resolution panel 2, New Delhi. The learned dispute resolution panel with respect to the most appropriate method conquered with the view of the learned transfer pricing officer in rejecting the CUP method as most appropriate method and held that transactional net margin method is the most appropriate method. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appropriate method, whereas the learned transfer pricing officer and DRP has held that transactional net margin method is the most appropriate method. He submitted that this issue is covered in favour of the assessee by the decision of the coordinate bench for assessment year 2008 09 in assessee s own case. He referred to the order of the coordinate bench in assessee s own case wherein it has been held that for assessment year 2008 09 CUP is the better method and the tips database was held to be proper. He further submitted that the order for that year of the coordinate bench was dragged before honourable High Court where only issue was with respect to the most appropriate method which has been admitted by the honourable High Court and is pending for decision. Be that as it may, but in fact the order of the coordinate bench covers the issue in favour of the assessee for assessment year 2008 2009 that the CUP method is the most appropriate method. He submitted that there is no change in the facts and circumstances of the case and therefore same should be followed. He referred to page number 18 of the order the learned transfer-pricing officer wherein the issue of the coordinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinate bench in assessee s own case for assessment year 2008 09 he made a specific reference to paragraph number 18 of the order wherein the approach of the assessee of determining arm s-length price of its transaction with the associated enterprise by comparing average export price by the assessee to its AEs with the average uncontrolled export price. The coordinate bench held that it is patently incorrect method. He further referred that the coordinate bench held that it is not open to the assessee to compare the average price and his transaction with associated enterprise with average price in uncontrolled transaction. He further referred to paragraph number 19 of that order stating that where the assessee has excluded exceptionally high prices in the cup method was not accepted and the determination of ALP was restored to the file of the assessing officer. With respect to the claim of the assessee to get set-off of the price where it is higher than the arm s-length price it was submitted that it is Saddled with many issues as assessee is selling highest quality as per statement of the assessee itself. Any adjustment that is to be made has to be in the framework of the law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aintained by the customs department at various ports. It was also open to the Transfer Pricing Officer to, if he had any doubts, call for further information from this database supplier and examine authenticity of the data so furnished. Yet, instead of doing so, he summarily rejected the data as unreliable on a technical ground which, as we have seen above, is not tenable in law. 12. We have also seen that the information so furnished by the database used by the assessee is fairly comprehensive information, including description and prices as per invoices presented to customs - a fact noted by the TPO himself, which can be cross-checked and verified, in case of doubts. The TPO has, at page 11 of the transfer pricing order, himself stated that the product data compiled in the TIPS database is taken from customs data relating to rice, but also specifies the variety and brand of basmati/ non basmati-rice . In these circumstances, the vague doubts expressed by the TPO on the relevance of this database are clearly unfounded. His action is incorrect in law as indeed inappropriate to the facts of this case. Therefore, in our considered view, the Transfer Pricing Officer was clearly in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t enterprise buys or sells products that are identical or very similar to those sold in the controlled transaction . . It would, therefore, indeed seem that for the purpose of applying CUP method would be, a reasonable classification, which could justifiably define the prices, would suffice. We have also noted that the assessee has done categorization of basmati rice, as evident from pages 352 and 253 of the transfer pricing study filed before us, in three broad geographical categories and seven sub-categories, and of non-basmati rice in four broad geographical categories and six sub-categories. Let us also not forget that the classification is done on the basis of geographical markets and normally the products sold in a geographical market, due to sheer competitive forces, are broadly similar. It is also useful to refer to certain observations made in UN Transfer Pricing Manual, with which we are in considered agreement, to the effect that External comparables may be difficult to find in practice unless the transactions involve a fairly common and homogeneous product or service. However, the advantages of the CUP Method are great enough to warrant a significant effort to app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riably be considered to be more reliable than others, on a conceptual note, transactional profit methods (i.e., TNMM and profit split method) are treated as methods of last resort which are pressed into service only when the standard methods, which are also termed as 'traditional methods' (i.e., CUP method, resale price method and cost plus method) cannot be reasonably applied . It was noted by the Coordinate Bench that the OECD Guidelines also recognize this approach, and the Bench expressed its considered agreement with this approach. We are in considered agreement with the views so expressed by the Co-ordinate Bench. In our considered view, the traditional transaction methods have an inherent edge over the traditional profit methods in most of the situations, and, therefore, wherever both the methods can be applied in an equally reliable manner, traditional transaction methods are to be preferred over traditional profit methods. 62. We are alive to the fact that in the 2010 version of OECD Guidelines, OECD has done away with hierarchical approach in selecting the method for determination of ALP. The OECD has abandoned its earlier position that transactional profit met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod and a tradition profit method can be applied in a equally reliable manner, the traditional transaction method is to be preferred over traditional profit method. Moreover, where, taking into account the criteria established in para 2.2, the CUP method and another transfer pricing method can be applied in an equally reliable manner, the CUP method is to be preferred 64. In other words, therefore, even as there may not be any order of preference in which methods of determining the ALP must be considered, the traditional transaction methods, and particularly CUP, have an edge in the sense that all things being equal, CUP and traditional transaction methods are preferred over the transaction profit method. We are broadly in agreement with these views. Whether we proceed on the basis that there is an order of preference in which transfer pricing methods are to be applied, or whether we proceed without any such priority order, the fact remains that as long as CUP method can be reasonably applied in determining the ALP of an international transaction in a particular fact situation, and unless another method is proven to be more reliable a method vis-a-vis the fact situation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st thing we have noticed is that the assessee has determined arm's length price of its transactions with the AEs by comparing average export price by the assessee to its AEs with the average uncontrolled export price. This approach is patently incorrect inasmuch as while under rule 10B (1)(a)(i), it is indeed open to compute ALP on the basis of price charged in a comparable controlled transaction or 'a number of such transactions', but the arm's length price so computed is, under rule 10B(1)(a)(iii), taken as arm's length price in respect of property transferred in the international transaction. The expression 'the international transaction' referred to in rule 10B(1)(a)(iii) is used in singular and does not permit taking into account, unlike rule 10B(1)(a)(i), 'a number of such transactions'. While averaging is thus permissible for the uncontrolled transactions, each international transaction is to be taken on standalone basis. In our humble understanding, it is not open to the assessee to compare the average price in his transactions with AEs with average price in uncontrolled transactions. Dealing with a somewhat similar issue, though in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave not been verified either. No efforts are made to show that the terms of sale to the AEs and all other relevant factors are materially similar vis-a-vis the transactions with independent enterprises. The CPM is applied by comparing gross profit on sales, whereas the method requires comparison of mark up on costs on transactions with AEs vis-a-vis mark up on costs on transactions with non-AEs. In view of these discussions, the CIT(A) was in error in upholding assessee's computation of ALP by CPM. 19. The second thing that we has been noticed is that the assessee has excluded exceptionally high prices. In our considered view, the CUP method does not allow exclusion of high priced sale instances, unless such high prices could be explained by differences of product or commercial terms. In any event, exclusion of extreme cases, such as in quartile ranges, is normally not permissible under the scheme of determination of ALP under the CUP method. However, we do not wish to give any findings, as assessee has not been given effective opportunity of hearing on this issue, in this respect beyond stating that we are remitting the matter to the file of the Assessing Officer for fresh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble and logical manner. It would be conspicuously wrong and incorrect to treat the segregated transactional value as 'NIL' when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to the aggregate package. It is noticeable that sub-section (3) to Section 92 does not make reference to the computation of the form 92E but makes reference to the books of account and computation on the basis of the entries in the books of account. It stipulates that the computation made under sub-section (2) or (2A) shall not have effect of reducing the income or increasing the losses as declared on the basis of the said entries. Income or loss is the net figure which is computed after taking into account the business activities undertaken by the assessed AE which will have reference to the declared bundled/packaged international transaction. 22. However as we have upheld that the cup method is the most appropriate method for determination of the arm s-length price, and the whole issue set-aside to the file of the learned assessing officer, the assessee may raise this issue before the learned transfer pricing officer at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on pertaining to sale of rice. 6. Ld. AO / TPO / DRP have erred by not accepting the economic analysis undertaken by Appellant in respect of international transaction pertaining to sale of rice. 7. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case by considering companies that are not comparable to the Appellant in respect of international transaction pertaining to sale of rice. 8. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case in applying an export turnover filter of 25% as against 50% proposed by the Appellant without providing any cogent reasons. 9. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case by not making suitable adjustments to account for differences in the working capital of the Appellant vis-a-vis the comparable companies without providing any cogent reasons. 10. Ld. AO / TPO erred in finalizing the assessment without giving effect to the directions of the DRP in gross violation of the provisions of Section 144C(13) of the Act by not allowing capacity utilization adjustment as directed to be allowed by the DRP. 11. Ld. AO/ TPO/ D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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