Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH : I-2: NEW DELHI
Before: SHRI R.K. PANDA & MS SUCHITRA KAMBLE
ORDER
PER R.K. PANDA, AM:
The appeal filed by the Revenue is directed against the order dated 20th August, 2015 of the CIT(A)-44, New Delhi, relating to assessment year 2010-11. The assessee also filed Cross Objection. For the sake of convenience, these were heard together and are being disposed of by this common order.
The grounds raised by the Revenue are as under:-
1. The ld. CIT(A) has erred in law by considering the proportionate difference for purpose of calculation of +/- 5% benefit as against the actual difference between the Arms Length Price determined and amount shown in the books of accounts. The Ld. CIT(A) has inadvertently taken the differential figure i.e. 3.56 % based on working of Rs. 4,10,82,956/Rs. 1,06,25,38,120*100 =3.86 % which is less than 5% instead of correct and appropriate figure of 10.44 % based on working of Rs.11,09,72,200/Rs.1,06, 25, 38, 120*100 = 10.44 %.
2. The appellant craves to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”
Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing and trading of components of car A/C systems. It filed its return of income on 27th September, 2010 declaring a loss of Rs.14,20,18,991/-.
The Assessing Officer referred the matter to the TPO u/s 92CA for computation of arm’s length price of the international transaction entered into by the assessee. The TPO, during TP assessment proceedings noted that the assessee has entered into the following international transactions:-
The assessee company had taken 12 comparables and the average PLI of such comparables was computed at 3.40% whereas the PLI of the assessee company was 3.85%. Accordingly it was argued that the international transactions entered into with the AE are at arm’s length price. However, the TPO proposed nine more comparables for benchmarking the international transaction vide its show cause notice to the company. After considering the reply of the assessee, the TPO finally determined the arm’s length PLI at 7.05% on the basis of final 27 comparables, the details of which are as under:-
S. No. Company OP/Sales (%) Comparables taken by i. Automotive Stampings & Assemblies 2.96 Assessee Ltd ii. Clutch Auto Ltd. 9.59 Assessee iii. Exedy India Ltd. 3.45 Assessee iv. Hindustan Hardy Spicer Ltd -0.78 Assessee v. IAI Industries Ltd. -0.47 Assessee vi. K R Rubberite Ltd. 4.42 Assessee vii. Rasandik Engineering Ind.India Ltd 8.24 Assessee viii. Schrader Duncan Ltd 2.47 Assessee ix. Triton Valves Ltd 9.66 Assessee X. Upasana Engineering Ltd 0.86 Assessee xi. Vaid Elastomer Processors Pvt. Ltd. -25.3 Assessee xii. Alpha Toyo Ltd. 2.8 Assessee xiii. Adroit Industries (India) Ltd. 19.15 TPO xiv. Banco Products India Ltd. 24.74 TPO XV. Kar Mobiles Ltd. 6 TPO xvi. Rane Engine Valves Ltd. 5.3 TPO xvii. Raunaq Auto Components Ltd. 6.77 TPO xviii. Brakes India Ltd. 7.75 TPO xix. ANG Industries Ltd. 4.1 TPO xx. Duro Valves India Pvt. Ltd. 6.15 TPO xxi. Wabco India Ltd. 17.49 TPO xxii. Tata Toyo Radiators Ltd. 13.41 TPO xxiii. RSB Transmission (I) Ltd. 14.4 TPO xxiv. Suprajit Engg. Ltd. 18.37 TPO xxv. Setco Automotive Ltd. 12.79 TPO xxvi. BMW Industries Ltd. TPO 8.66 xxvii. Tata Auto Comp Systems Ltd. 7.38 TPO Average 7.05%
The TPO has only proposed adjustment in respect of aforementioned international transactions entered into with manufacturing segments. No adjustment has been proposed in respect of the trading segment or purchase of capital goods. The TPO, after excluding non-operating income or expenses while computing operating revenues and operating expenses finally proposed adjustment of Rs.11,09,72,200/- the working of which is as under:-
Particulars Amount in INR 2,968,400,000 Total sales 7.05% Arm’s length Margin (%) 209,272,200 Arm’s length Margin 2,759,127,800 Arm's Length Cost 2,870,100,000 Operating Cost Difference in the Arm's Length Cost and Operating Cost for which adjustment is 110,972,200 required to be made Difference (in %) with the Arms Length Cost 10.44%
Aggrieved by the order of the TPO, the assessee filed appeal before the CIT(A). Since the assessee itself had found certain clerical mistake in respect of calculation of TP adjustment proposed by the TPO, which is apparent from record, filed a rectification application u/s 154 of the Act. As per the original order, the TPO had made adjustment of difference between total ALP of Rs.2,75,91,27,800/- and total operating cost of Rs.28,70,10,000/- which is incorrect as per the provisions of section 92 of the Act. It was argued before the TPO that TP adjustment should be proportionate of international transaction of manufacturing segments. It was accordingly requested to TPO to rectify the mistake. The TPO vide rectification order dated 16th July, 2014 passed u/s 154/143(3) reduced the transfer pricing adjustment from 11,09,72,200/- to Rs.6,58,73,098/-, the working of which is as under:-
Particulars (related to manufacturing segment Amount in INR Reference Total Sales 2,96,84,00,000 Arm’s Length PLI 7.05% Arm’s Length Operating Cost 20,92,72,200 Arm’s Length Cost 2,75,91,27,000 Page No. 3 of Operating Cost of 2,87,01,00,000 AO’s Difference between ALP Cost & 11,09,72,200 Rectification Operating Cost Order u/s 154/143(3) dated Difference (in%)with the Arm’s Length 10.44% 16.07.2014 cost Percentage of international transaction in 59.36% manufacturing segment to total of internationals transactions (i.e Rs. 1062538120/Rs. 1789939325*100) Proportionate Difference for which 6,58,73,098 adjustment is required to be made
However, the TPO/A.O. computed the TP adjustment by considering the proportion of international transactions in manufacturing segment to total international transactions which, according to the assessee, was incorrect.
Thereafter, the assessee company filed another application u/s 154, vide letter dated 12th March, 2015 for rectification of the mistake and also requested that the proportionate adjustment would be covered under +/- 5% of the international transactions and consequently adjustment should be reduced to nil as per the provisions of section 92C of the IT Act. The Assessing Officer, vide rectification order u/s 154/143(3) dated 12th March, 2015, reduced the TP adjustment from 6,58,73,098/- to Rs.4,10,82,596/-. However, the Assessing Officer rejected the +/- 5% benefit as per the second proviso to section 92(2) of the IT Act.
Before the CIT(A), it was argued that the adjustment in manufacturing segment in ALP comes to Rs.4,10,82,956/- which is also 3.87% of the total international transaction of manufacturing segment which is as under:-
4,10,82,956 = 3.87% 1,06,25,38,120
It was accordingly requested that no adjustment is required to be made while determining the ALP of the international transaction as per the first proviso to section 92C(2) of the IT Act. In appeal, the ld. CIT(A) allowed the appeal of the assessee by observing as under:-
“7. Decision:- I have considered the assessment order, order u/s 92CA(3) passed by the TPO and the subsequent rectification order passed by the TPO on 19.08/2014 and 12.03.2015. Without giving into the merits of selection of comparable by the TPO for finally determining the ALP of international transaction u/s 92CA, I would like to dwell upon whether the adjustment made in ALP is within the safe harbor as per second proviso below Sub-section 2 of section 92C of the I.T. Act. While passing the order u/s 92CA(3) dated 27.01.2014 the Ld. TPO has applied Arms Length Margin at the rate of 7.05% to arrive at Arm Length Cost from total sales which consist of manufacturing as well as trading. Total Arm Length Cost has been computed at Rs. 2,75,91,27,800/- and the total Operating Cost in the financial result (Profit 85 Loss A/c) is Rs.287,01,00,000/- and the difference between the Operating Cost and Arms Length Cost has been taken as adjustment is Arm Length Cost amounting to Rs.11,09,72,200/-. The Ld. TPO had given the finding in para 11 of the order and the other international transaction are either relatable to trading segment or they are with respect to the purchase of capital goods and not affecting the operating reserve of the relevant segment. Therefore, the TPO has intended to made adjustment in manufacturing segment only. This decision of the TPO is further reinforced while passing the rectification order u/s 154 on 16.07.2014 and 12.03.2015 where adjustment in ALP has been made on pro-data basis in respect of manufacturing segment on the proportion of manufacturing cost of the total operating cost including trading segment which has been arrived at 59.36% in rectification order dated 16.07.2014 which has been finally computed to 37.02% in the rectification order dated 12.03.2015. By applying the proportionate difference required to be made the TPO is basically making adjustment on the operating cost relatable to the manufacturing segment. The total final adjustment in ALP relatable to manufacturing cost is Rs.4,10,82,956 on the total operating cost to the manufacturing segment amounting to Rs. 106,25,38,120 ratio (Rs. 4,10,82,956/ 106,25,38,120 X100) which comes to 3.86% which is less than 5% of the base figure of operating cost. The Ld. TPO has rejected the rectification application on the issue of adjustment +-5% as per second proviso to sub-section (2) of section 92C on the ground that these mistakes requires deeper analysis and interpretation therefore is not a mistake rectifiable u/s 154. I have considered the argument of the Ld. AR and findings of the TPO. It is undisputed facts that the total adjustment in manufacturing segment after passing of rectification order u/s 154 dated 12.03.2015 in ALP has been made for Rs.4,10,82,956/- which is 3.86% of the operating cost of the manufacturing segment. This entire cost of the manufacturing segment is international transaction with its AEs which is Rs.106,25,38,120/-. Therefore, the adjustment in international transaction is definitely less than 5% of total international transaction. By virtue of second proviso of the sub-section (2) of section 92C no adjustment can be made and such international transaction has been deemed to be at ALP. Accordingly, addition of Rs. 11,09,72,200/- which has been finally rectified at Rs.4,10,82,956 is hereby deleted. Hence, third ground of appeal is allowed.”
10. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.
We have heard the rival arguments made by both the sides and perused the orders of the Assessing Officer and the CIT(A). We have also gone through the paper book filed on behalf of the assessee. We find, after passing of the second rectification order, the final TP adjustment as per the Assessing Officer comes to Rs.4,10,82,596/- which is 3.86% of the operating cost of the manufacturing segment. Therefore, the adjustment in international transactions being less than 5% of the total international transactions is deemed to be at ALP as per second proviso to sub-section (2) of section 92 of the IT Act. We, therefore, do not find any infirmity in the order of the CIT(A) in directing the A.O./TPO to delete the addition. The ground raised by the Revenue, in our opinion, is without any merit. The various decisions relied on by the ld. counsel also support its case that TP adjustment made under TNMM is not warranted when the value of the international transaction of purchase of raw material and the proportionate arm’s length operating cost falls within the +/- 5% arm’s length range. We further find that the TPO in the instant case has passed rectification order twice i.e., the first one on 19th August, 2014 and the second one on 12th March, 2015 and finally reduced the TP adjustment from 11,09,72,200/- to Rs.4,10,82,956/-. We, therefore, find merit in the argument of the ld. counsel that the appeal filed by the Revenue should be dismissed being infructuous since the variation between the ALP so determined and the price at which the international transaction has actually been undertaken does not exceed 5%. The grounds raised by the Revenue are accordingly dismissed.
CO No.06/Del/2016
We have heard the rival arguments made by both the sides. Since the appeal filed by the Revenue has been dismissed, therefore, the CO filed by the assessee becomes infructuous. Accordingly, the same is dismissed.