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TMI Blog2019 (8) TMI 1862X X X X Extracts X X X X X X X X Extracts X X X X ..... lly considering the relatable sales drawing the quantitative relationship to the imports from the AEs, i.e. controlled cost. The principle of relevant here proportionality is and it is a settled law in this regard. In the situation like the one in the instant case of the assessee, there is data relating to controlled and uncontrolled cost particulars. This undisputed data is suffice to arrive the proportionate sales relatable to the international transaction with the AEs ie controlled cost. Also we direct the AO to restrict the adjustments, if any only to the international transaction with AE - Decided against revenue. - ITA No.299/PUN/2018, ITA No.678/PUN/2018 - - - Dated:- 19-8-2019 - MS. SUSHMA CHOWLA, JM AND SHRI D. KARUNAKARA RAO, AM For the Assessee : Shri Kishore Phadke Shri Mehul Shah For the Revenue : Ms. Amrita Mishra ORDER PER D. KARUNAKARA RAO, AM : These are cross appeals filed by the assessee as well as by the Revenue for the assessment year 2012-13. 2. Briefly stated the relevant facts include that the assessee is engaged in the business of manufacturing of a list of products for tractors, excavators, material handling equipments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he operating cost qua the Exchange Loss etc. 4. Before the CIT(A): Aggrieved, the assessee filed an appeal before the CIT(A). The assessee raised the objection i.e. rejection of CUP as MAM, PLI workings, adjustment of transactions, adjustment to the operating profit cost, grant of other adjustment like the working capital adjustment etc. On the MAM, the CIT(A) sided with TPO due to the failure of the assessee in furnishing the details and relied on the provisions of Rule 10B of the I.T. Rules (Para 5.1 of the CIT(A) s order). On the issue of quantification of adjustment i.e. restricting to transaction level and not at entity level, the CIT(A) decided the issue in favour of the assessee and relied on the Jurisdictional High Court judgement in the case of CIT vs. Ratilal Becharlal Sons, 288 CTR 31 (Bom.). The CIT(A) approved the split profitability method and directed the TPO/Assessing Officer to adjust the Finance Cost account qua the Exchange Loss of Rs.1,52,28,670/-. Accordingly, CIT(A) concluded his finding as per discussion given in para 5.3 of his order. However, the PLI of the 6 comparables remains unaltered at 8.68%. The PLI of the assessee is adjusted by the CIT(A) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring to the appellant before making a reference to the learned TPO in this regard. 2. The learned TPO erred in law and on facts and CIT(A)-13 Pune, erred in confirming the decision of the TPO in not granting appropriate capital adjustment working to the appellant while arriving at the average OP/OI margins of the external comparables. Learned CIT(A) failed to appreciate that twhoer kninugm cbaeprista fl raodmju satumdeintet dd efriinveadn cbiya ltsh eo fa prpeeslplaenctt iivse computed based on external comparable company and is as per OECD's formula and no any presumption is used to arrive at the adjustment figure. 3. The appellant craves leave to add / modify / delete / amend all / any of the grounds of appeal. 10. Before us, ld. AR for the assessee submitted that the ground no.1 is not pressed. Accordingly, the same is dismissed as not pressed. 11. Referring to ground no.2, ld. AR submitted that the same relates to non-granting of working capital adjustment to the assessee while working at the margins. 12. On this issue of grant of working capital adjustment, before us, ld. AR for the assessee brought our attention to the contents of page 37 to 43 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2018 By Revenue 18. The grounds raised by the Revenue are as under :- 1. On the facts and circumstances of the case, the Ld. CIT(A) erred in rterastnriscaticntgi ontshe adjustment only to the value of international carried out by the assessee with its associate enterprise which is contrary to the prescription of Rule 10B(1)(e), since the TPO had selected Transaction Net Margin Method (TNMM) and applied the same on the entity level and because the presumption underlying arm s length principle is that uncontrolled transactions are at arm s length and therefore, if the overall margins are less than arm s length margins, the shortfall must be on account of Associated Enterprises (AE) transactions only and not on pro rata basis. 2. On the facts and circumstances of the case, the Ld. CIT(A) erred in allowing the proportionate adjustment claim even though the SLP on similar issue filed by the Revenue has been admitted by the Hon ble Supreme Court in the case of CIT Vs Firestone International Pvt. Ltd. vide its order dated 16.08.2016. 3. The appellant prays to be allowed to add, amend, modify, rectify, delete or raise any grounds of appeal during the course of appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions with AEs only, has been considered by us. We have also considered the legal proposition in existence on this issue and find it is settled legal matter that the adjustments cannot be extended to the entire receipts/turnover of the entity which may include transactions with non-AEs. TP adjustments need to be restricted to transaction with AEs only. In this regard, the Jurisdictional High Court judgement in the case of CIT vs. Firestone International (P.) Ltd. (378 ITR 558) is relevant and the same is binding on us. The said decision is relevant for the conclusion of the ratio that the ALP can be considered on value of international transaction alone and not entire turnover of the assessee. In this case, the Revenue was aggrieved against the order of the Tribunal and the same was agitated before the Hon ble High Court vide Question of Law 2(a) of the appeal and in para 3 of the said question of law was not entertained as substantial question of law. For the sake of completeness, the said para 3 is extracted hereunder :- 3. As far as Question (a) is concerned, the learned Counsel for the Revenue is unable to show how it arises from the impugned order of the Tribunal. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,285). In this regard, Ld Counsel relied on the provisions of the Rule 10B(1)(e) and also various judicial pronouncements on the subject ie (i) Emerson process Management India P Ltd ITA NO 8118/m/2010; (II) T Two International P Ltd and others; IL Jin electronics I PLtd 36 SOT 227 Del; Starlite case 2010-TII-28-ITAT-DEL-TP; Abhishek Auto Industries Ltd 2010-TII-54-ITAT-DEL-TP etc. 46. We have heard the parties and perused the relevant provisions of the said rule. Sub clause (i) and (ii) of the Rule 10B(1)(e) referred to the expressions in relation to and the relevant base . They read as follows: (i) The net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) The net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; 47. From the above, it is vivid that in TNMM, the net profit margin realized by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licated procedure to arrive at the amount of adjustment. In simple terms if the sales to Associated Enterprises is taken at Rs. 25 crores and straight way 7.25% margin is applied then approximately total margin would be Rs.1.81 crores, whereas adjustment has been made at Rs2,57,26,138/-... C. IL Jin Electronics I P Ltd v ACIT 36 SOT 227 Page 470 of the Paper Book: 15. The assessee has also taken one alternative ground out of the total raw materials consumed by the assessee for manufacturing printing circuit boards, only 45.51 per cent of the total raw materials were imported through assessee s associated concerns, and , therefore, any adjustment, if any called for, can only be made to the 45.51 per cent of the total turnover, and not to the total turnover of the assessee. After considering the facts of the case, we do not find any difficulty in accepting this contention of the assessee that at best only 45.51 per cent of the operating profit can be attributed to imported raw material acquired from assessee s associate concerns. In the present case, the AO has calculated the operating profit on the entire sales of the assessee, which in our considered opinion, is not j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 10.49 per cent whereas in the domestic sales segment it is only 2.88 per cent. .. We, therefore, accept this second proposition also that only international transaction is to be taken into account while calculating the ALP . 49. All these cited decision in general and the decision in the case of M/s IL Jin Electronics I P Ltd, supra , in particular are uniform in asserting that the TP adjustments are to computed not considering the entity level sales. Rather it should be done ideally considering the relatable sales drawing the quantitative relationship to the imports from the AEs, i.e. controlled cost. The principle of relevant here proportionality is and it is a settled law in this regard. In the situation like the one in the instant case of the assessee, there is data relating to controlled and uncontrolled cost particulars. This undisputed data is suffice to arrive the proportionate sales relatable to the international transaction with the AEs ie controlled cost. Accordingly, the grounds 10 relating to Incorrect computation of transfer pricing adjustment to the manufacturing activity is allowed pro tanto. 28. Considering the above settled legal proposition o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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