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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
This appeal is filed by the assessee i.e. Rosoboronservice (India) Ltd [ Appellant] against the assessment order dated 24.10.2018 passed by the Deputy Commissioner of Income Tax 15(3)(1), Mumbai [ The AO] u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (The Act) pursuant to direction dated 24.09.2018 issued by The Dispute Resolution Panel, Mumbai (Ld. DRP) dated 24.09.2018 wherein the transfer pricing adjustment proposed by the Ld. TPO u/s 92CA(3) of the Act is incorporated.
1. “That on the facts and circumstances of the case, the final assessment order dated 24 October 2018 (and received by the Appellant on 29 October 2018 passed by the Deputy Commissioner of Income-tax, 15(3)(1), Mumbai u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 Act"), pursuant to the directions dated 24 September 2018 by Dispute Resolution Panel. Mumbai ("DRP") u/s 144C(5) of the Act and read with order dated 27 October 2017 issued by Transfer Pricing Officer ("TPO") u/s 92CA(3) of the Act, is bad in law and void ab-initio 2. General Ground 2.1. That on the facts and circumstances of the case and in law, the learned AO/ DRP/ TPO have erred in making an upward adjustment of Rs. 11,29,97,681/- to the total income of the Appellant by holding that transactions of purchase of trading equipments etc. and payment for services by the Appellant to its Associated Enterprise ("AE") is not at arm's length. 2.2. The learned AO/DRP/TPO failed to appreciate that the MoD, is the Government of India with stringent controls over its procurements coupled with a rigorous system of purchasing, thus enjoys superior commercial leverage against its vendors such as the Appellant precluding any possibility of excessive profits. On the other hand the Russian Federation, being related party supplier also decides its selling price under strict Russian government regulations. Between the two, the Appellant cannot hope to have any unreasonable profits. This arrangement has a substantial bearing to the low profits of the Appellant. 2.3. The learned AO/DRP/TPO also failed to appreciate that by asking 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
Assessee filed its return of income on 28.11.2014 at loss of Rs. 5,81,64,543/-. Return of income was picked up for scrutiny. As assessee has entered into international transactions of import of defense equipments of Rs. 93,76,92,845/- and also paid technical Services fee of Rs. 87,63,241/-. Both the transactions, taken together were benchmarked adopting the Resale Price Method [ RPM] as the Most Appropriate Method. For testing the margins, assessee took itself as Tested party, gross profit was
The Ld. Transfer Pricing Officer held that the assessee is mere distributor of product, he adopted the transactions net margin method [TNMM] as the most appropriate method and determined the arm’s length price of import of stores considering the gross profit as the PLI. The PLI was determined after considering liquidated damages expenses and forex loss as operating expenses at - 4.06%. As assessee has disclosed the grass margin of 7.60%, the learned TPO substantially computed it at a lower figure for the reason that foreign currency fluctuation loss of ₹ 11.84 crore suffered by the assessee during the year was considered to be an operating item. The assessee considered it to be non-operating expenditure. The TPO selected 26 comparables whose PLI was 21.12% and assessee was asked to show cause why the adjustments should not be proposed. The assessee submitted that b. Assessee’s transaction of import and technical services cannot be segregated and should be benchmarked together. c. Comparables 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.
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 b. With respect to the service segment it was found that the revenue is Rs. 87,63,241/- having the cost of Rs. 80,49,345/- and profit is Rs. 7,13,896/- which is barely 8.14%. The Ld. TPO selected ten (10) comparable companies who margin was 24.85% and issued a show cause notice for the adjustment. The assessee objected on separate benchmarking as well as comparability analyses. The Ld. TPO rejected the contention of the assessee and made an adjustment of Rs. 10,30,329/- as per order u/s 92CA(3) of the Act dated 27.10.2017 the total transfer pricing adjustment of Rs. 13,81,82,259/-.
Accordingly daft assessment order was passed on 20.12.2017 wherein above of adjustment was made. There was also addition on account ARI mismatch of Rs. 72,56,192/-. Total income was assessed at Rs. 8,72,73,911/-.
The assessee objected before the Ld. Dispute resolution panel. The direction was passed on 24.09.2018. The learned dispute resolution panel held that a. resale price method is the most appropriate method instead of transactional net margin method adopted by the TPO. c. The learned DRP deleted the adjustment proposed by the TPO on account of international transaction towards import of service.
on the basis of directions, the ALP adjustment of Rs. 13,81,82,259/- was scaled down to Rs. 11,29,97,681/-. With respect to the disallowance of ARI mismatch was confirmed to Rs. 7,51,252/-.
Accordingly, final assessment order was passed on 20.12.2017 determining income at Rs. 5,55,84,393/- .Assessee aggrieved with the same is an appeal before us.
Ground no. 1 general and nature and ground no. 7 initiating penalty proceedings is premature. Therefore, those are dismissed. Ground no. 4 challenging the violation of the principle of natural justice was not pressed, hence, dismissed.
Adverting to ground number [2] to [6] except [4] on transfer pricing adjustment, The Ld. Authorized Representative has referred to the paper book containing 282 pages and further written note containing 24 pages. The Ld. Authorized Representative submitted that 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 appropriate method incorrectly. f. It was further submitted that though the learned dispute resolution panel has accepted that resale price method was the most appropriate method to benchmark the prices charged by the appellant however the learned dispute resolution panel also did not exclude forex fluctuation losses which cannot enter into the gross profit working of the assessee as well as the comparables. He therefore submitted that when resale price method is accepted as the most appropriate method, only gross profit requires to be computed and compared. He therefore submitted that foreign exchange fluctuation loss as well as liquidated damages are required to be excluded from PLI. g. Even otherwise he submitted that comparable taken by the learned TPO are dealing in different set of machineries and none of them is engaged in trading of defense equipments. Further assessee is only dealing in spare parts and not even the machineries, even if, the defense equipments are also considered to be the broader part of machinery segment. He h. He further submitted that the learned transfer- pricing officer himself has considered some of the companies to be incompatible with the appellant while completing assessment of immediately preceding year. He made a reference to page number 125 of the paper book where different set of companies were selected which if those are selected for the current year results into the average margin of 2.04% which was less than the gross margin earned by the appellant.
i. He further stated that the foreign currency fluctuation loss of ₹ 11.84 crores suffered by the assessee is on account of abnormal fluctuations/depreciation in the value of Indian currency which resulted in loss on account of outstanding payables in foreign currency to associated enterprises. He referred to the audited accounts of the assessee to show that assessee is constantly asking for reimbursement of the exchange loss to the extent it 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 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 gross margin on by the appellant even if resale price method is adopted. Therefore in the circumstances the most appropriate method for benchmarking these international transactions, ‘other method’ can also be considered. He submitted that assessee can resile from most appropriate method adopted in the transfer pricing study report. He specifically referred to the guidance note issued by the Institute of chartered accountants of India on transfer pricing which provides guidance l. To justify the other method, he submitted that that prices are negotiated by the Ministry of Defense and associated enterprises. Last traded price is the fair market price mutually agreed between two independent parties, therefore such last traded price of similar items can be considered as comparable price. He therefore submitted that for benchmarking the international transaction of the assessee, the ‘other method’ should be adopted as the most appropriate method. m. He referred to 15 comparables selected by the learned TPO and submitted a chart stating that all these 15 comparables cannot be used for comparability of this international transaction as none of the company is engaged in the business of supply of equipments to the Ministry of Defence and also spare parts and services. He submitted that as assessee is supplying the goods to the Ministry of Defence the cost structure, the functions, the risk are different than all these 15 entities. n. In the result is submitted that the transfer pricing adjustment measures to be deleted.
In rejoinder the learned authorized representative reiterated the submission already made.
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. However it would be the 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. In the result, ground number 2 – 6 [ except 4, of the appeal are restored to the file of the learned AO/TPO to benchmark the international transaction afresh by selecting first the
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 12.10.2023.