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Income Tax Appellate Tribunal, ‘’ D’’ BENCH, AHMEDABAD
Before: SHRI MAHAVIR PRASAD & SHRI WASEEM AHMED
आयकर अपीलीय अिधकरण, अहमदाबाद �यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’ D’’ BENCH, AHMEDABAD (CONDUCTED THROUGH VIRTUAL COURT AT AHMEDABAD) BEFORE SHRI MAHAVIR PRASAD, JUDICIAL MEMBER And SHRI WASEEM AHMED, ACCOUNTANT MEMBER आयकर अपील सं./ITA No. 559/AHD/2020 िनधा�रण वष�/Asstt. Years: 2011-12 D.C.I.T., Gulbrandsen Chemicals Pvt. Ltd, Circle-1(1)(1), Vs. On Coastal Highway, Vadodara. Mujpur, Tal. Padra, Vadodara.
PAN: AABCG0812A
(Applicant) (Respondent)
Revenue by : Shri Aarsi Prasad, CIT.D.R Assessee by : Shri S.N. Soparkar, Sr. Advocate with Shri Parin Shah, A.R सुनवाई क� तारीख/Date of Hearing : 08/03/2022 घोषणा क� तारीख /Date of Pronouncement: 11/05/2022 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Revenue against the order of the Learned Commissioner of Income (Appeals)-1, Vadodara, dated 05/03/2020 arising in the matter of assessment order passed under s. 250 of the Income Tax Act, 1961 (here- in-after referred to as "the Act") relevant to the Assessment Year 2011-12.
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The Revenue has raised the following grounds of appeal:
''Whether in facts and circumstances of the ca.se as well as in law, the Ld.CIT(A) was justified in deleting the upward adjustment of Rs.1,26,30,767/- made by the TPO on the basis of re-computing the arm's length price of the international transaction of sale of chemicals products viz. TEAL to its AEs ?" 2. Whether in facts and circumstances of the case as well as in law, the Ld.CIT(A) was justified in rejecting the TPO's approach of adopting the CUP method as MAM which is contrary to the provisions of Rule 1OC of the Income Tax Rules P 3. "Whether in facts and circumstances of the case as well as in law, the Ld,CIT(A) was justified in allowing the TNMM over the CUP method as the MAM which is contrary to the provisions of section 92C and Rule 10B & 10C of the Income Tax Rules ?" 4. "Whether in facts and circumstances of the case as well as in law, the Ld.CIT(A) was justified in allowing following appropriate adjustments claimed by the assesses for material difference in contractual terms, underlying commercial circumstances, functions, risk, and other economic factors between assessee's transactions with AEs vis-a-vis assessee's transactions with non-AEs while applying the cup method which is contrary to the provisions of the section 92C and Rule 10B & 10C of the Income Tax: Rules ? i. Adjustment on account of business volumes differences. ii. Adjustment for marketing and selling expenses not required to be incurred for AE sales vis-a-vis non AE sales. iii. Adjustment for credit risk not required to borne by the AE sales vis-a-vis non AE sales. iv. Adjustment for interest free ECB loan received from AE."
5."Whether in facts and circumstances of the case as well as in law, the Ld.CIT(A) was justified in allowing adjustments of saving in selling and marketing cost in respect of TEAL products claimed by the. assesses which is contrary to the provisions of Rule I OH 6. "Whether in facts and circumstances of the case as well as in law, the Ld. CIT(A) was justified in allowing the transaction of sale of TEAL Chemical to Reliance Industries Ltd., as comparable uncontrolled transactions for benchmarking the transaction of sale of Teal chemical products by assessee to ABs ?" 7. "Whether in facts and circumstances of the case as well as in law, the Id. CIT(A) was justified in rejecting the TPO's approach of price comparison in foreign currency value of international transaction without appreciating the fact that the price compared in foreign currency is actual value and the price determined in Indian Rupee have impact of currency conversion rate and there by the same is contrary to the provisions of Rule 10B of Income Tax Rules. " 8. Whether in facts and circumstances of the case and in law, the Ld, CIT(A) was justified in allowing benefit of ALP price range of+/- 5% claimed by the assessee which is contrary to the provisions of section 92C(2) of Income Tax Act ?" 9. "Whether in facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the adjustment made by the TPO amounting Rs.1,76,49,394/- on account of benchmarking of sales promotion and marketing services availed by assessee claimed to have been paid by the assessee ?"
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"Whether in facts and circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the facts that the assessee had failed to benchmark the transactions with Us AE as per Law thereby failing to discharge the primary onus cast upon it by the Act ?" 11. "Whether in facts and circumstances of the case and in law, the Ld. CIT(A) was justified in allowing aggregation of transaction which is contrary to the provisions of section 92 C of the Income Tax Act and Rule WA to 10C of 'the Income Tax Rules ?" 12. "Whether in facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs.11,17,079/- towards excess depreciation claimed on the ground that the cost of plant and machinery was required to be reduced, despite the said addition was in consonance to the provisions of section 43A of the I. T. Act, 1961." 4. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.
The interconnected issue raised by the Revenue in ground Nos. 1 to 8 is that the learned CIT-A erred in deleting the upward adjustment made by the AO/TPO amounting to ₹ 1,26,30,767.00 on account of sales made to the associated enterprises.
The necessary facts as culled out from the order of the authorities below are that the assessee in the present case is a private limited company and engaged in the business of manufacturing of chemicals. The assessee was manufacturing and selling different kinds of chemicals which were aggregated for the purpose of determining the ALP with respect to the sales made to the associated enterprise. As per the assessee all the transactions of different chemicals were closely linked and the same were arising from the long-term business contacts with the AE’s. It was also submitted by the assessee that similar sales of the different chemicals were also made to the non-associated enterprises. Thus, the assessee to benchmark the transactions with the associate enterprises has adopted internal TNMM after taking the PLI as return on total cost i.e. the ratio of operating profit to the total cost. As per the working of the assessee the PLI with respect to the sales made to the associated enterprises was worked out at 12.96% whereas PLI in case of non-associated the prices was worked out at 5.07%. Accordingly, the assessee claimed to have made sales to the associated enterprises at the arm length price and therefore no adjustment is required to be made.
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4.1 However, the TPO was not satisfied with the working of the assessee on the reasoning that the arm length price should be calculated with respect to sales of different chemicals made to the associated enterprises. As such, the TPO has not allowed the aggregation of the sales of different chemicals made by the assessee to the associated enterprises. Thus, the TPO adopted the cup method for determining the ALP for each product separately and independently. As such the TPO calculated the upward adjustments to be made with respect to the sales made to the associate enterprises for ₹ 1,26,30,767.00 which was added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT-A who deleted the upward adjustment made by the TPO/AO by observing that the ITAT in the own case of the assessee for the assessment years 2009-10 and 2010-11 in ITA Nos. 1215 & 1216/AHD/2017 has directed to adopt the TNMM as the most appropriate method.
Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us.
The learned DR before us contended that the assessee is engaged in the manufacturing of different chemicals and therefore the same should not be aggregated for the purpose of determining the ALP. The learned DR vehemently supported the order of the AO/TPO.
On the contrary, the learned AR before us filed a paper book running from pages 1 to 714 and contended that the facts of the case on hand are identical to the facts of the case of the assessee in the earlier year wherein the ITAT was pleased to delete the upward adjustment made by the TPO /AO. The learned AR before us vehemently supported the order of the learned CIT-A.
We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that, the learned CIT-A has deleted the upward
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adjustment made by the TPO/AO after making the reference to the order of the ITAT as discussed above in the earlier years. The relevant extract of the order of the ITAT reads as under: I have carefully considered the material facts and also the decision of the Hon'ble ITAT. The issue is identical and the facts are also identical The Hon'ble ITAT vide its order in 1TA No.1215 & 1216/AHD/2017 for the . 2009--10 and AY 2010-11 held that TNMM is t!. late method in the case of sale of chemicals and granted relief accordingly. The relevant part of the order is reproduced as under: "11, We have duly considered rival submissions and gone through the record carefully. We find that identical chemicals were sold in the immediately preceding year. The assessee has benchmarked its transaction by applying TNMM method that has been changed by the TPO and he determined ALP by following CUP method. This change of method did not meet approval of the Tribunal in the Asstt. Year 2008-09. The discussion made by the Tribunal reads as under: "8. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. We have also perused the detailed written submissions filed by the learned DR. 9. It is by now a reasonably well-established legal proposition that as long as It is reasonably possible to apply a direct method of ascertaining the arm's length price of a transaction, such a direct method will have an edge over application of indirect method of ascertaining the arm's length price. This principle has been reiterated in a large number of decisions of the coordinate benches, such as in the case of AC1T Vs MSS India Ltd [(2009) 32 SOT 132 (Pune) and Serdia Pharmaceutical India Pvt Ltd VS ACIT 1(2011) 44 SOT 391 (Mum)]. Going by this principle, all other things being equal, a direct method like Comparable Uncontrolled Price (CUP) method will have an edge over an indirect method like Transactional Net Margin Method (TNMM). That does not, and cannot, however mean that whatever be the fact situation, CUP is always a preferred method because of one of the essential prerequisite for application of any method of ascertaining the ALP is the inputs necessary for that purpose. Whatever may be inherent edge of the direct methods of determining arm's length price of an international transaction over indirect methods of determining the arm's length price of international transactions, selection of the most appropriate method for determining arm's length price under the transfer pricing provisions, in a particular fact situation, is not an academic exercise which can be decided de hors the peculiar facts of that situation, and, therefore, there cannot be any straight- jacket formulas holding application of a particular method in case of a particular type of product or service. While rule 10B(1) of the Income Tax Rules 1962, provides that arm's length price in relation to an international transaction shall be determined by any of the methods, "being the most appropriate method", set out therein, Rule 10 C(!) provides the mechanism for selecting the most appropriate method "which is best suited to the facts and circumstances of each particular transaction " and "which provides the most reliable measure of arm's length price of the international transaction". Rule 10C(2) further provides that in selecting the most appropriate method as specified in rule 10C(1), certain factors are to be taken into account: (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international 'transaction and the uncontrolled transaction and between the entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method [Emphasis, by underlining, supplied by us]
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What is clear from the above analysis is that a method of determining arm's length price, to be held as a 'most appropriate method' (MAM), should be, as provided in rule 10C(1), a method "which is best suited to the facts and circumstances of each particular transaction" and a method and "which provides the most reliable measure of arm's length price of the international transaction". Under rule 10C(2)(c), "the availability, coverage and reliability of data necessary for application of the method" is- one of the crucial factors determining suitability of a method of determination of arm's length price in a particular fact situation. Similarly, it is also important to determine whether accurate adjustments can be made for the differences between the international transactions and the comparable uncontrolled transactions, and unless such adjustments can be made the related method cannot be said to be most appropriate method. We have already seen as to how, in the CIT(A)'s analysis, suitable adjustments could not be made even though in his opening observations in the operative portion of the order, he stated that suitable adjustments can indeed be made. The inability to make suitable adjustments, therefore, does take the method outside the ambit of most appropriate method. Quite clearly, therefore, unless suitable reliable data inputs necessary for application of a particular method, as CUP in this case, are available, CUP method cannot be said to be most appropriate methods on the facts of this case. Let us, therefore, first examine whether sufficient inputs were indeed available. 11. At the outset, it Is important to note that what has been relied upon by the TPO is Internal CUP data but then rather than taking the comparable uncontrolled price of the transaction, the TPO has compared average of intra-AE transactions and independent transactions. This approach, though in the case of application of Cost Plus Method, has been rejected by a coordinate bench of this Tribunal in the case ofACIT Vs Tara Ultimo Pvt Ltd [(2012) 143 TTJ 91 (Mum)j, though the same reasoning will be equally applicable in respect of the CUP as well as the computation mechanism, in that respect, is materially similar. In this case, speaking through one of us (i.e. the Vice President), the coordinate bench had observed as follows: The way this rule works, the benchmark gross profit is to be applied on each transaction with the AEs, while, for computing the benchmark, one could take into account a series of same or sirnilar transactions. In other words, while setting the benchmark, one can take into account several transactions with unrelated enterprise on what can be termed as 'global basis', essentially in respect of same or similar property or services though, the benchmark so arrived at cannot be applied on the global basis i.e. the average of gross profit earned from same or similar transactions with AEs. The application of CPM has to be on transaction basis rather than on global basis, and this fundamental scheme of cost plus method is also evident from the plain wordings of Rule 10 B as well. Any other view of the matter will /result in incongruities. For example, if our average mark up to unrelated enterprises is 20 per cent, and we charge a mark-up of 2 per cent in one transaction with AE and 38 per cent in another transaction with the AE, both these transactions, by applying the mark up on global basis, will meet the test of ALP whereas in the first case, the mark up charged is certainly not a mark-up resulting in an ALP. In this particular case, for example, the normal mark up in transactions with has been computed at 16.31 per cent, and the average of mark up on sales to AEs having been taken at 17.08 per cent, entire sales to AEs has been taken at ALP, but, the mark up in the many cases is dearly less than benchmark. To give one example, at page 221 of the paper-book, margin of 14.15 per cent (4 invoices), 13.95 per cent. 13.81 per cent, 14 per cent (4 invoices), 14.14 per cent (2 invoices), and 14.16 per cent is given by assessee's own computation, and, on the same page, on one invoice, the assessee has shown a margin as high as 27 per cent. The cost plus method, therefore, has not been correctly applied. In any case, one of the most important input, i.e. diamond, has been imported at a price for which no ALP documentation Is available and the price of imports have been taken into account in computation of costs as well. The costs of inputs have not been verified either. No efforts are made to show that the terms of sale to the AEs and all other relevant factors are materially similar vis-a-vis the transactions with independent enterprises. The CPM is applied by comparing gross profit on sales, whereas the method requires comparison of mark up on costs on transactions with AEs vis-a-vis mark up on costs on transactions with non AEs [Emphasis, by underlining, supplied by us now]
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It is also important to note that the TPO has justified application of internal CUP on the basis of deviations in prices at which products are sold to different AEs and, by implication, using one intra AE price to bench the other intra AE price. That is wholly incorrect It is well settled in law that it is only an uncontrolled price which can be compared with controlled price and used for any benchmarking. This position has been well summarized in a coordinate bench decision in the case of Sabic Innovative Plastic India (P.) Ltd. v. Dy. CIT [2013] 59 SOT 138/35 taxmann.com 177 (Ahd.), and we are in considered agreement with the same. 13. When comparing the prices of products sold in intra AE transactions vis-a-vis independent transactions, it is not sufficient to compare the prices de hors the economic circumstances in which the respective AE and non AE transactions take place. This principle is beyond any doubt or controversy. In the OECD Guidelines for Multinational Enterprises and Tax Administrators, it is clearly stated that application of CUP method "requires high degree of comparability not only in the products sold and services provided but also in the economic circumstances in which the respective AE and non AE transactions take place ". In the UN Transfer Pricing Manual, it is observed that degree of comparability between controlled and uncontrolled transactions is typically determined on the basis of a number of attributes of the transactions or parties that could materially affect prices or profits and the adjustment that can be made to account for differences" and then it is observed that "these attributes, which are usually referred to as the five comparability factors, include: (i) Characteristics of the property or service '-"transferred; (ii) Functions performed by the parties taking into account assets employed and risks assumed, in short referred to as the functional analysis" (iii) Contractual terms; (iv) Economic circumstances; and (v) Business strategies pursued". Clearly, therefore, the significant variations in economic circumstances and contractual terms can take seemingly comparable transactions outside the ambit of comparability. 14. We have noted huge and crucial variations in payment terms of the transactions with the AEs vis-a-vi transactions with non AEs. The CIT(A) has rejected the adjustments in this respect on account of irrelevant factors such as assessee claiming only 8% adjustment in the financial year 2005-06, as against 20% adjustment sought in this year, even though the transactions were under the same agreement. That is immaterial. What is material is that there is huge difference in the payment terms. The CIT(A) has also noted the deviations in the advance payment terms of 120 days under the agreement and the actual advance payment of 17 months on average. He has also noted that in three invoices on non-AEs the credit period was 60 days but then he declines to treat these evidence as support for the claim that in all cases similar credits were given. However, what is clear that there is dearly significant variation in payment terms. As a matter of fact, at page 29, learned CIT(A) himself notes that "as per the agreement, advance payment was to facilitate appellant's purchases, working capital etc which, in turn, ensured uninterrupted supply to the AE". He does accept that he was given analysis sheet showing 17 months advance payment but rejects it as agreement refers to only 120 days advance payment. That does not belittle the fact that whatever may have been payment terms under the intra AE agreement, the payment was actually received substantially in advance. The question we must ask ourselves is that whether such substantial advance payments, which ensure availability of working capital to the assessee, can be compared with normal business transactions allowing, on the contrary, credit period to the customers, The answer is clearly in negative as the economic circumstances in which these two sets of transactions operate are substantially different. The very character of these transactions is different. 15. It is also important to bear in mind the undisputed fact that the AE had an obligation to buy at least 50% of its products and the assessee was reseller rather than an end user. These contractual terms and the difference in functions also seriously affect the comparability. The reasons given by the CIT(A) for rejecting these variations are wholly superficial and devoid of any legally sustainable merits. The variations in quantities between the AEs and the non AEs cannot be ignored either. There is no dispute that there is huge variations in quantities sold to the AEs vis-a-vis the quantities sold to the non-AEs but the CIT(A) has rejected the plea on the basis that "there is no consistent pattern or correlation between the volume and sale prices " and that "there is no reference to any volume
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discount in the agreement". That is again a superficial approach. Whether there is a mention of the volume discount or not or whether there is always a direct relation between the prices and volumes, the fact remains that the transactions with such huge variations, as in this case, cannot be considered to be comparable transactions and that is the consistent approach in benchmarking analysis. The scale of transactions is an important economic factor affecting the comparability. We have also noted that the AEs have reimbursed R&D costs, with mark up, to the assessee. The AEs have also given interest free ECB loans. These are a/so equally important factors. When we take the transactions with the AEs in the light of these surrounding economic and contractual realities, in our considered view, the transactions with non AEs, on the facts of this case and as a whole, are not comparable at alt. We cannot consider the price of the product in isolation with a/I these factors, and that is the reason why the comparability under CUP ceases to be relevant as these factors are clearly missing in non AE transactions. We have also noted that Rule 10 B(l)(a)(H) itself provides that "such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market" but then while CIT(A) uphold the application of CUP method on the ground that adjustments can indeed be made, he rejects the adjustments on merits. That is clearly incongruous. When he admits that no adjustments can be made on merits, the very foundation of his decision to uphold application of CUP method ceases to hold good. In any case, having perused the material on record, we are of the considered view that accurate adjustments cannot be made to nullify the impact of absolutely fundamental variations in the terms of the intra AE and non AE transactions, and since accurate adjustments cannot be made, for this reason alone, CUP method ceases to be workable on t/?e facts of this case. The contradiction in the approach is also evident from the fact that the CIT(A) has upheld application of CUP method on the sole basis that accurate adjustments can be made to take care of variations in the intra AE and independent transactions but then one of the points made before us, in the written submissions, is that "if total adjustment of 36% claimed in those years was allowed, prices would come down to such unrealistic levels that one of the international transaction, including sales to non AEs, were made anywhere neat them". Clearly, there is no meeting ground between these diametrically opposed stands by the authorities. As regards the decision of coordinate bench in the case of Serdis Pharmaceuticals (supra), that was a case in which no dispute was raised with respect to the comparables cases except on account of quality for which suitable adjustment was allowed. This precedent, therefore, does not offer any help to the case of the revenue. 16. A lot of emphasis has been placed on the fact that the assessee on its own was using the Internal CUP method in past, and, there was, thus, no good reason to deviate from the same. It is for this main reason that the application of TNMM has been declined by the author/ties below. Nothing, however, turns on this plea, What is before us is the question as to which method is most appropriate method for ascertaining the arm's length in the present year. We do not see how this question is to be adjudicated simply on the basis of what has been accepted by the assessee, on his own, as the most appropriate method in the earlier years. Such a choice of method in the earlier years, in our humble understanding, cannot act as an estoppel against the assessee. In our considered view, the decision as to what is the most , appropriate method on the facts of this case is to be taken in the light of the facts and material on record before us in the present year. The past conduct of the assessee, with regard to the selection of the most appropriate method for ascertaining arm's length price for the present assessment year, is not really decisive. We, therefore, reject this plea of the revenue authorities as well. 17. As we do so, we may also add that one of the decisions relied upon by the assessee was in the case of DCIT vs Dishman Pharmaceuticals & Chemicals Ltd and vice versa [(45 SOT 37 (2011)]. While dealing with a subsequent year's appeal, for the assessment year 2010-1.1, and reiterating the stand earlier taken by the Tribunal vide order dated 31st December 2018, the Tribunal has, inter alia, observed as follows: ................ the nature of trade relationship in the sense of its impact on the functions, asset and risks assumed by the AEs which will have the crucial bearing on the prices. Unless these vital factors are taken into account, and suitable adjustments are made in the available
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CUP inputs, the application of CUP has no usefulness. The variations in nature of relationship affecting the FAR analysis is not even disputed by the revenue and rule 10 B(l)(a)(ii) itself provides that "such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market". As regards the decision of coordinate bench in the case of Serdia Pharmaceutica/s (supra), that was a case in which no dispute was raised with respect to the comparabies cases except on account of quality for which suitable adjustment was allowed. This precedent, therefore, does not offer any help to the case of the revenue. All that has been relied upon is internal CUP and fur the detailed reasons set out by the C1T(A), which meets our approval, these CUP inputs were not reliable enough. In any case, differences due to variations in FAR due to nature of trade relationship with AEs have not been accounted for and suitable adjusted. The external CUP inputs are not even referred to and relied upon by the TPO. There are no other independent comparable transactions brought to the analysis by the TPO or the learned Commissioner (DR). All these factors put together do not make out s case for application of CUP in this case. Not only that there is no justification, beyond vague generalities, for CUP in the present case and not only that that CUP method application mechanism is incorrect, we find that sufficient quantity of reliable. CUP inputs are not available on the facts of this case, that In the light of these discussions, as also bearing in mind entirety of the case, we do not see legally sustainable merits in the case of the learned Commissioner (DR) and we reject his plea that on the facts and in the circumstances of this case, CUP method is required to be applied. In any case, the issue is squarely covered by the decision of the coordinate benches, in favour of the assessee, and having perused these decisions and material on record, we are not inclined to take any other view of the matter than the view so taken by the coordinate benches. We have also noted that Hon'ble High Court is already seized of the matter and it is only a matter of time that Their Lordships take a call on the matter. Given this situation, even if we had any reservations on the correctness of the coordinate bench decision, which we do not have anyway, the matter could not have been referred for the constitution of a special bench and this division bench could not have taken a different view of the matter. That is what is the settled legal position. ?n 'view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the iearneu CJ / (A) anii decline interfere in the matter. 18. We see no reasons to take any other view of the matter in this case. The decisions of the coordinate benches in the above cases hold good in the present context as well. 19. In view of the above discussions and following the consistent view being take by the coordinate benches, in our considered view, the application of CUP method was indeed not justified on the facts of the present case. The intra AE transactions, on the facts of this case, were so fundamentally different in character in economic circumstances and contractual terms, that these cannot be compared with the independent transactions entered into by the assessee. We, therefore, reject the stand of the authorities below on this issue. 20. We have noted that the assessee has applied TNMM by comparing the profits on transactions with AEs and the non AEs and no specific defects have been pointed out in the a/location of costs in the segmental accounts which are duly reconciled with entity level consolidated accounts. We have also noted that dealing with the Internal TNMM adopted by the assessee the TPO had expressed the view that the basis of allocating the overheads was not clear, in response to which it was explained by the assessee that revenue and expenses have been allocated on actual basis wherever these .are directly allocable, and wherever these are not directly allocable, the allocation has been done on the basis of appropriate allocation key such as ration of sales quantity, sales revenue, total revenue, ft was also explained that the segmental details have been reconciled with entity level audited accounts. The assessee had further submitted that "in case if in your view there are any inappropriate cost allocations, we would appreciate if you can kindly let us know which cost a/locations are not appropriate and why these are not appropriate so that we can accordingly clarify and explain on those aspects". We have noted that the TPO did not have any specific comment on this request and he simply rejected the explanation of assessee as "not accepted". In appeal also, no specific adjustments
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were suggested to the allocations made in the segmental accounts and the discussions were confined to generalities. In these circumstances, we see no reasons to disturb the internal TNMM adopted by the assessee. 5. There are some variations in this year, such as the advance payment in this year is for 13.97 months on an average, as evident from the calculations at pages 149-150 of the paper book, and such as the fact that there have no sales of certain products to non AEs at ail and yet internal CUP mechanism has been adopted. These variations will, however, not have any impact on the conclusions arrived at by us. We, therefore, see no reasons to take any other view of the matter for this assessment year. In any case, that approach is not even disputed by the parties before us. 6. We therefore, uphold the plea of the assessee and delete the impugned ALP adjustment which was made by adopting Internal CUP method and rejecting the TNMM adopted by the assessee for benchmarking the sales to AEs. Once we hold so, all other issues raised in the appeal are rendered infructuous call/no for no adjudication by us." 12. Since there is no disparity on facts, more particularly, when the Id.CIT(A) has not made any detailed analysis except putting reliance upon the order of his predecessor in the Asstt. Year 2007-08 and 2008-09, therefore, we are of the view that the issue is squarely covered in favour of the assessee by the order of the Tribunal passed in the Asstt .Year 2008-09 (supra). Respectfully following the order of Co- ordinate Bench, we delete the impugned ALP adjustment of Rs.7,99,59,176/-. Since we have upheld the computation of ALP of international transaction of sale of finished goods according to TNMM method, consequently, ground no.1 and 2 of the Revenue’s appeal would be redundant.” The decision being binding in nature, the same has been considered for disposing the ground raised by the appellant. Since, the facts in the present case are identical in the assessment year under consideration, hence, respectfully following the decision of the Hon’ble Tribunal, the addition made on this count is deleted. The appellant succeeds on Ground no.1 & five sub grounds.
9.1 Before us, no material has been placed on record by the ld. DR to demonstrate that the decisions of Tribunal that were followed by the Ld.CIT(A) while dismissing the appeals of Revenue have been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. In view of the above, we do not find any infirmity in the order of the learned CIT-A. Hence the ground of appeal of the revenue is hereby dismissed.
The next issue raised by the Revenue in ground Nos. 9 to 11 is that the learned CIT- A erred in deleting the addition made by the AO/TPO for ₹ 1,76,49,394.00 representing the marketing commission expenses which was taken as nil.
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The assessee in the year under consideration claimed to have incurred an expense of ₹1,76,49,394.00 in the name of the associated enterprises which was monitoring/ tracking the activities of the assessee. However the AO/TPO was of the view that such activity of the associated enterprises is in the nature of shareholder activity. Furthermore, there was no detail furnished by the associate enterprises relating to the expenses incurred by it for monitoring/tracking the activities of the assessee. Accordingly, the AO/TPO held that there was no need to incur any expense in the name of marketing commission and therefore the same was disallowed by way of upward adjustment of ₹ 1,76,49,394.00 which was added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT-A who deleted the upward adjustment made by the TPO/AO by observing that the ITAT in the own case of the assessee for the assessment years 2009-10 and 2010-11 in ITA Nos. 1215 & 1216/AHD/2017 has directed to adopt the TNMM as the most appropriate method.
Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us.
Both the learned DR and AR before us vehemently supported the order of the authorities below as favourable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that, the learned CIT-A has deleted the upward adjustment made by the TPO/AO after making the reference to the order of the ITAT as discussed above in the earlier years. The relevant extract of the order of the ITAT reads as under:
I have carefully considered the material facts and also the decision the Hon'ble ITAT. The issue is identical and the facts are also identical, The Hon'ble ITAT vide its order in ITA NO. 1215 & 1216/AHD/2017 for the AY 2009-10 and AY 2010-11 held that TNMM is the most appropriate method in the case of sales commission and granted relief accordingly. The relevant part of the order is reproduced as under:
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"20. We, have duly considered rival submissions and gone through the record carefully. As far as first fold of, contention is concerned, the Id. TPO cannot question the requirement of services and a/so to ascertain rendering of services. His jurisdiction is confined to quantification of ALP. We find that this aspect is squarely covered by the decisions referred by the Id. counsel for the assesses, more particularly, decision of Hon 'b/e Bombay High Court in the case of Lever India Exports Ltd. (supra) as we/1 as the decision of Hon 'b/e Delhi High Court in the case of CIT Vs. Cushman and Wakefield (supra). Apart from the above, we find that the assessee has produced evidence in the shape of agreement between it and the AE showing that AE would charge commission at the rate of X%''0n non-AE export sales/for rendering these services. The assesses has not debited other-expenditure for marketing and sales with regard sales made to non-AE. It is a/so pertinent to note that turnover of the assessee has increased with regard to non-AE sales a/so. Its export sales to non-AE have increased from Rs.9 crores approx. in F.Y.2005-06 to Rs,44.56 crores in the F. Y.2008-09. Therefore, taking into consideration the complete details, we are of the view that no adjustment been made at the recommendation of the TPO on this issue because it was not in the jurisdiction of the TPO to question requirement of services, and also ascertain rendition of services, and on these two reasoning, he cannot benchmark the ALP of these services at NIL. It is also pertinent to observe that In A.Y.2Q10-11, assessee has paid Rs. 160,16,780/- to its AE for these services and that transaction was referred to the TPO The Id TPO did not recommend any adjustment in A.Y.2010-11. Therefore, no adjustment is required in the Asstt. Year 2009-10. We allow this ground a/so, and delete adjustment recommended at Rs.2,24,01,998/-." The decision being binding in nature, the same has been considered for disposing the ground raised by the appellant. Since, the facts in the present case are identical in the assessment year under consideration, hence, respectfully following the decision of the Hon'ble Tribunal, addition made on this count is deleted. The appellant succeeds on Ground No.2 and also sub grounds.
15.1 Before us, no material has been placed on record by the ld. DR to demonstrate that the decisions of Tribunal that were followed by the Ld.CIT(A) while dismissing the appeals of Revenue have been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. In view of the above, we do not find any infirmity in the order of the learned CIT-A. Hence the ground of appeal of the revenue is hereby dismissed.
The issue raised by the Revenue in ground No. 12 is that the learned CIT-A erred in deleting the addition made by the AO for Rs. 11,17,079.00 representing the excess depreciation claimed by the assessee.
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The AO during the assessment proceedings found that the assessee was given reimbursement of capital expenses in the earlier years amounting to ₹ 1,42,66,483.00 but the assessee has not reduced the same from the cost of the plant and machineries. Thus, it was found that the assessee has claimed excess depreciation in the earlier years as well as in the year under consideration. The amount of excess depreciation for the year under consideration was calculated by the AO at Rs. 11,17,079.00 which was disallowed and added back to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT-A who deleted the upward disallowance made by the AO by observing that the ITAT in the own case of the assessee for the assessment years 2007-08 in ITA Nos. 915 & 917/AHD/2015.
Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us.
Both the learned DR and AR before us vehemently supported the order of the authorities below as favourable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that, the learned CIT-A has deleted the disallowance made by the AO after making the reference to the order of the ITAT as discussed above in the earlier years. The relevant extract of the order of the ITAT reads as under: I have carefully considered the material facts and the submissions! on the issue including the decision of the Hon'ble ITAT. The issue and the facts are identical and hence, it is proposed to follow the jurisdictional tribunal order on this issue. The issue of disallowance of depreciation was considered on account of receipt of Rs.1,42,66,483/- from the AE by the appellant in the year 2006, in AY 2007-08 and the Hon'ble Tribunal heid that the amount which was received has to be capitalized to the respective Plant & Machinery and not to be reduced from the cost of the assets. The relevant part of the order of the Hon'ble ITAT vide its order ITA No. 915 & 917/AHD/2015 for AY 2007-08 is extracted as under: "13. We have gone through the relevant record in the impugned order. We find that the expenditure of Rs. l,42,66,483/~ were pertaining to professional fees for setting-up of the Plant and the travelling cost of the Architects etc. which were incurred by Gulbrandsen Chemicals Inc., USA, and were paid by it on behalf of the appellant to external third parties during the period from 2000 to 2002. We
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noticed that before the AO that it had setup its Plants during the period of 2000 to 2002 in India. As per the appellant in this phase, it had very limited organizational and functional resources and therefore Gulbrandsen Chemicals Inc., USA assisted it in Plant set up phase engaging external service providers (such as Plant Consultant, Architect etc.). We hold that any expenditure incurred in relation to creation of a capital asset should be capitalized to the relevant asset. We can see appellant accordingly it also capitalized the amount of Rs. 1,42,66,483/- spent for setting up of the Plants to the respective plants account in FY 2006-07 when it received debit notes made the payment. 14. In fact, A.O. has invoked Section 43A on the basis of misconception in as much as receipt of Rs. 14266483/- was for reimbursement from the company and same was the debit to the company and this aspect is not disputed. On account of aforesaid discussion, we allow the appeal of the appellant and direct the A.O. to excess depreciation of Rs. 2139973/-. 15. In view of the above discussion, we allow this ground of appeal. Since, the facts are identical in the present case, respectfully following the order of the Tribunal, the addition on this count is hereby deleted. The appellant succeeds on Ground no.3.
Before us, no material has been placed on record by the ld. DR to demonstrate that the decisions of Tribunal that were followed by the Ld.CIT(A) while dismissing the appeals of Revenue have been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. In view of the above, we do not find any infirmity in the order of the learned CIT-A. Hence the ground of appeal of the revenue is hereby dismissed.
In the result, the appeal filed by the revenue is hereby dismissed.
Order pronounced in the Court on 11/05/2022 at Ahmedabad.
Sd/- Sd/- (MAHAVIR PRASAD) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER
(True Copy) Ahmedabad; Dated 11/05/2022 Manish