SOCOMEC INNOVATIVE POWER SOLUTIONS PRIVATE LIMITED,CHENNAI vs. DCIT, CHENNAI

आदेश /O R D E R

PER MANJUNATHA. G, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) dated 27.01.2017, in pursuant to the directions of the Dispute Resolution Panel-2,

:-2-: ITA. No: 848/Chny/2017 Bangalore dated 15.12.2016 issued u/s. 144C(5) of the Act and pertains to assessment year 2012-13.

:-3-: ITA. No: 848/Chny/2017 supplementary method, for the purpose of benchmarking its international transaction. 7 That the Ld. AO/ Hon'ble DRP/ Ld. TPO have erred on facts and in law by rejecting the comparable company considered by the appellant for benchmarking the impugned transaction. 8 That the Ld. AO/Ld. TPO/ Hon'ble DRP have erred on facts and in law by using Berry ratio under Transactional Net Margin Method ("TNMM") as the Profit level indicator ("PLI") to benchmark the international transaction. 9 That the Ld. AO/Ld. TPO/ Hon'ble DRP have erred on facts and in law in considering the third party purchases in the computation of Berry ratio, as the same would dilute the analysis. Further, the Ld. TPPO has rejected the RPM analysis undertaken by the appellant on the same ground that the usage of gross profit margin would include the impact of purchases from third parties. 1 O Without prejudice to appellant contentions against the use of Berry ratio, Ld. TPO has erroneously considered post- sale operation/and fixed expense as operating expenses while computing Berry Ratio. 11 That the Ld. AO/ Hon'ble DRP/Ld. TPO have erred, in law and on facts and circumstances of the case in selecting companies with different functional and risk profile as comparable companies. 12 That the Ld. AO/ Hon'ble DRP/ Ld. TPO have erred, in law and on facts and circumstances of the case in selecting companies which have failed the filters applied by the Ld. TPO himself, as comparable companies. - 13 The Ld. AO/ Ld. TPO have grossly erred by not allowing economic adjustments to account for the differences in the functional and risk profile of the Appellant vis-a-VIS companies selected as comparable for the purpose of determination of ALP of the impugned transactions. 14 That the Ld. AO/Hon'ble DRP/Ld. TPO have erred in attributing the entire difference between the Berry ratio of Appellant and alleged comparable companies to the international transaction, without proportionating the adjustment to the international transactions and therefore erred in denying the proportionate adjustment.

:-4-: ITA. No: 848/Chny/2017 15 That the Ld. TPO/Ld.AO/Hon'ble DRP erred in not applying the rule of consistency, and certainty, as the same approach of the appellant for determining ALP using CUP as the most appropriate method was accepted by the Ld. AO/Ld. TPO in A Y 2008-09 and AY 2009-10. 16 That the Ld. AO has erred on the facts and circumstances of the case and in law in levying the interest under Section 234B 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 may be advised. The grounds taken hereinabove are without prejudice to each other.”

:-5-: ITA. No: 848/Chny/2017 determination of ALP for AE purchases. During the course of assessment proceedings, the Transfer Pricing Officer has rejected CUP method adopted by the assessee for benchmarking transactions with its AEs. During the course of TP proceedings, the assessee vide its letter dated 09.01.2015 has stated that in case CUP method cannot be adopted, then Resale Price Method may be adopted as most appropriate method, because the assessee is predominantly engaged in business of trading in UPS and accessories. The Assessing Officer rejected CUP as well as RPM method proposed by the assessee and has adopted TNMM as most appropriate method with Berry Ratio as PLI. The TPO has selected three comparables, Ms. Sukam Power Systems Ltd and Swelect Energy Systems Ltd, and Ador Power Systems with average Berry Ratio of 0.27 and then compared with Berry Ratio of the assessee which was at 0.06% and made TP adjustment of Rs. 4,32,34,319/-. The assessee challenged TP adjustment as proposed by the TPO before the DRP, but could not succeed. The DRP sustained additions made by the Assessing Officer and applied TNMM as most appropriate method.

:-6-: ITA. No: 848/Chny/2017 4. The Ld. Counsel for the assessee, submits that this issue is covered in favour of the assessee by the decision of ITAT, Chennai Benches in assessee’s own case for assessment years 2010-11 & 2011-12, where an identical issue has been decided by the Tribunal and after considering relevant facts held that TNMM with Berry Ratio is not most appropriate method in the given facts and circumstances of its case and further direct the TPO/AO to examine CUP method as selected by the assessee or RPM as alternatively suggested by the assessee, may be examined in light of relevant facts of the case. Therefore, facts are identical in the year under consideration, the issue may be set aside to the file of the TPO with similar direction to re-examine the case.

:-7-: ITA. No: 848/Chny/2017 margin, there would be no room for any further adjustment. Aggrieved against this direction, M.A was filed by revenue. 2. The Hon'ble ITAT admitted the M.A filed by the revenue and recalled the order dated 04-06-2018 in its order in M.A No.243/2018 dated 05.04.2019. On this aspect, a written submission was alrcady filed on 21.12.2022. This copy is also enclosed as annexure-1. 3. However, during the course of hearing, the counsel for the appellant argued that in the earlier two years also, the same turn over filter only applied and hence there was no error committed by TPO in A.Y 2012-13. Hon'ble ITAT directed to verify this factual aspect. Accordingly, the clarification was sought from the TPO. The TPO vide letter dt.9.3.2023 clarified that for the A.Y 2010-11, the TPO has not mentioned anything about the turn over filter used by him both in show cause notice and in the assessment order. It is also clarified that in A.Y 2011-12, though the filter used was sales over Rs.1 crore, the TPO made a typographical error in the show cause notice as 'sales above Rs. 1 crore and less than Rs. 200 crores' and arrived at five comparable companies. As the appellant objected to the inclusion of very high turnover companies, the TPO restricted the comparable companies, having turn over less than Rs.500 crores. 4. In view of the above, the issue of turn over filter crept in for AY 2012-13 and that was suitably rectified by the TP0 vide his order u/s 154 dated 30.06.2017. As this rectification order was not brought to the notice of Hon'ble ITAT, the order dated 04.06.2018 was recalled. By summarising these facts, another written submission was also filed on 16.03.2023. A copy of the same is enclosed as annexure-2. 5. Argument of the counsel on merit and method adopted by TPO 5.1 During the course of previous hearing, the counsel had argued altogether a new issue, claiming that TNMM with Berry Ratio" is not a correct method for Bench marking their transaction. It was contended that CUP is the correct method and if the CUP is not met with the requirements, RPM (Resale Price Method) can be considered. 5.2 However, the TPO has given detailed reasoning on the Most Appropriate Method (MAM) to be followed in the case of assessee vide paragraph 7.1 to 7.2 from TP order, page no.9

:-8-: ITA. No: 848/Chny/2017 to 12. He has also mentioned that for the AY 2010-11 and 2011-12, the TP0 adopted TNMM with Berry Ratio, as the most appropriate method. Prima facie, there is no dispute in the method of determination of Arm's Length. In this connection, relevant paragraph of ITAT finding in ITA No. 848/Chny/2017 is reproduced below: "We have considered the rival submissions. Admittedly, the higher the turnover, the higher the PLI insofar as the fixed costs remained constant. In any case, perusal of the filters as determined by the ld. TPO itself shows that the ld. TPO has determined the filters and it is not the assessee, who has determined the filters. The ld. TPO who having determined the fillers, comparables must conform to such filters placed. Admittedly both Su-Kam Power Systems Ltd., & Swelect Energy Systems Ltd, clearly fall outside the purview of being comparable on account of the turnover filters, the same should be excluded and we direct it. Once the two comparables being Su-Kam Power Systems Ltd., and Swelect Energy Sstems Ltd., are excluded the PLI applying the Berry ratio on comparables being within the +5% margin, there would be no room for any further adjustments, The claim of the ld.D.R, the issue must be restored to the file of ld. TPO for re-adjudication would no more survive insofar as if there was a comparable other than that which has been taken by the ld. Assessing Officer, then obviously he would have brought it out in his order. The fact, the ld. Assessing Officer ITA No. 848/Chny/2017 SP No. 148/ Chny/2018 has considered only three comparables and it is on account of the filters applied by the ld.Assessing Officer that two of the comparables have to be excluded, we find no reason to restore this issue to the file of ld. TPO for re-adjudication" 5.3 It is evident that the assessee accepted that TNMM with Berry ratio and their prayer before Hon'ble ITAT was to exclude two comparables having higher turnover. If those comparables are excluded, there would be no room for any further adjustment. Hon'ble ITAT proceeded accordingly and directed the TPO to exclude those two comparables, that had higher turnover. The copy of the decision of ITAT in ITA No.848/Chny/2017 is enclosed as annexure-3. 5.4 As there was some mistake in fixing the turn over filter, the order was recalled by Hon'ble ITAT, vide order dated 05.04.2019. The copy is enclosed as annexure-4. In this order, it was clearly mentioned at paragraph-6 that whether the turn

:-9-: ITA. No: 848/Chny/2017 over filter would affect the decision of ITAT or not. The relevant paragraph is reproduced as under: - "8. Admittedly, the rectification order has been passed by the TPO mentioning the turnover filter as "sales above Rs. 1 Cr. only". Whether this change would affect the findings of the Tribunal can be decided only on MP No.243/Chny/2018 (in ITA No.848/Chny/2017) hearing of the appeal in detail. The fact that the said rectification order passed by the TPO was available with the assessee and it was not brought to the attention of the Tribunal when the original hearing took place, make the order of the Tribunal erroneous in so far as the order has been passed based on the erroneous facts. This being so, the order of the Tribunal in ITA No.848/Chny/2017 dated 04.06.2018 stands recalled and the appeal stands restored to the records of the Tribunal. The Registry is directed to post the appeal of the Revenue in the regular course for hearing. Hence, it is humbly submitted that the M.A in 243/Chny/2018 was very specific to examine the turn over filter adopted by TPO. The MAM adopted by the TPO did not under go any change. 6. Whether it is a covered issue? The counsel for the appellant company in the previous hearing made an alternative plea that it was a covered issue by placing reliance on decision of ITAT rendered subsequent to the direction of Hon'ble High Court for the AY 2010-11 and AY 2011-12. Facts in AY 2010-11 and 2011-12 are as under: i. In those assessment years also, the appellant adopted CUP method only. ii. The TPO passed a speaking order by holding that CUP is not the MAM. He had determined the Arm's Length of the transaction by adopting TNMM with Berry ratio, as the MAM. iii. This was upheld by Hon'ble ITAT in its order dated 26.04.2017. The copy of the same is enclosed as annexure-5. The relevant paragraphs are reproduced below: - "5. We have heard both the parties and perused the material on record. The assessee is a trader in UPS system and accessories and also providing sales after services. There is no dispute that the assessee has not made any value addition to the UPS goods procured from its A.E. The UPS were sold in

:-10-: ITA. No: 848/Chny/2017 Indian market as it s procured from the AE. The TPO has accepted the TP study that Resale Price Method (RPM) is one of the accepted methods out of five methods in Transfer Pricing (TP). Even after suggesting that one, he is not ready to accept that method. The Resale Price Method (RPM)is a method to compare the gross profit of the assessee with the gross profit of the comparable companies and to compute the ALP. The RPM begins with the price at which a product that has been purchased from A.E as resold to an independent enterprise. The price is then reduced by an appropriate gross profit, that this price representing the amount out of which the seller would seek to cover on selling and other operative expenses. In the light of the functions performed, make an appropriate profit margin can be recorded, after adjustments for other costs associated with the purchase of the product as an ALP filed original transfer of the pricing between A.Es. The TPO overwhelming the RPM adopted from Berry Ratio method on the reason that the company is not just trader. There was also value-added service by the assessee company which is a permanent factor. According to TPO, the conduct of the assessee clearly shows that it is captive for AE. For this purpose, rejecting the RPM, TPO has given the reasons that the assessee has not purchased all the materials from its AE. II purchased merely 50% of the materials such as battery and other related materials from domestic market and other independent enterprises. If the RPM is considered as most appropriate method, the margin earned by the assessee to purchase the material from other independent parties is also part of the gross profit earned by the assessee, which leased to annually. 6. Before us, ld. A.R pleaded that there is no purchase from domestic market. However, this argument of the ld. A.R is contrary to the findings of the lower authorities. Hence, we are not in a position to appreciate the argument of the ld. A.R relied on the following Tribunal cases: - i. Mattel Toys India Pvt Lid. in ITA No.2476/Mum/2008, dated 12.06.2013 ii. Danisco (India) Pvt Ltd. in ITA No.5291/Del./2010 dated 29.04.2014 iii. Star Diamond Group in ITA No. 3923/Mum/2008, dated 28.01.2011 iv. Kodak Polychrome Graphics()P Lid, in ITA No. 1557/Mum/2009, dated 26.06.2013

:-11-: ITA. No: 848/Chny/2017 v. v. Frigoglass India P Ltd in ITA No.463/Del.2013, dated 11.04.2014 vi. Tupperware India Pvt Ltd in ITA No.2140/Del./201, dated 29.08. 2014 6.1 In all the above case laws cited by the assessee, the goods are sold without any value addition. In the present case, it is not the case of the assessee that the assessee has purchased all from it's A.E. Being so, the ratio laid down by the above case laws have no application to the assessee 's case. Hence, we are of the opinion that the application of Berry Ratio is most appropriate method adopted by A0/TP0. DRP is justified and the same is confirmed. This ground of appeal of the assessee is rejected." The Hon'ble ITAT gave a categorical finding that Berry Ratio is the MAM. 6.1 Appeal of the assessce before High Court: Before Hon'ble High Court, the appellant challenged the decision of ITAT rendered for AY 2010-11 and 2011-12 in its order dated 26.04.2017. Hon'ble High Court remanded the matter back to ITAT to re-cxamine the issue. The copy of the order of Hon'ble High Court is enclosed as annexure-6. The relevant finding of the Hon'ble High Court is given from paragraph 5 to 8. The finding at paragraph-8 is as under: "Therefore, we are inclined to remand the case back to the learned Tribunal by setting aside the order dated 26.04.2017 for the Assessment Year 2010-11 and 2011-12 and request the learned Tribunal to decide the Appeal again on merits after giving opportunity of hearing to both the parties by giving appropriate reasons and findings of facts. The learned Tribunal is expected to deal with all the grounds raised before it in an appropriate manner and give its reasons for rejecting the CỤP method adopted by the Assessee or for adopting any other method like TNMM for determining ALP (Arm's Length Price" 6.2 Second round of appeal before ITAT for AY 2010-11 and 2011-12: During second round of appeal, a detailed written submission was also filed to explain the back ground of the appeal. The direction of Hon'ble High Court was very clear. It had asked the Tribunal to give its reason for rejecting the CUP method adopted by the assessee. This appeal was heard on

:-12-: ITA. No: 848/Chny/2017 01.07.2022 and the order was pronounced on 07.09.2022. Hon'ble ITAT, in the second round of appeal, altogether gave a new finding that it is neither CUP nor TNMM with Berry Ratio as the MAM. It gave its direction that RPM was the MAM. This was neither the TP study of the appellant nor the TP study of the TPO. By holding that RPM was the correct method, Hon'ble ITAT once again set aside the matter to the TPO. It is humbly submitted that Hon'ble ITAT ought to have decided between CUP and TNMM with Berry Ratio as observed by Hon'ble High Court. The copy of the order of ITAT is enclosed as annexure- 7. 6.3 Omission of considering decision of ITAT for AY 2012-13: Before Hon'ble ITAT, the appcllant company for the AY 2012- 13 had only challenged two comparables with high turnover. It was argued that if those two comparables are excluded, their margin could be permissible limit and there would bc no room for any further adjustment. In other words, TNMM with Berry Ratio as MAM as accepted. This order was pronounced by ITAT on 04.06.2018. Later, in the M.A. dated 05.04.2019, the order was recalled to re-examine the turn over filter adopted by TPO. In such a situation, if the appellant had brought to the notice of this decision ITAT for the AY 2012-13, the order for the AY 2010-11 and 201 1-12 (Second Round after High Court Direction) could have undergone substantial changes. ITAT could not have set- aside the appeal to the TPO with a finding that TNMM with Berry Ratio was not correct method. This fact was not brought to the notice by the appellant and this appeal for AY 2012 13 was posted separately. It is for this reason, Hon'ble ITAT in second round of appeal for AY 2010-11 and 2011-12 gave finding that TNMM with Berry Ratio was not the MAM. 7. Summary: It is evident from the facts on record that a) In all the three ycars, the appellant adopted CUP as MAM. b) Alternatively, they have requested for RPM as MAM

:-13-: ITA. No: 848/Chny/2017 c) TPO after analysing the whole transaction and the facts on record held that TNMM with Berry Ratio" was the MAM. d) In all the years, DRP upheld the method adoptcd by TPO. e) In all the years, even Hon'ble ITAT, upheld the method adopted by TPO. It was held that TNMM with Berry Rato is the MAM. f) In the AY 2012-13, thc issue recalled by ITAT was to examine the upper turn over filter of two comparables that was fixed as Rs.200 Cr inadvertently. As far as the method is concerncd, there is no dispute. g) The MA was pronounced on 05.04.2019. h) These facts were not before Hon'ble ITAT, when the second round of appeal was decided for AY 2010-11 and 2011-12 vide its order dt. 07.09.2022. This led to setting aside the matter of the assessment for AY 2010- 11 and 2011-12 to TPO for adopting RPM as MAM. It is prayed that the recalled matter for the AY 2012-13 is only to examine the upper turn over filter and the facts are already brought to the notice of Hon'ble ITAT in the earlier written submissions. The same may kindly be considered.”

:-14-: ITA. No: 848/Chny/2017 findings given by the TPO/AO by adopting TNMM with Berry Ratio as most appropriate method. The relevant findings of the tribunal order as under: “5. We have heard both the parties, perused material available on record and gone through orders of the authorities below. The facts with regard impugned dispute are that the assessee is in the business of trading in UPS and accessories, has imported UPS from its AEs. The assessee has adopted CUP as most appropriate method and claimed that it has benchmarked import of UPS from its AE with third party importer transaction of similar products and such information has been obtained under RTI from Chennai Customs authorities. The assessee has filed a chart explaining transactions with import from its AEs with comparable imports of similar nature by third parties and claimed that price paid by the assessee for its imports from its AEs are at arm’s length price. Alternatively, the assessee has made submission before the TPO that in case, CUP method cannot be adopted as most appropriate method, then RPM is suitable method for the assessee like traders / distributors and thus, filed relevant details to consider RPM as most appropriate method. The TPO has rejected CUP as well as RPM proposed by the assessee and has adopted TNMM with Berry Ratio as PLI as most appropriate method. The TPO has selected two comparables with Berry Ratio 0.37% and then compared with Berry Ratio of average assessee and has made upward adjustment towards import of UPS.

:-15-: ITA. No: 848/Chny/2017 AEs, because the TPO has summarily rejected CUP method adopted by the assessee without giving any reasons as to how CUP method is not suitable for given facts & circumstances of the present case. No doubt, CUP cannot be applied in each & every case, because in order to apply CUP method for benchmarking transactions, one has to have accurate data with respect to nature and type of transactions entered into by the assessee with its AEs. In case, if there is slight difference in nature of transactions, then CUP may not give desired results. In this case, the assessee claims that it has compared its transactions with AE with third party transactions of similar nature, where similar type of products has been imported by other importers. The assessee has filed a chart explaining transaction-wise import of goods from its AE with third party importers and claimed that price paid by the assessee is less than the price paid by the third party importers on similar goods and services. The assessee has obtained information from Chennai Customs authorities to compare transactions with its AE. We find that the assessee has tried to establish its case with help of third party importers of similar goods & services and claimed that transactions with its AEs are at arm’s length price. However, the TPO / DRP has summarily rejected claim of the assessee without assigning any reasons as to why transactions of the assessee cannot be compared with CUP method.

:-16-: ITA. No: 848/Chny/2017 purchased more than 50% of goods from Indian suppliers, but on perusal of details filed by the assessee, said findings of the TPO appears to be not based on any evidences. On the other hand, the assessee has filed necessary details to prove that it is only engaged in the business of trading in UPS and accessories and its major revenue from operations for the year is from trading in UPS and accessories. Therefore, we are of the considered view that under these circumstances Resale Price Method (RPM) is suitable method for benchmarking transactions with its AEs. The TPO without considering above method has simply rejected arguments of the assessee and has adopted TNMM with Berry Ratio as PLI and benchmarked transactions of the assessee with AE.

:-17-: ITA. No: 848/Chny/2017 expenses is very minimal, when compared to purchase of UPS. From the above, it is very clear that Berry Ratio cannot be applied to facts of the present case, because as we have already stated in earlier part of this order that Berry Ratio can only be applied where operating expenses is main contributor for determining profitability of an assessee. In this case, operating expenses incurred by the assessee is very less, when compared to total amount paid for purchase of UPS from its AEs. Therefore, we are of the considered view that the TPO has completely erred in adopting TNMM with Berry Ratio as PLI for benchmarking international transactions of the assessee with its AEs.

:-18-: ITA. No: 848/Chny/2017 assessee in their TP documentation or RPM method as suggested during the course of assessment proceedings and decide the issue in accordance with law.