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TMI Blog2023 (10) TMI 1057X X X X Extracts X X X X X X X X Extracts X X X X ..... er CUP method, which warrants a very high degree of similarity between controlled and uncontrolled transactions. Thus we hold that once TNMM has been accepted under the similar FAR, there is no reason to deviate by adopting CUP Method and other methods admittedly are incapable of capturing the true arm's length result and therefore, we hold that TNMM should be taken as a most appropriate method for benchmarking the said transaction. Accordingly, we are inclined to allow the Grounds of Appeal No. 4, 6 7 for statistical purpose and remand the issue to the file of Ld. TPO to examine and bench mark the integration transaction by adopting as most appropriate method by taking Berry ratio as PLI as has been approved by Hon ble High Court. Protective addition under TNMM applying PLI of OP/OPEX - TPO while making the adjustment included the FOB value of the goods transacted under indenting segment in the cost base as well as part of opening revenues of the assessee - HELD THAT:- By respectfully following above said ratio laid down by the Tribunal in earlier years [ 2021 (11) TMI 1173 - ITAT DELHI] we are of the opinion that FOB value of the goods is the cost and revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.1. As the reference made by the Ld. AO to the Ld. TPO is not in accordance with the provisions of Section 92CA(1) of the Act; and 2.2. As no opportunity of being heard was granted at any stage of the proceedings for this purpose, whether at the proposal stage or even later at the time of grant of approval. 3. The Ld. TPO has erred in making the transfer pricing adjustment without establishing the existence of any one of the four preconditions provided in section 92C(3) of the Act, which is a mandatory requirement for making an adjustment under section 92CA(3) of the Act. 4. The Ld. TPO has disregarded the transfer pricing approach adopted by the Appellant to determine the arm's length price ( ALP ) of its international transactions. The Appellant's use of Transactional Net Margin Method ( TNMM ) with operating profit/operating expenses ( OP/OPEX ) as the profit level indicator ( PLI ) has been disregarded without any justification whatsoever. 5. The Ld. AO / TPO has disregarded the directions of the Ld. Dispute Resolution Panel ( DRP ), wherein it is directed to the Ld. AO / TPO to ascertain whether an appeal has been filed against the order of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent products and without conducting any such enquiry, such average rate of commission could not be adopted as arm's length; and 6.4. the transfer pricing approach agreed upon in the Bilateral Advance Pricing Agreement ( BAPA ) signed between the Appellant and the Central Board of Direct Taxes ( CBDT ), where TNMM has been selected as the most appropriate method with OP/OPEX as the PLI for similar transactions with Sumitomo Corporation Japan. 7. The Ld. DRP / TPO has erred in applying and computing ALP for indenting transactions by applying 3.29 per cent commission rate (by first applying 2.92 per cent and then adding 0.37 per cent based on OP/OPEX of comparable companies). While doing so, the Ld. DRP / TPO erred in: 7.1. alleging that the functions performed by the Appellant were far more for the AEs as compared to the non-AEs, without providing any justification / empirical evidence thereof; 7.2. applying a flawed methodology of adding a mark-up of 0.37 per cent to the commission earned from the non-AEs, which does not fall under any of the specified methods in Section 92C of the Act, read with Rule 10B of Income-tax Rules, 1962 ( the Rules ); 7.3. usi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O erred in making an adjustment on protective basis in respect of an issue on which substantive addition has also been made, which is not permissible in law as the concept of substantive and protective adjustment is relevant only when an income is to be added in the hands of more than one taxpayer. This is without prejudice to the contention that TNMM with Berry ratio (modified form of OP/OPEX) as the PLI should be accepted as the most appropriate method for determining ALP of the international transactions entered into by the Appellant in a proper manner, as has been upheld by the Hon'ble ITAT in earlier years, rather than the CUP method. 10. That on the facts and circumstances of the case and in law, the AO have erred in levying / charging interest under sections 234B and 234C of the Act. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised. The arguments taken hereinabove are without prejudice to each other. 3. The Ground No. 1 is general in nature which requires no adjudication, Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to before us as discussed herein above. The approach of determining the ALP on the basis of average per cent of commission reported by the assessee in respect of indenting transactions with the non-AEs as held by the Tribunal has not found judicial favour with the Hon'ble High Court and matter has been remanded back for further examination of similarity between the two transactions and to conduct further in depth inquiry to examine the high degree of comparability of relevant control and uncontrolled transactions. Further, if the average rate of commission on such transactions was to be applied to the FOB value of goods involved in the indenting transactions with the AEs, then this Tribunal has to satisfy itself that there is no significant variation in the rate of commission between different products. From the perusal of the indenting transactions undertaken by the assessee with AE and non AE under various product segments, it is discerned that, for instance in the product segment 'Automotive', the assessee has undertaken 249 transactions with AE and only 4 with non AE and in the Assessment Year 2007-08 the volume of transaction, FOB value wise is 'Nil' in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction and the comparable uncontrolled transactions has to be seen which could materially affect the price in the open market. The price of different products cannot be the same as it depends upon the negotiation based on volumes, value and other contractual terms. Further different market and geographical location also affects the pricing factors and therefore, if there are differences on account of these factors CUP cannot be held to be the most appropriate method for bench marking the arm's length price. Here in this case, under the indenting segment there are various dissimilarities in the transaction with the AE and non AE as discussed above and for this reason alone the average commission earned cannot be the benchmarking factor for determining the ALP, and therefore, we hold that neither the CUP method can be applied nor the transaction with the AE and non AE can be taken for the purpose of comparability analysis. Thus, we reject the CUP method by taking the average commission earned in the transaction with the AE and non-AE. 17. Now, in these circumstances, we have to see whether TNMM can be considered as most appropriate method. First of all, it has been brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14-15 and in case no appeal has been filed against the aforesaid order, the benchmarking of the A.E indent segment has to be in line of the aforesaid orders of the Tribunal and that the adjustment made by the TPO in its original order on protective basis has to be dropped. The Ld. Counsel submitted that while making the adjustment based on the direction of the Ld. DRP, the Ld. A.O/TPO has assumed that an appeal has been filed against the order of the Tribunal for AY 2012-13, AY 2013-14 or AY 2014-15 but not provided any evidence to substantiate the same. Therefore, the order of the A.O/TPO should be considered as null and void-ab-initio. Due to noncompliance of Section 144C(10) and Section 144C (13). 11. The similar ground of appeal was also raised before the Tribunal in Assessment Years 2015-16 2016-17, however, since in those Assessment Yeas, the Tribunal has deleted the substantiate adjustment itself the above ground has not been adjudicated as the said ground has remind as academic in nature. Following the consistency since we have also deleted the substantive adjustment itself, the Ground No. 5 has become academic in nature. Accordingly, the Ground No. 5 is dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B value of the goods is the cost and revenue of the buyer and the seller and not the commission agent. Therefore, such an adjustment could not have been made. 14. Ground No. 8.2 8.3 are regarding comparables selected by the TPO. The Ld. Counsel for the assessee submitted that the assessee in TP report selected 8 comparable companies, but the TPO has rejected all the 8 comparables and selected fresh comparable set off 8 new Companies. Without giving any cogent reason whatsoever. The Ld. Counsel for the assessee further submitted that the new set of comparables includes three companies which are fully dissimilar on product functions risks and business model. The Ld. DR has justified the action of the Lower Authorities. Since the Ld. DRP and the Ld. TPO has rejected all the 8 comparables and selected a fresh comparables set of 8 new companies. The observation made by the Ld. TPO while rejecting the comparables proposed by the assessee reproduced hereunder:- S.No Company Name Analysis 1 Associated Road Carriers Ltd. This company fails the FAR filter hence; this company is not bei ..... X X X X Extracts X X X X X X X X Extracts X X X X
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