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Facts
The Revenue filed an appeal and the assessee filed a cross-objection against an order dated 25.08.2016 passed by the Ld. Commissioner of Income-tax-2, Mumbai, concerning Assessment Year 2012-13. The core issue revolves around a Transfer Pricing adjustment of Rs. 5,17,24,173/- made by the Assessing Officer (AO) and the subsequent directions issued by the Ld. CIT(A). The AO had included 14 Indian companies as comparables for determining the Arm's Length Price (ALP), while the assessee argued that its business of bottling and distribution of beverages was different from the business of packing material and its associated enterprise, Ayacucho Preforms Ltd., was the appropriate comparable.
Held
The Tribunal observed that the Ld. CIT(A)'s direction to compute the arithmetic mean of 14 Indian companies for comparison with the margin of tested parties was not in accordance with law, as Section 251 of the Income-tax Act does not permit restoring the matter back to the Assessing Officer. Furthermore, Section 250(4) of the Act allows for inquiries but no such inquiry was conducted by the Ld. CIT(A). Therefore, the Tribunal set aside the finding of the Ld. CIT(A) and restored the matter back to him for deciding afresh after providing adequate opportunity of being heard to both parties.
Key Issues
Whether the Ld. CIT(A) erred in deleting the Transfer Pricing adjustment and in directing comparison of margins involving Indian companies as comparables when the assessee's foreign AE operated in a different geographical location, and whether the Ld. CIT(A)'s direction to compute arithmetic mean was legally valid.
Sections Cited
Section 92CA(3), Section 251, Section 250(4), Rule 10B(2), Rule 10B(3), Rule 10C(2)(c), Section 92C
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Income Tax Appellate Tribunal, MUMBAI BENCH “K” MUMBAI
Before: SHRI OM PRAKASH KANT & MS. KAVITHA RAJAGOPAL
This appeal by the Revenue and cross-objection by the assessee are directed against order dated 25.08.2016 passed by the Ld. Commissioner of Income-tax-2, Mumbai [in short ‘the Ld.
M/s AJE India Pvt. Ltd. CO No. 133/M/2022 & CO No. 133/M/2022 CIT(A)’] for assessment year 2012 CIT(A)’] for assessment year 2012-13. The grounds raised by the 13. The grounds raised by the Revenue are reproduced as under: reproduced as under:
1. "Whether, on the facts and circumstances of the case and in law, 1. "Whether, on the facts and circumstances of the case and in law, 1. "Whether, on the facts and circumstances of the case and in law, the Ld. CIT(A) was correct in deleting the Transfer Pricing adjustment the Ld. CIT(A) was correct in deleting the Transfer Pricing adjustment the Ld. CIT(A) was correct in deleting the Transfer Pricing adjustment of Rs.5,17,24,173/ 5,17,24,173/- made by the A.O." 2. "Whether, on the facts and circumstances of the case and in Law, 2. "Whether, on the facts and circumstances of the case and in Law, 2. "Whether, on the facts and circumstances of the case and in Law, the Ld. CIT(A) failed to appreciate principles of comparability in the Ld. CIT(A) failed to appreciate principles of comparability in the Ld. CIT(A) failed to appreciate principles of comparability in transfer pricing while directing the comparability of margin to be transfer pricing while directing the comparability of margin to be transfer pricing while directing the comparability of margin to be undertaken between average margin of 14 comparables op undertaken between average margin of 14 comparables operating in erating in Indian geography with that of the profitability (PLI/margin) of Indian geography with that of the profitability (PLI/margin) of Indian geography with that of the profitability (PLI/margin) of assessee's overseas Associated Enterprise, M/s. assessee's supplier assessee's overseas Associated Enterprise, M/s. assessee's supplier assessee's overseas Associated Enterprise, M/s. assessee's supplier thereby comparing PLI of AE, a foreign company, with that of Indian thereby comparing PLI of AE, a foreign company, with that of Indian thereby comparing PLI of AE, a foreign company, with that of Indian comparables?" 3. "Whether, on the facts and c 3. "Whether, on the facts and circumstances of the case and in Law, ircumstances of the case and in Law, the la. CIT(A) failed to appreciate that if foreign AE is treated as a the la. CIT(A) failed to appreciate that if foreign AE is treated as a the la. CIT(A) failed to appreciate that if foreign AE is treated as a tested party, then comparables must also be from the same tested party, then comparables must also be from the same tested party, then comparables must also be from the same geography i.e. country of AE and thus, directions are against the geography i.e. country of AE and thus, directions are against the geography i.e. country of AE and thus, directions are against the principles of transfer p principles of transfer pricing as also the mandate of Rule 10B(2) and ricing as also the mandate of Rule 10B(2) and 10B(3) of I.T. Rules?" 10B(3) of I.T. Rules?" 4. "Whether, on the facts and circumstances of the case and in Law, 4. "Whether, on the facts and circumstances of the case and in Law, 4. "Whether, on the facts and circumstances of the case and in Law, the la. CIT(A) erred in impliedly approving assessee's foreign AB, the la. CIT(A) erred in impliedly approving assessee's foreign AB, the la. CIT(A) erred in impliedly approving assessee's foreign AB, M/s Ayacucho, as tested party without appreciating t M/s Ayacucho, as tested party without appreciating the fact that the he fact that the assessee has not demonstrated any valid justification for the same assessee has not demonstrated any valid justification for the same assessee has not demonstrated any valid justification for the same and without giving reasons for rejection of TPO's selection of and without giving reasons for rejection of TPO's selection of and without giving reasons for rejection of TPO's selection of assessee as tested party?» assessee as tested party?» 5. "Whether, on the facts and circumstances of the case and in Law, 5. "Whether, on the facts and circumstances of the case and in Law, 5. "Whether, on the facts and circumstances of the case and in Law, la. CIT(A) has erred in directing comparison of profitability of M/s erred in directing comparison of profitability of M/s Ayacucho (assessee's foreign AE) Ayacucho (assessee's foreign AE) while impliedly approving impliedly approving comparables operating in Indian geography?" comparables operating in Indian geography?" 6. "Whether, on the facts and circumstances of the case and in Law, 6. "Whether, on the facts and circumstances of the case and in Law, 6. "Whether, on the facts and circumstances of the case and in Law, the ld. CIT(A) is justified in the ld. CIT(A) is justified in holding that the AO/TPO has erred, while holding that the AO/TPO has erred, while determining the Arm's Length Price (ALP), by taking the assessee as determining the Arm's Length Price (ALP), by taking the assessee as determining the Arm's Length Price (ALP), by taking the assessee as the tested party as opposed to the analysis carried out by the the tested party as opposed to the analysis carried out by the the tested party as opposed to the analysis carried out by the assessee in which Ayacucho Preforms Co. Ltd, Thailand was assessee in which Ayacucho Preforms Co. Ltd, Thailand was assessee in which Ayacucho Preforms Co. Ltd, Thailand was considered as the tested considered as the tested party, even though the assessee did not party, even though the assessee did not make available the reliable data for foreign comparables necessary make available the reliable data for foreign comparables necessary make available the reliable data for foreign comparables necessary for application of the method, in view of Rule 10C(2)(c) of Income for application of the method, in view of Rule 10C(2)(c) of Income for application of the method, in view of Rule 10C(2)(c) of Income-tax Rules, 1962 read with Section 92C of the Income Rules, 1962 read with Section 92C of the Income-tax Act, 1961?. 1961?. 7. "Whether, on the facts and circumstances of the case and in Law, on the facts and circumstances of the case and in Law, on the facts and circumstances of the case and in Law, the ld. CIT(A) has erred in determining the arm's length price (ALP) by the ld. CIT(A) has erred in determining the arm's length price (ALP) by the ld. CIT(A) has erred in determining the arm's length price (ALP) by taking the foreign AE as the tested party and by rejecting the finding taking the foreign AE as the tested party and by rejecting the finding taking the foreign AE as the tested party and by rejecting the finding of the AO/TPO that the assessee has to be considered as th of the AO/TPO that the assessee has to be considered as th of the AO/TPO that the assessee has to be considered as the tested party?"
M/s AJE India Pvt. Ltd. CO No. 133/M/2022 & CO No. 133/M/2022
"Whether, on the facts and circumstances of the case and in Law, 8. "Whether, on the facts and circumstances of the case and in Law, 8. "Whether, on the facts and circumstances of the case and in Law, the Id. CIT(A) erred in selecting and using certain Indian companies the Id. CIT(A) erred in selecting and using certain Indian companies the Id. CIT(A) erred in selecting and using certain Indian companies as comparables to determine the ALP by not appreciating the fact as comparables to determine the ALP by not appreciating the fact as comparables to determine the ALP by not appreciating the fact that the comparable companies selecte that the comparable companies selected by TPO are operating in d by TPO are operating in India, whereas the foreign AE is operating in Thailand, a different India, whereas the foreign AE is operating in Thailand, a different India, whereas the foreign AE is operating in Thailand, a different geographical location and hence, cannot be used in the instant case, geographical location and hence, cannot be used in the instant case, geographical location and hence, cannot be used in the instant case, in view of Rule 10B(2)(d) of Income in view of Rule 10B(2)(d) of Income-tax Rules, 1962 read with Section tax Rules, 1962 read with Section 92C of the Income 92C of the Income-tax Act, 1961?" 2. The ground raised by the assessee are reproduced as under : The ground raised by the assessee are reproduced as under : The ground raised by the assessee are reproduced as under :
The Commissioner of Income The Commissioner of Income-tax (Appeals) - 2, Mumbai 2, Mumbai (hereinafter referred to as the CIT(A)) erred in upholding the action of (hereinafter referred to as the CIT(A)) erred in upholding the action of (hereinafter referred to as the CIT(A)) erred in upholding the action of the Deputy Commissioner of Income the Deputy Commissioner of Income-tax - 1(1)(1), Mumbai (hereinafter ai (hereinafter referred to as the Assessing Officer) in treating the 14 Indian referred to as the Assessing Officer) in treating the 14 Indian referred to as the Assessing Officer) in treating the 14 Indian companies determined by the Deputy Commissioner of Income companies determined by the Deputy Commissioner of Income companies determined by the Deputy Commissioner of Income-tax (Transfer Pricing 1(1)(2)), Mumbai (hereinafter referred to as the (Transfer Pricing 1(1)(2)), Mumbai (hereinafter referred to as the (Transfer Pricing 1(1)(2)), Mumbai (hereinafter referred to as the Transfer Pricing Officer) as comparable entitie Transfer Pricing Officer) as comparable entities without appreciating s without appreciating that the functions, assets and risk analysis of the said companies that the functions, assets and risk analysis of the said companies that the functions, assets and risk analysis of the said companies are different from the functions, assets and risk analysis of the are different from the functions, assets and risk analysis of the are different from the functions, assets and risk analysis of the appellant-company. company. The cross objectors contend that on the facts and in the The cross objectors contend that on the facts and in the The cross objectors contend that on the facts and in the circumstances of the cas circumstances of the case and in law, the CIT(A) ought not to have e and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer and the Transfer Pricing upheld the action of the Assessing Officer and the Transfer Pricing upheld the action of the Assessing Officer and the Transfer Pricing Officer inasmuch as the CIT(A) has not appreciated the facts of the Officer inasmuch as the CIT(A) has not appreciated the facts of the Officer inasmuch as the CIT(A) has not appreciated the facts of the case in its entirety. case in its entirety.
The CIT(A) erred in directing to compare the operati 2. The CIT(A) erred in directing to compare the operating margin or ng margin or the profit level indicator of the foreign associate enterprise the profit level indicator of the foreign associate enterprise the profit level indicator of the foreign associate enterprise considered as tested party with the operating margin or profit level considered as tested party with the operating margin or profit level considered as tested party with the operating margin or profit level indicator of the 14 Indian companies considered by the TPO instead indicator of the 14 Indian companies considered by the TPO instead indicator of the 14 Indian companies considered by the TPO instead of the foreign comparable considered by the of the foreign comparable considered by the cross objector for making cross objector for making transfer pricing adjustment. transfer pricing adjustment. The cross-objectors contend that on the facts and in the objectors contend that on the facts and in the objectors contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have circumstances of the case and in law, the CIT(A) ought not to have circumstances of the case and in law, the CIT(A) ought not to have issued the impugned direction inasmuch as the geographical location issued the impugned direction inasmuch as the geographical location issued the impugned direction inasmuch as the geographical location of the foreign associate enterprise and the Indian companies are foreign associate enterprise and the Indian companies are foreign associate enterprise and the Indian companies are completely different and as such, the impugned direction is invalid. completely different and as such, the impugned direction is invalid. completely different and as such, the impugned direction is invalid. 3. None represented on behalf of the assessee despite notifying None represented on behalf of the assessee despite notifying None represented on behalf of the assessee despite notifying for the hearing nor was any adjournment was any adjournment sought. It is seen from t sought. It is seen from the record that on the past record that on the past occasion also none appeared on behalf of also none appeared on behalf of the assessee. Therefore, we the assessee. Therefore, we were of the opinion that assessee of the opinion that assessee was not interested in prosecuting the cross not interested in prosecuting the cross-objection and responding objection and responding to M/s AJE India Pvt. Ltd. CO No. 133/M/2022 & CO No. 133/M/2022 the appeal of the Revenue, the appeal of the Revenue, therefore, we heard the app appeal and cross objection ex-partee qua the assessee after hearing the qua the assessee after hearing the Ld. Departmental Representative (DR) Departmental Representative (DR) and perusal of record and perusal of record.
In the case the Ld. CIT(A) has the Ld. CIT(A) has issued direction to the Assessing issued direction to the Assessing Officer for computing the arithmetic means of the 14 companies for Officer for computing the arithmetic means of the 14 compa Officer for computing the arithmetic means of the 14 compa comparing with the margin of the tested parties. The relevant comparing with the margin of the tested parties. The relevant comparing with the margin of the tested parties. The relevant finding of the Ld. CIT(A) is reproduced as under: finding of the Ld. CIT(A) is reproduced as under:
“5. Ground No.1 “5. Ground No.1 The AO has added sum of Rs. 5,17,24,173/ The AO has added sum of Rs. 5,17,24,173/- by invoking by invoking Sectin 92CA(3) of the Income Sectin 92CA(3) of the Income-tax Act, 1961. I have also tax Act, 1961. I have also gone through the copy of the Order passed by TPO ugh the copy of the Order passed by TPO ugh the copy of the Order passed by TPO (1)(1)(2) dated 28.01.2016 wherein the TPO has made (1)(1)(2) dated 28.01.2016 wherein the TPO has made (1)(1)(2) dated 28.01.2016 wherein the TPO has made comparable margins with about 14 companies who are in comparable margins with about 14 companies who are in comparable margins with about 14 companies who are in the business of packing material and on the other hand the business of packing material and on the other hand the business of packing material and on the other hand the AR of the appellant argues that the appellant the AR of the appellant argues that the appellant the AR of the appellant argues that the appellant company is in the business of bottling and distribution of ny is in the business of bottling and distribution of ny is in the business of bottling and distribution of beverages in India and the submissions of the company beverages in India and the submissions of the company beverages in India and the submissions of the company is as under :- "Ajeindia is a company whose functions are "Ajeindia is a company whose functions are "Ajeindia is a company whose functions are bottling and distributing beverages in India. Its bottling and distributing beverages in India. Its bottling and distributing beverages in India. Its main activity is the production of bever main activity is the production of beverages, ages, sodas, water, nectar beverages, citric drinks, sodas, water, nectar beverages, citric drinks, sodas, water, nectar beverages, citric drinks, rehydrating drinks, teas and energizing drinks to rehydrating drinks, teas and energizing drinks to rehydrating drinks, teas and energizing drinks to further sell in the Indian Market." further sell in the Indian Market." Therefore, the comparable figures arrived by TPO are in Therefore, the comparable figures arrived by TPO are in Therefore, the comparable figures arrived by TPO are in the business of packing material etc and not directly the business of packing material etc and not directly the business of packing material etc and not directly connected with the appellant company but with the connected with the appellant company but with the connected with the appellant company but with the Associate Enterprises Ayacucho Preforms Ltd. and that Associate Enterprises Ayacucho Preforms Ltd. and that Associate Enterprises Ayacucho Preforms Ltd. and that the company's activity is as under: the company's activity is as under: "Ayacucho is a company whose main function is cho is a company whose main function is cho is a company whose main function is manufacturing bottles and caps for its releated entities to manufacturing bottles and caps for its releated entities to manufacturing bottles and caps for its releated entities to use in their beverage manufacturing activities. Ayacucho use in their beverage manufacturing activities. Ayacucho use in their beverage manufacturing activities. Ayacucho sold preform materials to Ajeindia during 2012." sold preform materials to Ajeindia during 2012."
M/s AJE India Pvt. Ltd. CO No. 133/M/2022 & CO No. 133/M/2022 The AR of the appellant argues that the appellant The AR of the appellant argues that the appellant The AR of the appellant argues that the appellant company mainly deals with the production of beverages, company mainly deals with the production of beverages, company mainly deals with the production of beverages, sodas, water, nectar beverages, citric drinks, rehydrating sodas, water, nectar beverages, citric drinks, rehydrating sodas, water, nectar beverages, citric drinks, rehydrating drinks, teas and energizing drinks to further sell in the drinks, teas and energizing drinks to further sell in the drinks, teas and energizing drinks to further sell in the Indian Market. On the other hand, the supplier Ayacucho Indian Market. On the other hand, the supplier Ayacucho Indian Market. On the other hand, the supplier Ayacucho Preforms Ltd deals only in m Preforms Ltd deals only in manufacturing of bottles & anufacturing of bottles & caps and it is fair to make the comparable margin with caps and it is fair to make the comparable margin with caps and it is fair to make the comparable margin with the 14 companies so as to arrive at the correct margin. the 14 companies so as to arrive at the correct margin. the 14 companies so as to arrive at the correct margin. The arguments of the AR of the appellant company has The arguments of the AR of the appellant company has The arguments of the AR of the appellant company has been considered and found to be acceptable one as the been considered and found to be acceptable one as the been considered and found to be acceptable one as the AO compared AO compared the margin of 14 companies who deals the margin of 14 companies who deals with the packing material and the appellant company's with the packing material and the appellant company's with the packing material and the appellant company's main business is with the production of beverages, main business is with the production of beverages, main business is with the production of beverages, sodas, water, nectar beverages, citric drinks, rehydrating sodas, water, nectar beverages, citric drinks, rehydrating sodas, water, nectar beverages, citric drinks, rehydrating drinks, teas and energizing drinks to further sell in t drinks, teas and energizing drinks to further sell in t drinks, teas and energizing drinks to further sell in the Indian Market. Indian Market. Therefore, I am in agreement with the arguments of the Therefore, I am in agreement with the arguments of the Therefore, I am in agreement with the arguments of the AR of the, appellant company that the comparable AR of the, appellant company that the comparable AR of the, appellant company that the comparable company margin to arrive at arithmetic meaning may be company margin to arrive at arithmetic meaning may be company margin to arrive at arithmetic meaning may be exercised between 14 companies as enumerated in para exercised between 14 companies as enumerated in para exercised between 14 companies as enumerated in para 9 of the Assessment Order b 9 of the Assessment Order by the AO with the supplier y the AO with the supplier M/s Ayacucho who supplied material to the appellant M/s Ayacucho who supplied material to the appellant M/s Ayacucho who supplied material to the appellant company. Therefore, I direct the AO to make comparable company. Therefore, I direct the AO to make comparable company. Therefore, I direct the AO to make comparable margin to arrive at arithmetic mean with the 14 margin to arrive at arithmetic mean with the 14 margin to arrive at arithmetic mean with the 14 companies and the Ayacucho and assess accordingly.” companies and the Ayacucho and assess accordingly.” companies and the Ayacucho and assess accordingly.”
We find that as per We find that as per section 251 of the Income- -tax Act, the Ld. CIT(A) in appeal against order of the assessment made confirm, CIT(A) in appeal against order of the assessment made CIT(A) in appeal against order of the assessment made reduce, enhance or annul reduce, enhance or annul but he can’t restore the matter restore the matter back to the Assessing Officer. Further sect the Assessing Officer. Further section 250(4) of the Act prescribe ion 250(4) of the Act prescribe for making any inquiry by himself or he may direct the Assessing quiry by himself or he may direct the Assessing quiry by himself or he may direct the Assessing Officer for making further inquiry but in this case no inquiry has Officer for making further inquiry but in this case no inquiry has Officer for making further inquiry but in this case no inquiry has been carried out by the Ld. CIT(A). Therefore, we are of the opinion been carried out by the Ld. CIT(A). Therefore, we are of the opinion been carried out by the Ld. CIT(A). Therefore, we are of the opinion that the direction given by the Ld. CIT(A) not being in accordance that the direction given by the Ld. CIT(A) not being in accordance that the direction given by the Ld. CIT(A) not being in accordance with law, we set aside the finding of the Ld. CIT(A) and restore the we set aside the finding of the Ld. CIT(A) and restore the we set aside the finding of the Ld. CIT(A) and restore the matter back to him for deciding afresh after providing adequate matter back to him for deciding afresh after providing adequate matter back to him for deciding afresh after providing adequate
M/s AJE India Pvt. Ltd. CO No. 133/M/2022 & CO No. 133/M/2022 opportunity of being heard to both the Revenue as well as to the opportunity of being heard to both the Revenue as well as to the opportunity of being heard to both the Revenue as well as to the assessee.
In the result, the ground of appeal of the Revenue and cross In the result, the ground of appeal of the Revenue and cross In the result, the ground of appeal of the Revenue and cross- objection of the assessee both are allowed for statistical purposes. objection of the assessee both are allowed for statistical purposes. objection of the assessee both are allowed for statistical purposes.