OCEAN INDIA PVT. LTD.,,VISAKHAPATNAM vs. THE ACIT,, VISAKHAPATNAM

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM (Through web-based video conferencing platform) BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, HON’BLE ACCOUNTANT MEMBER I.T. (T.P.) A. No. 150/VIZ/2016 (Asst. Year : 2011-12) M/s. Teejay India Pvt. Ltd. vs. The ACIT, Circle-5(1), (Formerly known as Ocean Visakhapatnam. India Pvt. Ltd.), Plot No. 15, Brandix India Apparel City Pvt. Ltd. SEZ, Pudimadaka Road, Atchutapuram, Visakhapatnam. PAN No. AAACO 9452 H (Appellant) (Respondent)

Assessee by : Shri Ajith Tolani/ Darpan Kirpalani/ Aakanksha Kumar, ARs Department By : Shri D.K.Sonowal, CIT(DR)

Date of hearing : 25/09/2020. Date of pronouncement : 23/11/2020 O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER

This appeal by the assessee is against the order passed u/s 143(3) r.w.s 144C(13) of Income Tax Act dated 29/01/2016 for the Assessment Year 2011-12.

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―1. That the order of the learned Assistant Commissioner of Income- tax, Circle-5(1), Visakhapatnam ('learned Assessing Officer' or 'learned AO') and Joint Commissioner of Income-tax (Transfer Pricing) ('learned Transfer Pricing Officer' or 'learned TPO') to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case and liable to be quashed.

3.1. Rejecting the TP documentation maintained by the Appellant and the comparability analysis undertaken therein by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962, ('the Rules');

3.2. Rejecting the Comparable Uncontrolled Price method ('CUP') as the most appropriate method, as applied by the Appellant in its transfer pricing documentation for both the purchase and sales transactions;

3.3. Disregarding the conditions prescribed under section 92C(3) of the Act for determining the arm's length price for international transaction in relation to sale of finished goods and purchases of raw materials to/from its AEs.

3.4. Upholding the learned TPO's approach of using data which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant;

3.5. Disregarding the application of multiple year data while computing the arm's length mark up on cost/ margin on sales for the comparable companies;

3.6. Disregarding the peculiar economic conditions faced by the

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Assessee during assessment year 2011-12 on account of the start- up nature of its manufacturing operations; 3.7. Not granting an adjustment on account of under-utilisation of capacity by the Assessee under Rule 10B(3)(ii) of IT Rules in order to eliminate the effect of differences between the Appellant and comparable companies; 3.8. Not granting an adjustment on account of abnormal business losses incurred by the Assessee in order to eliminate the effect of differences between the Assessee and comparable companies; 3.9. Considering certain non-operating expenses and extraordinary expenses while computing the operating mark-up on cost of the Assessee and computing the transfer pricing adjustment on the international transaction relating to sale of finished goods and purchases of raw materials made by the Assessee from its AEs, incorrectly; 3.10. Computing the mark up on cost/ margin on sales of the comparable companies in his order and not providing actual working capital adjustment; 3.11. Not appreciating the limited-risk nature of the manufacturing activity of the Assessee as a captive manufacturer and in not providing an appropriate adjustment towards the risk differential, even when full-fledged manufacturers are selected as comparable companies.

That the appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this appeal.‖

2.1. Subsequently, the assessee filed a letter dt.22.09.2020 for inclusion of some more grounds as under : 4. That the learned AO / learned TPO erred in not conducting a contemporaneous search and relying on the search conducted during the previous year, i.e. Financial Year 2009-10. The learned Panel erred in upholding the action of the learned AO/learned TPO; 5. Ground for CPLM as the most appropriate method. 5.1. Without prejudice to ground No.3, the learned AO/ learned TPO ought to apply Cost Plus Method (―CPM‖), which was applied by the learned AO/learned TPO during the previous year i.e. Financial Year

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2009-10 and also accepted by the Hon’ble Bench for the referred financial year. 5.2. While applying CPM, the Appellant pleads to exclude the following extraordinary expenses incurred by the Appellant while computing the gross profit margin of the Appellant and the comparable companies so as to eliminate the effect of differences in the operating costs incurred by the Appellant vis-a-vis comparable : Stores & consumables Depreciation 5.3. The Appellant craves to plead this Hon’ble Tribunal to consider foreign exchange gain as operating in nature while computing the gross profit margin of the Appellant and the comparable companies under the CPM method; 6. Without prejudice to the ground 3 and 4 above, even if the Transactional Net Margin Method (TNMM) is to be applied as the most appropriate method, the Appellant humbly prays before the Hon’ble Bench that the learned AO / learned TPO erred in not appreciating the reasons for losses incurred by the Appellant and also not granting the following adjustments while computing the operating mark-up on cost of the Appellant and the comparable companies Adjustment on account of abnormal business losses incurred by the Appellant due to the start-up nature of its operations and below mentioned factors be granted so as to eliminate the effect of differences in the operating costs incurred by the Appellant vis- a-vis the comparable while the learned AO / learned TGPO erred in not appreciating - Abnormal losses incurred in carrying out excessive startup test-runs - Set up expenses incurred in installing additional process capability - Under utilisation of installed capacity be excluded from the operating cost base of the Appellant in testing the arm’s length nature of the international transactions using TNMM as the most appropriate method. 3. Facts of the case in brief are that the assessee-company is engaged in the business of manufacturing and exporting knitted fabrics / apparels at Brandix APSEZ apparel, Atchutapuram, Visakhapatnam, filed its return of income for the A.Y. 2011-12 on 29/09/2011 admitting loss of Rs. 31,16,05,142/-. The return was

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selected for scrutiny under CASS. During the scrutiny proceedings, the AO found from Form 3CEB report that the assessee-company had entered into international transactions with its Associated enterprises (AEs) amounting to Rs.44,02,69,760/- on account of purchases and from the exports Rs.35,41,46,007/- (Sales to AEs) and hence, referred the case to the Transfer Pricing Officer (TPO) to determine the arm‟s length price (ALP) as required u/sec. 92CA(3) of the Act. The TPO observed that assessee Manufactures and sells grey fabric (raw yarn) to its affiliates and operates as contract manufacturer to the parent company and the group is the largest manufacturer of Weft Knitted Fabric in Sri Lanka. It produces core textile products such as jerseys, lycra, fleece and terry etc. The assessee entered into international transactions with it‟s AE as under:- Amount Nature of transaction (in rupees) Purchase of raw materials 44,02,69,760 Sale of finished goods 35,41,46,007 79,44,15,767

3.1. The taxpayer carried out the economic analysis and bench marked both the transactions under the CUP method relating to the purchases/sales. The taxpayer stated that the company has purchased the raw material from its AEs for the purpose of its

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manufacturing activity. The AEs have undertaken corresponding back to back purchase of the same raw materials from third party suppliers. Thus, viewed that the prices paid by the taxpayer for purchase of raw material from its AEs are not higher than that of by the AEs to third party suppliers, hence, held that the prices paid by the taxpayer to its AEs for purchases are at Arms Length Price(ALP). With regard to sale of finished goods, the tax payer stated that the average monthly price charged by the tax payer to its AEs and non AEs is comparable. The price charged to AEs is equal to or more than non AEs. Based on an analysis undertaken by the company in its report called “operational and financial review – F.Y. 2011” the company has supported the sale price received by the assessee from its AEs are not lower than the sale price received in similar transactions with third party customers, therefore, viewed that the transactions are at ALP and accordingly submitted that no adjustments are required on account of international transactions entered by the assessee. The financials of the taxpayer as per the audited statement are as under:- Operating Revenue 69,43,15,068 Operating cost 98,35,91,503 Operating profit -24,92,76,435 OP/OC -26.42 OP/OR -35.90

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3.2. The TPO found that the taxpayer did not furnish the supporting documents in respect of CUP analysis for the purchase of raw material. Further TPO viewed that back to back invoices cannot form a valid CUP as the purchase of raw material from the third party by the AEs is not similar to the sale of raw material by AE to the taxpayer. According to the TPO valid CUP is where the same transaction i.e. purchase is compared with another purchase with focal point being the taxpayer. In the instant case, the taxpayer is not the focal point, hence, the TPO did not accept the CUP as Most Appropriate Method (MAM) for purchases. Similarly transaction relating to sale of finished goods, the TPO did not accept the internal report of the taxpayer which was prepared for its own purpose as a valid document for adopting CUP method as MAM. Even otherwise, the TPO found that the assessee did not furnish the copy of the said report relied upon. In the TP study the taxpayer stated to have enclosed a copy as Annexure-E but only front page of the report was found to be furnished but not the entire report. Therefore, the TPO rejected the CUP as MAM and conducted the independent economic study and separate analysis has been made and held that TNMM is most appropriate method for both purchase and sale transactions. The TPO has taken the

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previous year‟s search results and found the following comparable companies:- Name of the OR OC OP OP/OC OP/OR company Indocount 7033566000 6266463000 767103000 12.24 10.91 Industries Ltd., Nutech Global Ltd., 273467363 262746321 10721042 4.08 3.92 Krishna Knitwear 23075603000 22181233000 894370000 4.03 3.88 TOTAL 20.35 18.71 Arithmetic Mean 6.78 6.24

3.3. The TPO has arrived at arithmetic mean of comparables at 6.78% i.e. OP/OC and issued a show cause calling for objections from the assessee for rejection of CUP method and for adopting TNMM as most appropriate method. In response to the notice issued by the TPO, the assessee filed objections reiterating that CUP as the most appropriate method for purchase of raw material, since the assessee has purchased the raw materials from third party vendors without adding expenses or profit. The prices paid by the assessee were equal to the price paid by the AE from their parties was in uncontrolled and independent conditions, therefore the assessee contended that there is no reason to disturb the CUP as most appropriate method for purchases. With regard to sales, the assessee submitted that sales price charged by the taxpayer to AE is equal to or more than the prices charged to third party sales.

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3.4. The TPO has considered the submissions made by the assessee and viewed that CUP is applicable in situations when a price is charged for product or a service. The comparison of prices charged for the product in a controlled transaction to prices charged for the same products in a comparable uncontrolled transaction is carried out. The TPO viewed that internal CUP is the price that the taxpayer has paid in a comparable uncontrolled transaction with an independent party when compared to the price paid in a controlled transaction. External CUP is a price paid in between third parties when compared to the price of a controlled transaction. Thus, the TPO viewed that the price paid by the taxpayer to its AE needs to be compared with a price charged by an independent seller to another independent buyer and further observed that in the instant case, there is no transaction available with regard to uncontrolled transaction made by the AE or the assessee i.e. uncontrolled party. The TPO also viewed that under internal CUP two situations would exist (i) where the AE sells the identical products to the taxpayer as well as to an unrelated third party; (ii) when the taxpayer purchases identical products from an AE as well as the non-AE. In the case of the assessee, the AE has purchased the material and sold it to the taxpayer on back to back

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basis. The information regarding purchase of same material by the taxpayer from an independent third party is not available as also information regarding sale/purchase between independent parties of the same product under similar circumstances is not available. Thus, the TPO held that the requirement of both internal and external methods are not satisfied, therefore viewed that the CUP is not acceptable method in case of assessee.

3.6. As regard to sales of finished goods, the assessee stated that average monthly price charged by the assessee to its AEs and non-AEs are comparable and the sale price charged to AE based on the internal report of the assessee company. With regard to objections raised by the assessee relating to earlier year data, the TPO verified the comparable cases selected with the last year and found to be valid comparables. The AO further observed that assessee did not object to the comparables, therefore rejected the assessee‟s contention for earlier year data. With regard to adjustments requested by the assessee, the TPO rejected the assessee‟s request stating that though the assessee made a mention with regard to adjustments no numerical value for adjustment is provided. Since the taxpayer did not elaborate much on the issue, the TPO rejected the contention of the

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assessee to adopt CUP as most appropriate method and viewed that TNMM as the most appropriate method for sale. The AO worked out the arithmetic mean at 6.78% of the third party comparables as discussed earlier in para 3.2 of this order. As the operating profit on operating cost admitted by the assessee is at (-) 26.42%, made the adjustments of Rs.15,97,13,166/- in respect of sales, Rs. 14,91,84,370/- in respect of purchases. Thus, proposed for adjustment of Rs. 30,88,97,536/- u/sec. 92CA(3) of the Act. 4. On receipt of the Transfer Pricing Order, the Assessing Officer issued draft assessment order and the assessee filed objections before the Ld.Dispute Resolution Panel (DRP). The assessee objected for adopting the TNMM as most appropriate method and the DRP rejected the contention of the assessee and upheld the order of the TPO in adopting TNMM as most appropriate method. The assessee objected for considering the earlier year data instead of using contemporaneous data for bench marking and the ld. DRP rejected the assessee‟s objection stating that as per Rule 10B(4) financial data relating to the financial year in which international transactions were undertaken has to be used as per Income Tax Rules, unless it is established that the use of data of the earlier financial years will result in adverse results.

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The Ld.DRP viewed that in the instant case, the assessee failed to establish the same. The Ld.DRP placed reliance on the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. Vs. DCIT (ITA No. 417/2014) and accordingly rejected the objection of the assessee. With regard to objections raised by the assessee in respect of incorrect calculations of margins the ld. DRP directed the Assessing Officer to carry out the verifications and make necessary adjustments. With regard to adjustments requested by the assessee in respect of the start up company the DRP rejected the objection stating that due to nature of the business carried out by the assessee no such adjustments are called for. The DRP further viewed that mean margins of the comparable companies takes care of such differences and hence, held that no adjustments are required. The assessee‟s request for non- utilization of full capacity etc., the Ld.DRP observed that the assessee did not demonstrate that the other circumstances does not exist in the comparables selected and rejected by the DRP. The risk adjustment and working capital adjustment requested by the assessee was also rejected by the DRP.

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4.1. In a nut shell, the DRP rejected the objection with regard to adopting the CUP method, objection for adopting TNMM method, using earlier year data, adjustments – in respect of working capital, start up, peculiar condition etc. and remitted the matter back to the file of the TPO in respect of incorrect margins of comparable companies.

4.2. DRP directed the Assessing Officer to pass necessary orders u/sec. 143(3) r.w.s. 144C as per the directions given in it‟s order. On receipt of DRP‟s order the Assessing Officer made the adjustment of Rs.30,88,97,536/- and passed the final order u/sec. 143(3) r.w.s. 144C by order dated 29/01/2016. Against the order of the Assessing Officer, the assessee is in appeal before this Tribunal.

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basis there is uncontrolled transactions hence, argued that there is no reason to reject the TP study made by the assessee hence, requested to accept the CUP as MAM. The assessee further submitted that it has annexed some invoices relating to purchases made from AE and third party vendors to demonstrate that the purchases were made back to back basis and at ALP. The assessee furnished purchase bills from the AE. From the said purchase bills, we find that the AE has sold 6048 kg of material to the assessee @ Rs. 7.40 per kg vide bill dated 01/04/2010 which was purchased from Invista Singapore Fibres Pvt. Ltd. @ 7.40 per kg. Similarly, the tax payer also has enclosed some more invoices relating to purchases made by the tax payer from AE on back to back basis on various dates. With regard to Saravana Spinning Mills, the assessee has enclosed invoice at page No.8 which demonstrated that it had purchased raw material @ 3.88 per kg which was sold directly to AE on 08/08/2010 and shipped to the taxpayer. Ld.AR further argued that except stating that there was no uncontrolled transaction from third party no other reason or defect was pointed out by the TPO/AO and all the conditions for adopting internal CUP is satisfied by the assessee, thus, argued that purchases made by the assessee are at arm‟s length and there is no reason to reject the contention of the taxpayer to

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adopt CUP as the most appropriate method. Accordingly requested to accept CUP as MAM for purchases.

5.1. The ld. AR further submitted that the TPO in his order stated that the tax payer represented the sale price at ALP on the basis of analysis undertaken by Operational Financial Review – F.Y.2011 but not furnished the report. In this regard, the Ld.AR stated that the contention of the TPO with regard to non submission of the report is incorrect and page No.147 onwards the document on operational financial review was enclosed and page No. 152 is the sales break up containing the average monthly sale price. Therefore, submitted that the entire information was placed before the TPO and the same was not properly verified by the TPO. With regard to sales, ld.AR argued that the assessee is a tax exempt company and there is no requirement for shifting of profits outside the country. The assessee has explained that it has manufactured the goods and sold to related party as well as unrelated party and the price received by the assessee from the AE is more or equal to the unrelated party. Therefore, argued that there is no reason in rejecting the TP study undertaken by the assessee. The observation of the TPO in his order that the TP study Annexure-G was not made available to him was incorrect in fact the same was

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submitted to the TPO vide letter dated 14/03/2014. Taking our attention to page No.147 the ld.AR submitted that it was the first page of Appendix-E relating to operation and financial review and page No.152 contain the sales break up of group companies versus non-group companies. Page No.157 contain monthly sales, thus, argued that the complete details of sales were furnished to the TPO, therefore, there is no reason to reject TP study of the assessee. The Ld.AR argued that it has demonstrated that sale price received by the assessee from the AE was more than the sale price charged to third parties hence, argued that the TPO did not point out any specific objection or defect in the TP study conducted by the assessee. Hence, no reason to reject the CUP as most appropriate method and accordingly argued that the order of the ld.DRP/TPO/ may be set aside and adopt the CUP as most appropriate method both for purchases and sales.

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method in the facts and circumstances. Similarly with regard to sales, ld.DR submitted that there were no comparable transactions for taking CUP as most appropriate method. For adopting CUP as most appropriate method, the geographical location, the date of transactions with related and unrelated parties and the rates quoted are required and in the instant case, no such information is available, hence, argued that the TPO rightly rejected the CUP as most appropriated method adopted by the taxpayer. According to the ld.DR, TNMM as most appropriate method, hence, argued that no interference is called for in the order of the Ld.DRP/AO and requested to uphold the order of the AO/DRP and dismiss the appeal of the assessee.

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01/VIZ/2014. The Ld.AR further argued that in case the ITAT considers the TNMM as MAM the necessary adjustments may be given in respect of start up, non-utilisation of full capacity etc. as requested in additional grounds of appeal.

We have heard rival contentions and gone through the 8. orders of the authorities below. The assessee is a subsidiary company of Brandix Apparel Ltd. and engaged in the business of manufacturing and exporting of knitted fabrics / apparels at Brandix APSEZ Apparel, Atchutapuram, Visakhapatnam. Brandix Lanka is the largest manufacturer of Weft knitted fabric in Sri Lanka and holding the company of Ocean Lanka. Brandix Lanka is engaged in developing, manufacturing and marketing end to end apparel sales of globally fashioned brands. For the assessment year under consideration, the tax payer had international transaction in respect of purchase and sales with it‟s AE. It has made purchases to the tune of Rs.44.02 crores of raw material and exported finished goods for a sum of Rs.35.41 crores. The total international transaction worked out to be Rs.79.44 crores. The assessee had undertaken the transfer pricing analysis and adopted CUP

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as most appropriated method, both for purchases and sales and held that the purchase price is at Arms Length, since, the AE is supplying the material to the taxpayer on back to back basis without adding any costs or expenses or profit.

8.1. The sales are more or equal to the sale price charged by the taxpayer to third party buyers. Since, the purchase price is less or equal to the price charged at uncontrolled conditions and the sale price charged to the AE is more or equal to the uncontrolled transactions, the assessee viewed that no adjustments are required and the sale and purchases are at arms length price. The TPO rejected the assessee‟s contention and held that TNMM is most appropriate method both for purchases and sales and accordingly proposed for adjustment of Rs.30,88,97,536/- which is representing shortfall in adjustment in sales of Rs.15,97,13,166/- and excess paid in purchases to the extent of Rs.14,91,84,370/-. Though the assessee has objected the proposed adjustments before the DRP, it could not succeed, hence, the assessee has approached the Tribunal.

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8.2. The AO has rejected the transfer pricing document, the analysis made by the assessee on the reason that the assessee has made analysis based on report titled “Ocean India – Operational and Financial Review –FY2011 which is internal document and the same was not made available to the TPO. The Ld.TPO further observed that in page No.4 of the TPO order that the tax payer did not furnish the copy of the report relied upon by the assessee and stated to have enclosed Annexure ‟A‟ which was not placed before the TPO. The assessee invited our attention to paper book page No.111 a copy of letter addressed to the TPO dated 14/03/2014 wherein Transfer Pricing Study was enclosed in page No.147, copy of Appendix E, titled as Ocean India – Operational and Financial Review – FY 2011 was furnished. Further the TPO rejected the transfer pricing document for the reason that the taxpayer did not furnish the supported documents in respect of CUP analysis for purchase of raw material. He further viewed that back to back invoices cannot form valid CUP as the purchase of raw material from third party by the AE is not similar to the sale of raw material

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by the AE to the taxpayer. The TPO also viewed that valid CUP is where the transaction is compared with another purchase with focul point, being the tax payer. Since the above conditions are not satisfied, the TPO held that the CUP method adopted by the assessee for the purchases is unacceptable and accordingly rejected the CUP as most appropriate method. In this regard, we observe from the information placed before us by the assessee in Appeal Memo from page No.74 to 93 that the assessee has enclosed sample invoices where the Associated Enterprise has supplied the raw material to the tax payer on back to back basis. The AE has not charged any extra cost or expenditure to the purchase price of the AE. The assessee also enclosed the purchase invoice from Sri Saravana Spinning Mills Pvt. Ltd. as per page No.81 of Appeal Memo and demonstrated that the purchase price of the assessee comparable with that of supplies made by the AE. Though the assessee has made purchases on back to back basis from AE without cushioning the profit or extra cost by the AE, the TPO rejected the contention of the assessee to adopt CUP as most appropriate

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method without assigning any reason, simply holding that internal CUP is not valid CUP. The TPO also observed that the purchase of raw material from the third party is not similar to the sale of raw material by AE, but the invoices enclosed in appeal memo shows that the same raw material which was purchased by the AE was supplied to the tax payer on back to back basis. Therefore, the observation of the TPO is not well founded. Though it is necessary for valid CUP to compare the purchase transaction with another purchase transaction, the focal point, being the taxpayer, in the instant case, the assessee has made entire purchase from the AE on back to back basis without adding any profit or expenditure. The AO did not bring any other material to show that the material purchased by the assessee from its AE was at higher cost, than the material available from third party vendors. Therefore, it is observed that the taxpayer has demonstrated the purchase made by the assessee from its AE are at arms length price. The assessee placed reliance on the guidance note on transfer pricing issued by Institute of Chartered Accountants of India. In para No.5.26, the Institute viewed

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that internal CUP is preferred method over external CUP. For the sake of convenience, we extract para No.5.26 of guidelines of Institute of Chartered Accountants of India in page No.40 of the Form 35A placed before DRP.

―C. Internal CUP preferred over external CUP "5.26 It is important to note that the transactions entered into by associated enterprises with unrelated Party (―internal comparables‖) would provide more reliable and accurate data as compared to transactions by and between third parties ("external comparables"). OECD's Guidelines on Transfer Pricing recognize the fact that external comparables are difficult to obtain and, also, it may be incomplete and difficult to interpret. Hence for those reasons, internal comparables are preferred to external comparables.‖

8.3. The assessee relied on the decision of Destination of World (Sub Continental) Private Limited, wherein, the coordinate Bench of ITAT, „B‟ Delhi in I.T.A.No.5534/2010 held that internal CUP is valid under all methods. For the sake of clarity and convenience we extract relevant part of the order of the coordinate Bench of ITAT Delhi (supra) which reads as under :

―6. We have considered the facts of the case and submissions made before us. On the basis of the same, the first question which requires decision according to us is-whether, the AO was justified in taking recourse to external comparables when internal comparables were available? 6.1. Briefly, the facts are that the assessee is carrying on the business of providing services for in-bound, out-bound and local travels. The dispute is in regard to in-bound and out-bound travel services. The

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assessee maintains consolidated accounts. Segmental accounts have not been maintained separately in respect of various kinds of services. However, in respect of both in-bound and out-bound services segmental accounts have been culled out. Thereafter, in respect of each segment, controlled and uncontrolled transactions have been segregated. In so far as in-bound travels are concerned, the assessee had utilized cost plus method to justify the arm’s length value of controlled transactions, comparing them with the value of uncontrolled transactions undertaken by it. However, in respect of out-bound travel services, Resale method has been employed on the ground that no value addition is made in respect of these services. The objection of the AO is that while the assessee has incurred loss, the expenses in respect of in-bound and out-bound travel services have been so arranged as to show that the PLIs are comparable with uncontrolled transactions. In other words, the accounts cannot be segregated as separate books of account have not been maintained. On the other hand, the case of the ld. Counsel is that internal comparables are preferable to external comparables because of difference in business environment. The assessee has utilized a system for maintenance of accounts which is not amenable to manual manipulation and, therefore, the charge of manipulating the accounts is not justified. Having considered these matters, we find that OECD guidelines, reproduced in paragraph no. 4.6 (supra), mention that net margin of the tax payer from the controlled transactions should be established with reference to net margin which the same taxpayer earns in comparable uncontrolled transactions. Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise may serve as a guide. Thus, these guidelines suggest preference for internal comparables and reference has to be made to the results of independent enterprises only when former course of action is not possible. The ld. counsel has also relied on the decision of UCB India Pvt. Ltd. (supra), a copy of which has been placed before us. In this case, the assessee wanted to support the value of controlled transactions by comparing with external comparables. However, it appears that the same could have been compared by having recourse to internal comparables of the parent company, for which the data was not furnished on the ground that the two companies are separate entities. The Tribunal did not find favour with this line of argument, which indirectly leads to a conclusion that internal comparables should be preferred to external comparables. Further, in the case of Birlasoft (India) Ltd. (supra), it has been clearly held that the assessee was justified in undertaking internal comparison on stand alone basis by placing on record working of operative profit margin from international transactions with AEs and transactions with uncontrolled parties undertaken in similar functional and economic scenario. Such internal comparison is valid in all the methods. Therefore, it is held that in the first instance, the attempt should be made to determine arm’s length price of controlled transactions by comparing the same with internal uncontrolled transactions undertaken in same or similar economic scenario. No argument has been made by

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the ld. DR that economic scenarios of controlled and uncontrolled transactions were different. Therefore, it is held that the transfer pricing analysis should have been done by taking recourse to internal uncontrolled transactions.‖

8.4. The assessee also relied on the decision of coordinate Bench of ITAT, Chennai‟-B‟ in the case of Redington India Ltd in ITA No.2164/Mds/2010 dated 02/05/2013 to support their case for purchases following Internal CUP. For the sake of convenience we, extract para No.12 of the order of ITAT in the case cited (supra) as under :

―12. Leaving aside the merits and demerits of different methods used for ascertaining the ALP, in the given instance, what was bought by the assessee was 1250 items of Pentium IV processors from its Associate Enterprise in Singapore. A look at the invoice raised by M/s Intel Semiconductor Limited, on the said Associate Enterprise, clearly shows that these items though sold to the Singapore entity but, directly shipped to the assessee in India. The invoice mentions the unit price as 144 US$. The said invoice clearly shows that the price at which M/s Intel Semiconductor Limited supplied to Redington Distribution Pvt. Ltd, Singapore and price at which the latter sold to the assessee in India, was one and the same. We are of the opinion that when the Associate Enterprise had sold the items to the assessee at the same price at which it had purchased it, there cannot be any arm's length price adjustment done, unless and until the original vendor was also an Associate Enterprise. Here, admittedly, M/s Intel Semiconductor Limited was not an Associate Enterprise of assessee or its Associate Enterprise in Singapore. Therefore, we cannot say that the price at which M/s-Intel Semiconductor Limited sold to Redington Distribution Pvt. Lid., Singapore, was not at arm's length price. In our opinion, when Redington Distribution Pvt. Ltd. sold the items to assessee at very same price at which it had purchased from M/s Intel Semiconductor limited, there cannot be any question of under pricing or over pricing. We are, therefore, of the opinion that the adjustment carried out by the lower authorities, based on list price, on the purchase of 1250 Pentium IV processors

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from Associate Enterprise was not called for. Such adjustment, therefore, stands deleted.‖

8.5. From the above facts and law, it is observed that the assessee had purchased the raw material from its AE and the AE has supplied the raw material to the tax payer on back to back basis without marking up for any costs or expenses or profit. The AE has made purchases from third party vendor which is uncontrolled transaction and the supplies made by the AE to the taxpayer are controlled transaction. The price charged by the AE to the taxpayer is less or equal to the uncontrolled transaction. This fact was also demonstrated by the assessee in respect of purchases made from Saravana Spinning Mills by the assessee through the AE. The AO has not demonstrated that the price charged in controlled transaction is more than the uncontrolled transaction with any proof or evidence. The TPO also did not bring any material to show that the internal CUP is not acceptable or any restrictions are placed by the Income Tax Act to consider internal CUP as comparable. It is also undisputed fact that supplier of the material is not related party of the AE. Therefore, we do not see any reason to reject the transfer

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pricing study of the assessee and to accept CUP as most appropriate method in respect of purchases. Accordingly, we set aside the orders of the lower authorities and direct the AO to adopt CUP as most appropriate method for purchases.

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equal to the non group companies. Thereby the assessee has demonstrated that the average sale price is more or equal to the uncontrolled transaction. Thereby discharged its burden to show that the CUP as most appropriate method by taking material available with regard to sale from internal transactions. Though the AO has rejected the transfer pricing documentation, as well as CUP method adopted by the assessee, but not brought on record to show that the information placed by the assessee is incorrect or the price charged to the AE is lesser than the third party buyers. i.e. uncontrolled transaction. Though the AO has adopted the TNMM as the most appropriate method, instead of taking the contemporaneous data, the AO has adopted the earlier years data which is incorrect. The AO did not allow the adjustments sought by the assessee such as start up, unutilised capacity, risk, working capital adjustments etc. The DRP also has not considered the adjustments sought by the assessee and no proper reasoning was given both by DRP or TPO to reject the contention of the assessee with regard to objections of earlier years data, adjustments for working

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capital, unutilised capacity, start up company etc. In the circumstances, approach of the DRP as well as the TPO in adopting the TNMM as most appropriate method is incorrect. In the instant case, sufficient data and information is available to show that the sale price charged by the assessee to its AE is comparable and internal comparables are available which were placed by the assessee before the TPO as well as the DRP. No valid reason was assigned for rejecting the method adopted by the assessee. The AO simply brushed aside the internal report with regard to sale price, without bringing any evidence to show that the sale price charged to the AE is incorrect. When the assessee has given complete documentation to the TPO / DRP, the burden shifts on AO/TPO to establish that the method adopted by the assessee is faulty. On sales to support their contention to accept the CUP as MAM, the assessee relied on the decision of this Tribunal in the case of CCL Products (India) Ltd. in I.T.A. No.433/Viz/2019 dated 07.01.2020. For the sake of clarity and convenience, we extract relevant part of the order of this Tribunal which reads as under :

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―22. We find that the assessee has supplied instant coffee to the AEs and non-AEs in different sizes i.e. 11 sizes, out of which the TPO has taken only two sizes i.e. 100 grams and 200 grams and suggested adjustment. The case of the assessee is that when the same product is supplied to AE as well as non-AE in out of 11 sizes, 6 sizes the assessee has charged to AE higher rate and 5 sizes lower rate, therefore once the entire supply is the same product the entire sales made to AE and non- AE has to be considered and adjustment has to be made. This was not considered by the TPO. The ld. CIT(A) by considering the same and gave a finding that TPO is not correct in selecting two items out of 11 items suggested adjustment for the purpose of arriving at ALP. He further gave a finding that if the entire sales is considered the irrespective of size of packaging difference is only 1.49% which is permissible limit as per provisions of law. As per proviso to sub-section (2) of section 92C, the difference to the extent of 3% is permissible. We further find that the assessee by submitting all the details explained before the TPO that the assessee has charged for AE as well as non-AE similar prices for the supply of instant coffee and no profit has been shifted to AE, however, the TPO not accepted the explanation given by the assessee and suggested TP adjustment without giving any reasons. The TPO has not given what is the reason for choosing only two sizes 100 grams and 200 grams, when the assessee specifically submitted before the TPO that out of 11 sizes, 6 sizes the assessee has charged high price and submitted that average has to be taken. Without considering the same, the TPO simply suggested adjustment by taking only two sizes, in our opinion, the assessee has discharged the burden casted upon him to show that it has not shifted profits to AE, therefore it is the duty of the TPO to establish that the assessee has shifted profits to AE. In this case, without giving any reason simply suggested TP adjustment by the TPO. We find that TPO is not correct. Thus, we find that the ld.CIT(A) has considered the facts and directed the Assessing Officer to delete the addition. We find no reason to interfere with the order passed by the ld. CIT(A). Thus, this ground of appeal raised by the Revenue is dismissed.‖ 9.1. The assessee also relied on the following decisions which support the assessee‟s case :

(i) M/s Essar Steel Pvt. Ltd —ITA No. 3727/MUM/2011 – (Shri RC Sharma & Shri VP Rao)

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the price charge was less than the average market price. Rule 10(A)(a) defines a transaction to include a number of closely linked transaction. In case they are closely linked then they can be aggregated for determining the ALP. We found that assessee has exported hot rolled coils to its AE between 30-6-2005 to 10-3-2006, the price has been determined from the website whose data is not subject to challenge. The product remains the same and the source from which the average price has been taken remains the same. Accordingly, it is a fit case for aggregation. We found that if the average price is adopted for all the 8 transactions, then the average comes exactly to 420.71 which is what the price charged by the assessee to its AE. Furthermore, the detailed finding recorded by the CIT(A) at para 3.4 to 38 has not been controverted by learned DR by bringing any cogent material on record. Accordingly, we do not find any reason to interfere in the order of CIT(A) for deleting the addition in respect of adjustment made of Rs.5,22,41,193/-.

(ii) M/s Bilag Industries Pvt. Ltd - ITA No, 2886/AHO/10 - (Shri Amarjit Singh & Shri OP Meena) 12. In the light of ratio laid down by the Hon'ble High Court in above case, it would be seen that aggregation of sales to AE 's ALP is INR 443.31 and Similarly aggregation of sales to Non-A Es is INR 423.29, if 5% tolerance margin is added it gives ALP at INR 444.45, whereas the Arithmetic mean ALP of AE's is INR 444.31. Hence, no addition or TP adjustment is required as the average price 444.45 is higher then ALP determined at INR 444.31 by the DRP. Thus, the average aggregation sale price to Non AE's is within the range of + 5% - Therefore, TP adjustment made by the AO is deleted. The decision of Special bench in the case of IHG IT Services (India) (P.) Ltd. v. income-tax Officer, Ward - 11(3), New Delhi [2013] 33 taxrnann.com I (Delhi-Tub) (SB) is not applicable as the AR of the assessee has accepted the retrospective effect, but to aggregate on issue was not discussed whereas when the decision of Hon 'ble High Court of Bombay has clearly discussed the aggregation issue on the issue which directly covered the issue.

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(iii) MIs Barclays Bank PLC-ITA No. 2242/Mum/15 - (Shri Mahavir Singh & Shri MK Aggarwal) 16. After going through the facts and arguments of the both the sides, we noticed that the Tribunal is consistently taking the view that arms length price should be after aggregation and there was no scope for adjustment without aggregation. Taking a consistent view by following the co-ordinate benches decisions cited supra, we confirm the order of CIT(A) deleting the addition. This issue of Revenue's appeal is dismissed.

The Ld.AR also relied on following decisions to support his view :

(i) M/s Audco India Pvt. Ltd – ITA No.2642/MUM/2009 (ii) M/s Audo India Pvt. Ltd. – ITA No.1829 of 2016 (iii) M/s 3M India Pvt. Ltd. (2011) 46 SOT 44 (iv) M/s Reliable Cashew Co. Ltd – ITA 2237/MDS/13 (v) M/s Cheminova India Pvt. Ltd. – ITA 4865/N/05 (vi) M/s iMedx Information Services Pvt. Ltd. – ITA 577/H/16 As discussed in Para No.9, we observe that the sale price charged to AE is more or equal to Non AEs and the assessee has furnished the complete information before the AO/TPO. The Department has not brought on record to

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controvert the submission of the assessee to establish that the assessee has charged the less price than third party buyers. The assessee has relied on various decisions cited supra to support their contention with regard to CUP as MAM in respect of sales. Therefore, in the facts and circumstances of the case we, hold that CUP is most appropriate method for sales as well as purchases. We therefore, direct the AO to adopt CUP as most appropriate method and delete the additions made by the AO/TPO. The appeal of the assessee is allowed.

Sd/- Sd/- (V. DURGA RAO) (D.S. SUNDER SINGH) Judicial Member Accountant Member Dated: 23.11.2020 vr/-

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Copy to: 1. The Assessee - M/s. Teejay India Pvt. Ltd. (Formerly known as Ocean India Pvt. Ltd.), Plot No. 15, Brandix India Apparel City Pvt. Ltd. SEZ, Pudimadaka Road, Atchutapuram, Visakhapatnam. 2. The Revenue –The ACIT, Circle-5(1),Visakhapatnam. 3. The CIT 4. The D.R., Visakhapatnam 5. Guard file. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.