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Income Tax Appellate Tribunal, “B” BENCH, PUNE
Before: SHRI D. KARUNAKARA RAO, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER
PER D. KARUNAKARA RAO, AM :
This appeal by the assessee is directed against the orders of DRP/TPO/AO for the assessment year 2009-10.
The assessee has raised following grounds in appeal:
2 ITA No.515 /PUN/2014 A.Y.2009-10.
“Transfer pricing adjustment made to the international transaction pertaining to import of raw material/components 1. The Ld. DRP / Ld. AO erred on facts and in law in enhancing the income of the assessee by Rs.1,92,64,620 by holding that the international transaction of import of raw materials/components (under the Factories business segment) from the associated enterprises ('AEs') does not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 ('the Act'). 2. The Ld. DRP / Ld. AO erred on facts and in law by rejecting the Cost Plus Method ('CPM') applied by the appellant as the most appropriate method to demonstrate the arm's length nature of the pricing of the transaction pertaining to import of raw material/ components from AEs.
The Ld. DRP / Ld. AO erred on facts and in law by adopting the Transactional Net Margin Method ('TNMM') for determining the arm's length price of the transactions pertaining to import of raw materials/ components.
The Ld. DRP / Ld. AO erred on facts and in law while applying the TNMM by not considering the differences between appellant and that of com parables as required by Rule 10B(1)(e)(iii) of the Income-tax Rules, 1962 ('The Rules').
The Ld. DRP erred on facts and in law by not computing the economic adjustment pertaining to differences in the level of working capital of the appellant an t at of comparables, a required by Rule 10B(1)(e)(iii) of the Income-tax Rules, 1962 ('The Rules').
The Ld. TPO/Ld. AO erred on facts and in law by erroneously computing the arm's length price of the transaction pertaining to import of raw material I components from AEs while applying TNMM.
• Transfer pricing adjustment made to the international transaction pertaining to cost allocations from Associated Enterprises 7. The Ld. DRP / Ld. AO erred on facts and in law in enhancing the income of the appellant by Rs.1,84,97,787 by holding that the international transaction of cost allocation from the associated enterprise to the appellant does not satisfy the arm's length principle envisaged under the Act. 8. The Ld. DRP /Ld. AO erred on facts and in law in disallowing the entire value of transaction pertaining to the cost allocations from AEs without taking cognizance of the fact that the amount allocated to IEC business segment has been held to be at arm's length by Ld. TPO, thereby resulting in the double adjustment. 9. The Ld. DRP /Ld. AO erred on facts and in law by rejecting the Comparable Uncontrolled Price ('CUP') method applied by appellant to demonstrate the arm's length nature of the pricing of the transaction of cost allocation from AE. 10. The Ld. DRP /Ld. AO erred on facts and in law by erroneously interpreting the cost allocation arrangement between the appellant and its AE as a service transaction without taking cognizance of the pricing mechanism for the transaction.
3 ITA No.515 /PUN/2014 A.Y.2009-10.
The Ld. DRP erred on facts and in law by allowing the partial relief on the basis of sample documents and only to the extent of reference of India in such sample documents.
Without prejudice to the above grounds, the Ld. AO /Ld. TPO while giving effect to directions of Ld. DRP, has erred by considering the incorrect amount of the international transaction pertaining to cost allocations from Associated Enterprises thereby resulting in excessive transfer pricing adjustment of Rs.25,37,909.
• Transfer pricing adjustment made to the international transaction pertaining to cost recharges from Associated Enterprises.
The Ld. DRP /Ld. AO erred on facts and in law in enhancing the income of the appellant by Rs.2,70,74,788 holding that the international transaction pertaining to its cost recharges from the AEs do not satisfy the arm's length principle envisaged under the Act. 14. The Ld. DRP /Ld. AO erred on facts and in law by rejecting the Comparable Uncontrolled Price ('CUP') method applied by appellant to demonstrate the arm's length nature of the pricing of the transaction of cost allocation from AE. 15. The ld. DRP erred on facts and in law by allowing the partial relief on the basis of sample documents.
The Ld. DRP /Ld. AO erred on facts and in law in disallowing the entire value of transaction pertaining to the cost recharges from AEs without taking cognizance of the fact that the amount allocated to IEC business segment has been held to be at arm's length by Ld. TPO, thereby resulting in the double adjustment. • Initiation of penalty proceedings by the AO 17. The Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act for furnishing inaccurate particulars of income. The above grounds are without prejudice to each other. Your appellant craves leave to add, amend, alter, modify and /or substitute, and to withdraw the above grounds of appeal.”
Thus, the TP adjustments made to the (i) transaction of import of Raw
material/components; (ii) cost allocations from Associated Enterprises and (iii)
cost recharges from Associated Enterprises are the issues raised in the appeal.
Briefly stated relevant facts includes that the assessee-company is
engaged in the business of interior design and development, manufacturing
assembly of automotive seating system and engineering services to automotive
4 ITA No.515 /PUN/2014 A.Y.2009-10.
industry. The assessee filed its return of income on 29.09.2009 declaring loss of
Rs.18,97,75,614/-. The assessee entered into international transactions with the
Associated Enterprises (AEs). Therefore, the matter was referred to the Transfer
Pricing Officer (TPO) for benchmarking international transactions. The TPO
recommended following adjustments and the summary of adjustment narrated
in Para-7 of the order is given as follows:
“7. Summary of Adjustments The summary of adjustment U/s. 92CA is as under:
Particular Adjustment On account of import of Raw 1,92,64,620 Materials/Components ( Factory Segment) Cost Allocation Rs.2,60,08,841 Cost recharges Rs.9,71,01,546 Total Rs.14,23,75,007
Thus, the above amount of Rs.14,23,75,007/- is treated as transfer pricing adjustment for the FY 2008-09.”
The Assessing Officer made draft assessment order u/s.144C of the
Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) incorporating the said
adjustment in February, 2013 determining total loss of Rs.4,74,00,607/- before
supplying the copy of it to the assessee. Against the same, assessee went to the
Dispute Resolution Panel (DRP) against the additions proposed by the Assessing
Officer/Transfer Pricing Officer. The Transfer Pricing Officer issued directions
vide direction dated 24.01.2013. Eventually, the Assessing Officer finalized the
assessment on 28.01.2014 declaring total loss of Rs.12,49,38,419/-. Aggrieved
by the same, the assessee in appeal before Tribunal with the grounds mentioned
above.
At the outset, Ld. Counsel for the assessee submitted that there are four
main issues relating to (i) Transfer pricing adjustment made to the international
5 ITA No.515 /PUN/2014 A.Y.2009-10.
transaction pertaining to import of raw material/components. (ii) Transfer
pricing adjustment made to the international transaction pertaining to cost
allocations from Associated Enterprises (iii) Transfer pricing adjustment made to
the international transaction pertaining to cost recharges from Associated
Enterprises and (iv) Initiation of penalty proceedings by the Ld. AO.
Referring to the first issue, the Ld. Counsel of the assessee submitted that
there are six grounds under the same. Deviating from the same, Ld. Counsel
submitted that except ground No.5, ground Nos. 1 to 4 and 6 are not pressed.
After hearing both the parties, the ground Nos.1 to 4 and 6 are
dismissed as not pressed.
Referring to ground No.5, Ld. Counsel of the assessee submitted that he
merely wants granting of working capital adjustment before quantifying the
adjustment as required by Rule 10B(1)(e) (iii) of the Income-tax Rules, 1963.
Further, relying on the order of Tribunal in the case of Demag Cranes &
Components (India) Pvt. Limited Vs. DCIT, in ITA No.120/PN/2011 decided on
04.01.2012, Ld. Counsel submitted that the said working capital adjustments
are allowable, in principle and it is in favour of assessee. In this regard, bringing
our attention to Para-20 (Page-8) of the Tribunal’s order (supra.), the Ld. Counsel
submitted that the matter may be remanded back to the file of Assessing Officer
for granting the same in accordance with the principles approved in the case of
Demag Cranes & Components (India) Pvt. Limited Vs. DCIT (supra) by Tribunal.
After hearing both the parties on this issue, we find, in principle, it is
decided issue and the assessee is entitled to fair adjustments on account of
‘working capital’ for eliminating of the material effects. For this proposition,
Para-33 of the Tribunal’s order (supra) is relevant and the same is extracted as
under:
6 ITA No.515 /PUN/2014 A.Y.2009-10.
“33. We have already discussed in the preceding paragraphs, this issue of adjustment on account of WC was raised for the first time before the Ld. DRP and the DRP has passively relied on the order of TPO without realizing that the said issue was never dealt with by the TPO. Therefore, the issue of granting of adjustment on account of ‘working capital’ for eliminating of the material effects and the issue of, if such adjustment @ 3.41% constitutes that difference, if any, which is likely to materially affect the price/profit margin, have not been examined. We find that there are written request of the assessee to DRP to this extent and assessee furnished the relevant figures, which are enough to adjudicate the said request by the AO/DRP. It is not the case of the DRP that the above claims of the assessee are incorrect. Alternatively, it is not the request of the revenue’s DR that these sais issues should be remitted for another round of the proceedings before the revenue authorities. In our opinion, the existence of difference @ 3.41%, which is worth Rs.31,72,099/-, attributable to the ‘working capital’ ought to amount to the ‘material difference’ considering the existing unadjusted operating margin of the comparables at 7.18%. In these circumstances, we are of the opinion that the said working capital differences constitutes quantitatively likely to materially affect the ALP/AL Operating Margin of the comparable. Therefore, the claims of the assessee are allowed. Accordingly, the grounds 4(a) is covered by the cited decisions and is allowed pro-tanto.”
Considering the above, we are of opinion that request of assessee for
remitting the issue back to the file of Assessing Officer/TPO with identical
directions is allowed. The Assessing Officer shall grant reasonable opportunity of
being heard to the assessee. Accordingly, ground No. 5 raised by assessee is
allowed in pro-tanto.
Referring to the second and third issues, the Ld. Counsel of the assessee
submitted that the assessee has raised ten grounds in this respect and out of
which Serial. No. 7 to 12 relate to cost allocations from Associated Enterprises
and ground Nos.13 to 16 pertains to cost recharges from Associated
Enterprises. Bringing our attention to the paper book dated 28.07.2016, Ld.
Counsel submitted that assessee made an application under Rule 29 of Income
Tax (Appellate Tribunal) Rules, 1963 seeking permission to file additional
evidences in support of the said grounds. Referring to said additional evidences
at page 405 to 592, the Ld. Counsel submitted that these additional evidences in
the form of paper book will go root of the issues in so far as allocation of cost
from Associated Enterprises as well as cost charges from the Associated
7 ITA No.515 /PUN/2014 A.Y.2009-10.
Enterprises for deciding TP adjustment in correct manner. It is the request of Ld.
Counsel of assessee for admitting the additional evidences and referring the
matter to the file of Assessing Officer/TPO for fresh adjudication of the issue
raised in all these grounds i.e. Serial No. 7 to 16.
On going through the said additional evidences, on hearing both the
parties, we are of the opinion that request of the Ld. Counsel should be admitted
and remitted the issues back to the file of Assessing Officer/TPO for fresh
adjudication after considering the said additional evidences. Needless to say,
Assessing Officer shall grant reasonable opportunity of being heard to the assessee in accordance with set principles of natural justice. Accordingly, issue
raised in grounds i.e Serial No. 7 to 16 by assessee are allowed for
statistical purposes.
With regard to fourth issue i.e. initiation of penalty proceedings u/s.
271(1)(c) of the Act for furnishing inaccurate particulars of income, we find that
this issue is premature for our adjudication at this point of time and accordingly,
we dismiss the same as premature.
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced on Thursday, the 26th day of April, 2018.
Sd/- Sd/- (�वकास अव�थी /Vikas Awasthy) (डी. क�णाकरा राव/D. KARUNAKARA RAO) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER
पुणे / Pune; �दनांक / Dated : 26th April, 2018. SB
8 ITA No.515 /PUN/2014 A.Y.2009-10.
आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT (Appeals)-13, Pune. 4. The CIT-IT/TP, Pune. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” ब�च, पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 6.
// True Copy // आदेशानुसार / BY ORDER,
�नजी स�चव /Private Secretary आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune.