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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM
This appeal for A.Y. 2016-17 is filed by Franklin Wardcorp India Pvt. Ltd. (assessee /appellant) against the assessment order passed under Section 143(3) read with section 144C(13) read with section 144B of the Act dated 19th April, 2021, passed by the National e- assessment centre, Delhi, wherein the total income of the assessee was determined at ₹1,91,05,546/-, against the return of income filed on 29th November, 2006 at a loss of ₹4,57,49,567/-. The only dispute in this appeal is with respect to the transfer pricing adjustment of ₹2,66,44,021/- with respect to the Arm’s Length Price
2. The assessee has raised following grounds of appeal:-
“1. On the facts and in the circumstances of the case, the Hon‟ble Dispute Resolution Panel (“DRP”) was not justified in endorsing the Transactional Net Margin Method („TNMM‟), as used the Transfer Pricing Officer („TPO‟), for the purpose of determining the Arms length Price („ALP‟) of the concerned transaction with as its Associated Enterprise and in making a Transfer Pricing Adjustment of ₹ 2,66,44,021.
On the facts and in the circumstances of the case, the DRP should not have endorsed the view of the TPO that the your Appellant‟s products were in the category of auto spare parts and in using data of auto spare parts companies for the purpose of arriving the ALP under the TNMM.
3. On the facts and in the circumstances of the case, the Hon‟ble DRP was not justified in rejecting the contention of the Appellant that either the Cost Plus method or the Comparable Uncontrol Price („CUP‟) Method should have been applied in arriving at the ALP of the concerned transactions with its Associated Enterprise.
4. On the facts and in the circumstances of the case, the Hon‟ble DRP was not justified in taking the view that the tested party could not have been the Associated Enterprise of your Appellant.
5. On the facts and in the circumstances of the case, the Hon‟ble DRP ought to have taken only loss-making enterprises, as pointed out in our submissions to the DRP,
The brief facts of the case shows that assessee is engaged in the business of selling tank truck equipment for transportation of fuel from storage tank depot of oil companies in India to various retail outlets. The assessee has entered into international transaction for purchase of spares of ₹24,63,399/- and purchase of bottom loading tank truck fitting of ₹ 5,89,74,155/- from its Associated Enterprises. The assessee adopted Resale Price Method [ RPM] as the Most Appropriate Method. For benchmarking assessee submits that its Associated Enterprises has followed the practice of cost of purchase plus markup of 10% margin in all transactions with the assessee. The assessee submitted letter issued by that company along with the minutes of the assessee’s board of directors. Assessee also submitted the copies of all invoices and compared with global prices list of Associated Enterprises stating that the Associated Enterprises has sold the same product to third party at higher price as compared to the price charged by Associated Enterprises to the assessee. Therefore, the international transaction is at Arm’s Length Price.
The learned Transfer Pricing Officer rejected the above benchmarking methodology stating that to justify the resale price method, no other comparables margins were used by the assessee to demonstrate that international transaction is at Arm’s Length Price. Therefore, the resale price method as Most Appropriate method [MAM] is incorrect. According to the learned Transfer Pricing Officer, the assessee and the Associated Enterprises are operating in different economic circumstances and Associated Enterprises caters to different parties situated in different market conditions. Therefore, there cannot be comparison for price charged to third parties globally by the Associated Enterprises with the prices charged to the assessee. According to the learned Transfer Pricing Officer, the business model of the assessee is more similar to a retailer and Associated Enterprises business is more like a wholesaler. Thus, he rejected
Assessee preferred the objection before the learned Dispute Resolution Panel, who passed direction on 18th March, 2021. The directions were further rectified on 15th April, 2021. The learned Dispute Resolution Panel held that the learned Transfer Pricing Officer has correctly applied Transactional Net Margin Method as The Most Appropriate method to compute Arm’s Length Price. It further rejected the claim of the assessee holding that no adjustment for payment of custom duty is to be given while computing the PLI. It further held that finance charges are non-operating in nature in consonance with the PLI of the comparables. However, it accepted that the PLI may be computed only in the respective segment of the transactions entered into by the assessee. Based on this, the final assessment order was passed on 19th April, 2021, wherein the transfer pricing adjustment was restricted to ₹2,66,44,021/-.
The learned Authorized Representative vehemently referred to paragraph no. 4.6 and 4.7 of the learned Dispute Resolution Panel. It was stated that all products are manufactured by the Associated Enterprises on API standard and all the kits have to be mandatorily be approved by the Explosive Authority of India, Petroleum and Explosives Safety Organization (‘PESO’). After that only the product of the assessee is fitted to the petroleum transportation vehicle. After fitting of the kit once again the vehicles needs to be approved by
The learned Departmental Representative submitted that if the Comparable Uncontrolled Price method is to be applied there is no concept of tested party in that method. It is not the comparison of profit element, it was further stated that object of determination of Arms Length Price by the custom department is different than the object of determination of Arms Length Price in income tax Act. He submitted that it is an anti tax evasion provision. He further stated that the assessee is supplying only equipments. Merely, fitting of the equipment in petroleum transpiration vehicle does not make it specific and therefore, Transactional Net Margin Method is correctly applied. It was further stated that subsistence over form is required to be sent and economic issue and factors are required to be looked into for which assessee has not given any details. And therefore, the Resale Price Method adopted by the assessee is out of question.
In the rejoinder, the assessee has submitted five judicial precedents in a paper book stating that foreign tested party should be accepted.
In the result, the appeal of the assessee is allowed for statistical purposes.
The facts of the case for A.Y. 2017-18 are also identical. Therefore, the appeal of A.Y. 2016-17, is also set aside with similar directions.
In the result, both the appeals are allowed for statistical purposes.
Order pronounced in the open court on 26.07.2023.