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TMI Blog2023 (10) TMI 697X X X X Extracts X X X X X X X X Extracts X X X X ..... n two governments therefore it was held to be reasonable to conclude that the international transactions entered into by the associated enterprise with its associated enterprise is at arm s-length. We find that even if the resale price method is adopted, in absence of comparable, the comparability analysis fails. Thus there is no use of adoption of most appropriate method as resale price method. Assessee has also stated that in such cases the other method is the most suitable method for benchmarking the international transaction by considering the last purchase price of the similar items which are negotiated between the two governments. Considering the facts and circumstances of the case, we set-aside the whole issue back to the file of the learned TPO/assessing officer to benchmark above international transaction by adopting either resale price method , if adequate comparability data is available, or other method as the most appropriate method. Also duty of the assessee to substantiate before the AO/TPO to show that the international transaction entered into with its associated enterprise are at arm s-length based on certain credible information. - Shri Prashant Maha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the Appellant Company to make profits at the arm's length margin determined by TPO, is in fact, violation of provisions of section 92(3) of the Income-tax Act, 1961, since MoD is the end client for the Appellant Company. That the profits of an enterprise are determined by commercial realities, and not by any benchmarking formula independent of such realities, needs to be considered. 2.4. The learned AO/DRP/TPO erred in not acknowledging the fact that the Appellant Company is dealing with Government Agencies viz Defense Ministries on both sides of the transactions. That the very nature of these organizations makes it impossible to have anything but the arm's length price in contracts with them. 3. Erroneous consideration of facts by splitting Appellant's business into trading and service segment and erroneous computation of margins by the learned AO/DRP/TPO 3.1. The learned AO/ DRP/ TPO erred in considering/splitting the Appellant's business activity into two segments for benchmarking the international transaction of import of equipments from AE and availing allied services from AE in connection to said imports supplied to Ministry of Defense ( MOD ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well settled position in law, in absence of any material differences in the functions, assets or risks, the position once accepted in prior years, ought to have been followed. 7. Erroneous initiation of penalty proceedings under section 271(1)(c) of the Act 7.1. The learned AO erred in initiating penalty proceedings u/s. 271(1)(c) of the Act for furnishing inaccurate particulars of income thereby concealing income. 8. Addition on account of AIR Mismatch 8.1 The learned AO erred in making addition of Rs. 7,51,252/- on account of AIR Mismatch. 03. Brief facts of the case shows that assessee company is engaged in the business of execution of composite project of trading in defense equipments, servicing and repairing thereof. In fact it is acting as an interface for supplying of Russian origin military products between the Russian Federation and Ministry of Defence government of India. The associated enterprise of the assessee is established in accordance with the decree of President of Russia Federation. The AE had contract with Indian defense Ministry for supply of defense equipments, spares of such equipments and related services. In order to ensure del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables were also challenged stating that the none of the comparable are supplier to the defense ministry. d. Computation of the margin was also challenged stating that the foreign exchange fluctuation loss is to be considered as non-operating expenditure. 06. The Ld. TPO rejected the contention stating that a. the ministry of defense has neither decided the price of the equipment or price of the services, the ministry of defense has decided the price of import of equipment from the associated enterprises and hence this argument of the assessee is not found favour. The learned TPO further held that though assessee is dealing in defense equipments but in fact those are also the machineries and therefore there is no difference as defense equipments also falls into the broad category of machinery. He further stated that distribution of spares and the services should not be aggregated, as both are different transactions. Accordingly, the Ld. TPO found that the import of material of Rs. 93.77 Cr as ALP of Rs. 80.05 Cr and accordingly an adjustment of Rs. 13.71 Cr was made on trading segment. b. With respect to the service segment it was found that the revenue is Rs. 87,63,241 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er paragraph 9 it set aside the issue to the file of the AO/TPO. In that appeal, it was stated that the assessee has provided only support services, which involves supply of part and providing services. Both the activities are composite services and therefore interlinked. Accordingly, the product segment should be combined, it directed TPO to examine this aspect. b. It was further held that liquidate damages paid by the assessee cannot be considered to be part of cost incurred and therefore should not enter into computation of the profit level indicator. c. The Ld. AR on the most appropriate method stated that assessee is not making any value addition to be products which our procured from Russian Government and supplied to ministry of defense, India and therefore assessee has selected resale price method as the most appropriate method for the benchmarking these transactions. It was stated that in earlier years the TPO accepted the resale price method as the most appropriate method even for assessment year 2013-14 the DRP has also held the resale price method as the most appropriate method. d. The Ld. TPO has adopted the transactions net margin method as the most appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is related to delayed/overdue realization of the sales proceed. He further stated that the accounting note clearly shows that assessee has recognized income of ₹ 7.90 crores on account of pending recovery. He further submitted that in the earlier years foreign exchange gain was not considered as operating income and therefore on the principle of consistency also the forex loss should be excluded. j. He further submitted that in immediately preceding year the learned DRP has directed to exclude the forex loss while computing the profit level indicator. To substantiate his argument he referred to the DRP directions for assessment year 2013 14. He also referred to several judicial precedents wherein forex loss was not considered as part of operating expenditure. He also pressed into service the principle of consistency. Accordingly he submitted that resale price method should be accepted as the most appropriate method and the gross margin of 7.60% shown by the assessee should be compared for determination of transfer pricing adjustment. k. He even otherwise stated that revenue as well as the assessee both admits that there are no comparable is available to benchmark gros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 1/8/2018 in case of the assessee has decided this issue in favour of the assessee. With respect to the most appropriate method he submitted that it is for the assessee to substantiate with the functions, assets and risk of the assessee to demonstrate that what is the most appropriate method. He submitted that constantly resale price method has been accepted as the most appropriate method in case of the assessee. Now the assessee has raised new plea of adopting other method as the most appropriate method. The relevant details substantiate the arm s-length price of the international transaction by adopting that method has not been placed on record. Therefore the order of the learned transfer-pricing officer/assessing officer after the direction of the learned dispute resolution panel deserves to be upheld. 014. In rejoinder the learned authorized representative reiterated the submission already made. 015. We have carefully considered the rival contention and perused the orders of the learned lower authorities. The facts clearly shows that assessee is an Indian entity of its foreign associated enterprises which has been awarded the contract for supply of defence equipmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this FAR, assessee in its transfer pricing study report placed at page number 35 of the report stated that out of the 52,215 companies [ capitaline] the only company which could be considered a similar to the assessee was Brahmos aerospace private limited which was also rejected for nonavailability of the latest available data in public domain. One more reason was given that company owned significant intangible and technology of developing missiles. It was also stated to be a full-fledged manufacturer. In the end it was stated that the gross profit margin of the assessee at 7.84% is stated to be at arm s-length for the reason that the contract is in essence between two governments therefore it was held to be reasonable to conclude that the international transactions entered into by the associated enterprise with its associated enterprise is at arm s-length. In the circumstances, we find that even if the resale price method is adopted, in absence of comparable, the comparability analysis fails. Thus there is no use of adoption of most appropriate method as resale price method. Assessee has also stated that in such cases the other method is the most suitable method for benchmarking ..... X X X X Extracts X X X X X X X X Extracts X X X X
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