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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
आदेश / ORDER PER SUSHMA CHOWLA, JM:
The appeal filed by the assessee is against the order of ACIT, Circle 1(1), Pune, dated 03.10.2012 relating to assessment year 2008-09 passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’).
The assessee has raised the following grounds of appeal:- The grounds stated hereunder are independent of, and without prejudice to one another:
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Common Ground - On the facts and in the circumstances of the case, the Ld Assessing Officer ('AO') pursuant to the directions of the Ld. Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted/ contemporaneous documentation maintained by the appellant and thereby making a transfer pricing adjustment of Rs.6,69,25,547 to the income of the appellant by holding that the international transactions pertaining to import of raw material, import of trading goods and export of packing material of the appellant do not satisfy the arm's length principle envisaged under the Income- tax Act, 1961 ('the Act'). 2. Specific Ground for transfer pricing adjustment pertaining to import of raw material - On the facts and in the circumstances of the case, the Assessing Officer ('AO') pursuant to the directions of the DRP has erred in enhancing the income of the appellant by Rs.5,73,57,820 by holding that the international transactions pertaining to import of raw materials is not at arm's length. While doing so, the AO has inter-alia erred in: - holding that the mark-up earned by the Associated Enterprises ('AEs') in line with the Group Transfer Pricing Policy cannot be considered for determining the arm's length price under the Cost Plus Method ('CPM'); - disregarding the appellant's contention that even if adjustments are to be made to the prices of import of raw materials, then the same cannot exceed the profit earned by the AEs on such supply of raw materials; - disregarding the profit level indicator of 'cash profit as a percentage of sales' considered by the appellant in an alternate benchmarking analysis for substantiating the arm's length nature of the import of raw materials, wherein the external comparables where identified and the cash profit of such external comparables was compared with that earned by the appellant's relevant manufacturing segment; - not restricting the transfer pricing adjustment only to the transactions between associated enterprises considering the proportion of AEs cost (i.e. controlled cost) to the total cost (controlled and uncontrolled costs) of the relevant manufacturing segment. The Appellant prays that the book value of the said transactions be held to be the arm's length price of the transactions, and the additions made by the AO be deleted. 3. Specific Ground for non admission of additional critical evidences pertaining to transaction import of raw material - While directing the AO to so enhance the income of the appellant as mentioned in Ground 2 above, the Ld DRP has inter-alia erred by: - non admission of the certain additional critical evidences filed by the appellant on August 23, 2012 i.e. 37 days before due date of completion for appellate proceedings by Ld DRP; - rejecting additional critical evidences filed by the appellant despite the fact that the report of the Ld Transfer Pricing Officer on the same being available with Ld. DRP. The Appellant prays that the additional evidences to be admitted and evaluated on merit basis. 4. Specific Ground to pertaining to transaction import of trading goods - On the facts and in the circumstances of the case, the AO has erred in enhancing the income of the appellant by Rs.91,36,453 by holding that the international transactions pertaining to import of trading goods is not at arm's length. While doing so, the AO has inter-alia erred in:
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- Holding that a controlled transaction can be used to benchmark another controlled transaction, and rejecting the appropriate comparables as furnished by the assessee; - making a transfer pricing adjustment which exceeds the amount of mark up earned by the AEs on the sale of trading goods to the appellant. The Appellant prays that the book value of the said transactions be held to be the arm's length price of the transactions, and the additions made by the AO be deleted. 5. Specific Ground to pertaining to transaction export of packing material - On the facts and in the circumstances of the case, the AO has erred in proposing to enhance the income of the appellant by Rs.4,31,274 by rejecting the benchmarking analysis conducted by the appellant for its international transaction of export of packing material. The Appellant prays that the book value of the said transactions be held to be the arm's length price of the transactions, and the additions made by the AO be deleted. The above grounds are without prejudice to each other.
The assessee has also raised additional ground of appeal which read as under:- 6. Additional Grounds for transfer pricing adjustment pertaining to Import of Raw Material – On the facts and in the circumstances of the case and in law, the Learned Assessing Officer („AO') / Transfer Pricing Officer („TPO‟) pursuant to the directions of the Dispute Resolution Panel („DRP‟) has erred in making an adjustment of Rs.5,73,57,820/- by holding that the international transaction pertaining to import of raw materials is not at arm's length. While doing so, the Ld. AO has, inter-alia erred in: i. rejecting the appellant‟s contention regarding Associated Enterprises („AEs‟) to be taken as the Tested Party for the transaction pertaining to import of raw materials; ii. accepting comparable companies which are functionally not comparable to the appellant‟s manufacturing business segment; iii. adopting the profit level indicator of operating profit as a percentage of total cost instead of operating profit as a percentage of sales; iv. proposing adjustment on entire manufacturing business segment instead of restricting adjustment to AE transactions; v. not granting economic adjustments for : - higher import content; and - on account of difference in depreciation
The ground of appeal No.1 raised by the assessee is general and the same is dismissed as general.
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The ground of appeal No.2 raised by the assessee is against transfer pricing adjustment made pertaining to the transaction of import of raw materials.
The ground of appeal No.3 is linked to the issue raised vide ground of appeal No.2, where the assessee is aggrieved by non-admission of additional evidence pertaining to transactions of import of raw materials.
Briefly, in the facts of the case, the assessee had filed the return of income on 30.09.2008 declaring total loss of ₹ 7,72,20,145/-. Thereafter, the assessee filed revised return of income declaring similar income. The assessee was engaged in the business of manufacture of Steel Tyre Cord & Hose Reinforcement Wire. The assessee had entered into international transactions with its associated enterprises totaling ₹ 58.11 crores. The Assessing Officer thus, made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO). The TPO noted the business profile of assessee, wherein the assessee was subsidiary of N.V. Bekaert S.A. Belgium. Bekaert Group, headquartered in Belgium was the largest independent multinational manufacturer of wire, wire products and steel cord. The assessee had entered into various international transactions during the year which are enlisted at page 2 of the TPO’s order. The assessee in respect of all the international transactions had used cost plus method for determining arm's length price except in respect of international transactions relating to receipt of sales commission where CUP method had been used. The arm's length price of international transactions computed by the assessee was same as recorded in the books of account. The TPO after perusing the details and documents filed by the assessee, was of the view that in respect of few international transactions, benchmarking done in the consequent determination of arm's length price was not acceptable. Show cause notice in this regard was given to the assessee as to why TNMM method should not be applied, as also why several transactions should not
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be aggregated. In respect of import of raw materials, the TPO noted that the assessee had imported raw materials worth ₹ 47,99,29,822/- from its associated enterprises. The assessee had selected CPM method for benchmarking international transactions. The cash profit margin earned by comparables was 5.31%, whereas the assessee’s PLI was 4.23% and it was claimed that the same was at arm's length. The TPO noted that the assessee company was incorporated in the year 2000 and it was not in the initial period of production and depreciation expenses though, notional but were part of expenditure, hence the said deprecation could not be ignored while working out the profitability of assessee. Therefore, PBIT / total cost was to be the correct method to ascertain the profitability of assessee company. The assessee was asked to submit working of benchmarking by adopting PLI as PBIT/total cost. The assessee filed submissions and the assessee’s cash markup was (-) 2.95%, whereas the markup of comparables was 4.22%. The TPO noted difference of 7.14% and by adopting the said parameter, the TPO worked out the cash profit markup at ₹ 5,97,38,149/- i.e. cost multiplied by 7.14% as against the loss of ₹ 2,47,04,692/- shown by the assessee. Therefore, an upward adjustment of ₹ 5,97,38,149/- was proposed to the arm's length price shown by the assessee. The assessee explained that associated enterprises had received markup of 7% in respect of raw material imported by the assessee and furnished detailed worksheets in this regard which were annexed as Annexure-1. The plea of assessee was that markup earned by associated enterprises in their capacity as manufacturer was fair and reasonable, hence international transaction was claimed to be at arm's length price. Without prejudice to the same, the assessee pleaded that adjustment on this account could not exceed the markup earned by associated enterprises from the aforesaid international transactions i.e. ₹ 2.67 crores. The TPO did not accept the explanation of assessee in this regard observing that the method selected by assessee was not changed and only working of PLI was changed i.e. instead of PBDIT / sales, the TPO adopted PBIT/sales
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because the assessee was very old concern and it was not in the initial period of production and as such, depreciation could not be excluded for benchmarking the profit margin level. The assessee had selected CPM method for benchmarking the arm's length price, which the TPO had not been disturbed. Similarly, comparables selected had not been disturbed. However, due to change of method of PLI, the difference was arising. The argument of assessee that associated enterprises received only 7% markup was not accepted by the TPO as according to him, benchmarking required to be done by using specified methods only and there was no scope to consider the markup earned by associated enterprises for benchmarking arm's length price by using CPM method. As far as working was concerned, the working of assessee at ₹ 5,73,57,820/- was found to be in order and hence, adjustment of ₹ 5,73,57,820/- was proposed. The Assessing Officer passed draft assessment order in this regard proposing the aforesaid adjustment, against which the assessee filed objections before the Dispute Resolution Panel (DRP).
Before the DRP, the assessee once again contended that it had considered associated enterprises as tested party and gross profit markup was 7% on standard cost charged by associated enterprises in their capacity of manufacturer to the assessee was fair and reasonable. It was also contended that the same was lower than normally charged in third party transactions and hence, the transfer pricing approach should be accepted at arm's length price. The assessee filed additional evidence before the DRP on 23.08.2012 in support of its contention that the associated enterprises had earned markup of 7% on raw materials supplied by it. It was further submitted that the assessee with the help of its associated enterprises had been able to collate some fresh evidence to demonstrate appropriateness of the price charged by associated enterprises to the assessee for the products. Request was made for admission of additional evidence. The DRP observed that the assessee had filed additional evidence on 23.08.2012 when the case was
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getting time barred on 30.09.2012. It further commented that the evidence was found to be about the profit earned by foreign party. In view of non-availability of adequate time to verify the additional evidence of such nature, the DRP declined to admit the additional evidence filed by the assessee. The DRP further noted that the TPO had given reasons for changing the PLI and adopted by the assessee and since the assessee had not furnished any arguments as to why PLI adopted by TPO was incorrect, except for stating that its investment was higher because its manufacturing facilities had to be constructed according to global standards, hence the order of TPO in this regard was accepted. Secondly, the DRP observed that the assessee had changed tested party during transfer pricing assessment proceedings, wherein it had adopted itself as tested party in TP study report. Subsequently, it changed tested party as associated enterprises when the issue was raised by the TPO. Referring to the OECD guidelines, the DRP observed that the tested party should be the one, which is least complex and does not own intangibles. Therefore, manufacturer cannot be least complex party when it was the assessee’s company, which was earlier considered as least complex. Since the assessee had not given any reasons for the change, the same was not accepted. The DRP further observed that there was no merit in the arguments of assessee that adjustment could not be more than profit earned by associated enterprises, which was related with the additional evidence filed by the assessee. Since the additional evidence was not filed in time, the same was not admitted and the order of TPO was thus, upheld.
The Assessing Officer passed the assessment order making addition on account of transfer pricing adjustment as proposed by the TPO and upheld by the DRP.
The assessee is in appeal against the order of Assessing Officer.
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The learned Authorized Representative for the assessee pointed out that additional evidence was filed before the DRP to support the arguments taken before the TPO and also in the TP study report. He pointed out that the assessee was manufacturer of Steel Tyre Cord & Hose Reinforcement Wire, which was used by MRF Ltd., J.K. Industries, etc. He elaborated that the same became raw material for the said concern. During the year under consideration, the assessee had imported raw materials, wherein the associated enterprises had charged the assessee cost plus markup. In the TP study report cost plus markup was adopted by taking into account the foreign associated enterprises as tested party or in case Indian company as its tested party, the PLI should be cash PLI i.e. profit before depreciation and interest. The TPO did take the PLI after depreciation. Before the DRP, additional evidence was filed to prove why foreign party should be taken as tested party. The DRP asked for remand report, which was received on 17.09.2012 but the DRP rejects the additional evidence on the ground that it was filed too late. The learned Authorized Representative for the assessee stressed that the DRP erred in not adjudicating the additional evidence when remand report was called for. He further pointed out that in any case, the DRP proceedings were continuation of proceedings and should have accepted and adjudicated on the additional evidence. Referring to the provisions of section 144C of the Act read with Rule 6 of DRP Rules, the same talks of admission of additional evidence. He further pointed out that DRP had no power to reject additional evidence and also referred to provisions of Rule 46A of the Income Tax Rules, 1962 (in short ‘IT Rules’) and even if the same were applied, then also additional evidence had to be admitted. The learned Authorized Representative for the assessee in this regard further submitted that in any case, where remand report was called for and there was no violation of Rule 46A, clauses (a), (b) and (c) of the IT Rules, then additional evidence needs to be admitted and adjudicated. The learned Authorized Representative for the assessee pointed out that adoption of cash PLI was not the
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argument of assessee. Our attention was drawn to the order of TPO at pages 6 and 7 and the order of DRP in this regard. He further pointed out that the DRP had erred in rejecting the additional evidence because of shortage of time, wherein additional evidence was filed on 23.08.2012; comments of TPO were on 14.09.2012 and copy was received in the office of DRP on 17.09.2012 and the DRP passed its order on 24.09.2012. The learned Authorized Representative for the assessee stressed that when the TPO’s remand report was already there, the DRP should have admitted and commented on the same. Referring to section 144C(6) of the Act and with special emphasis of clause (e), wherein it talks regarding record to draft order and what is covered under clause (c) is additional evidence, otherwise, there was no reason to have clause (c) or (e) separately. The learned Authorized Representative for the assessee then referred to Rule 4 of DRP Rules and proviso thereunder, which provides that separate Paper Book should be filed giving reasons for admission of additional evidence and under Rule 9, there is power to call for or permit admission of additional evidence. He further pointed out that there was no negative covenant as in Rule 46 of IT Rules. The learned Authorized Representative for the assessee in this regard placed reliance on the ratio laid down by Delhi Bench of Tribunal in BG Exploration & Production India Ltd. Vs. JCIT (IT) (2017) 82 taxmann.com 446 (Delhi – Trib.). The learned Authorized Representative for the assessee stressed that only issue raised in the present ground of appeal is taking foreign associated enterprise as tested party and applying CPM method. Our attention was drawn to additional evidence filed at pages 481 to 726 of Paper Book and it was pointed out that they were in the nature of independent CA certificates to show what was the cost to associated enterprise and margins earned by the associated enterprise. Further, how markup was analyzed and benchmarked with reference to other shown companies to show that margins earned by associated enterprise were less than earned by other concerns and hence, are at arm's length. He stressed that the stand was taken during TP
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stage and because of certain reasons, evidence could not be filed before the TPO but was filed by way of additional evidence before the DRP, which merits to be accepted. He then, relied on the ratio laid down by the Mumbai Bench of Tribunal in M/s. Nivea India Pvt. Ltd. Vs. DCIT in ITA No.121/M/2013, relating to assessment year 2007-08, order dated 21.08.2017 for the proposition that additional evidence filed before the Assessing Officer needs to be accepted. The learned Authorized Representative for the assessee also pointed out that no adjustment on this count was made in any of earlier years, wherein similar benchmarking was accepted. In respect of additional ground of appeal No.6 raised by the assessee, the learned Authorized Representative for the assessee stressed that in case the matter was remitted back, then additional ground of appeal raised therein, was on without prejudice basis.
The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below.
We have heard the rival contentions and perused the record. The question which arises before us is in respect of adjustment made on account of international transactions of import of raw materials. The assessee was incorporated in 1996 and was wholly subsidiary of N.V. Bekaert S.A. Belgium. Bekaert Group, headquartered in Belgium was the largest independent multinational manufacturer of wire, wire products and steel cord. The assessee company was engaged in the business of manufacture of Steel Tyre Cord & Hose Reinforcement Wire. The Steel Tyre Cord was used as reinforcing material for the radial tyres for passenger cars and trucks. The major customers of assessee company were CEAT, JK Industries and MRF Ltd. & Good Year. The Hose Reinforcement Wire was used for the reinforcement of rubber subjected to high pressure reinforcement. The plant of assessee was located at Ranjangaon, Pune and the commercial production had
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started in February, 2001. The assessee during the year under consideration had imported raw materials from its associated enterprise totaling ₹ 47,99,29,822/-. The assessee had benchmarked its international transactions by applying CPM method by taking associated enterprise as the tested party. In the alternate, plea of assessee was that in case the assessee was taken as tested party, then PLI should be cash PLI of that PBDIT/sales before depreciation and interest. The learned Authorized Representative for the assessee during the course of hearing before us has pointed out that cash PLI was not the issue. In any case, there is no merit in the plea of assessee to adopt PBDIT i.e. profit before depreciation and interest as has been held by us in various other cases. The assessee before us has stressed that it had imported raw materials from its associated enterprise, which was the manufacturer, who had charged markup of 7% to cost in respect of raw materials which were imported by the assessee company. The said transaction was benchmarked by comparing the margins with independent comparables which were exporting their goods to Asian countries. The assessee had pleaded that markup earned by associated enterprises was fair and reasonable. Such a stand was taken by the assessee in TP study report and also before the TPO. The submissions of assessee are reproduced at pages 6 and 7 under para 7.1 of the TPO’s order. However, the assessee claims that necessary evidence in this regard could not be furnished before the TPO, which was filed before the DRP. The DRP refers to the additional evidence in its order, however, rejects the same, since it was filed at a later stage. The assessee however, stresses that where DRP proceedings are continuation of proceedings before the Assessing Officer / TPO and in view of the provisions of the Act, the additional evidence which has been filed by the assessee before DRP needs to be admitted, considered and adjudicated by the DRP. The DRP has no power to brush aside the said additional evidence. Simili in this regard was drawn to the provisions of Rule 46A of the IT Rules, wherein power was enshrined upon the CIT(A) to admit the additional
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evidence. In Rule 46A of the IT Rules, there was negative covenant i.e. the assessee had to satisfy why the additional evidence which was being filed before the CIT(A) was not filed before the Assessing Officer. Thereafter, there is mechanism provided i.e. additional evidence needs to be forwarded to the Assessing Officer for its comments and after receiving the same, additional evidence has to be admitted, considered and adjudicated upon by the CIT(A). The assessee however, points that on the other hand, no such negative covenants are available in DRP Rules.
In order to adjudicate the issue, let us look at the provisions of section 144C of the Act, wherein reference is to be made to the Dispute Resolution Panel (DRP) Rules. Under sub-section (1), the Assessing Officer shall, in the first instance forward draft of the proposed order of assessment to the eligible assessee if he proposes to make any variation in income or loss returned, which was prejudicial to the interest of such assessee. Under sub-section (2), on receipt of draft assessment order, the eligible assessee shall within 30 days of receipt of the order (a) file his acceptance of the variations to the Assessing Officer; (b) file his objections, if any, to such variation, with (i) the Dispute Resolution Panel; and (ii) the Assessing Officer. As per sub-section (3), the Assessing Officer shall complete assessment on the basis of draft assessment order if the assessee intimates to the Assessing Officer the acceptance of variation or where no objections are received within period specified in sub-section (2). Under sub-section (4), the Assessing Officer shall notwithstanding anything contained in section 153/153B, pass the assessment order under sub-section (3) within one month from the end of the month in which (a) the acceptance is received; or (b) the period of filing of objections under sub-section (2) expires. Under sub-section (5), the DRP shall in case where any objections are received, issue such directions as it thinks fit for the guidance of Assessing Officer to enable him to complete assessment. In other
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words, proceedings before the DRP are continuation of proceedings before the Assessing Officer; as only on receipt of guidance from the DRP, the Assessing Officer has to complete assessment i.e. in cases where objections are filed against proposed draft assessment order, before the DRP. Under sub-section (6) of 144C of the Act, it is provided that the DRP shall issue directions after considering the following, namely:- (a) draft order; (b) objections filed by the assessee; (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or TPO, etc. (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it.
Under sub-section (7), the DRP may before issuing any directions, (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income tax authority and report the result of the same to it. Under sub-section (8), it is provided that DRP may confirm, reduce or enhance the variation proposed in the draft order; however, it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiries and passing of the assessment order. In case of any difference of opinion in the members of DRP, then opinion of majority of the members would be binding as per sub-section (9). Further sub-section (10) provides that every direction issued by DRP shall be binding on the Assessing Officer. Under sub-section (11), no direction shall be issued unless opportunity of being heard is given to the assessee and the Assessing Officer, where direction would be prejudicial to the interest of assessee or interest of revenue, respectively. Under sub-section (12), no direction shall be issued after nine months from the end of the month in which the draft order was forwarded to the eligible assessee. Under sub-section (13), on receipt of direction issued under sub-section (5), the Assessing Officer shall in conformity with the directions, complete the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which
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such directions were received. This is without prejudice to the provisions of section 153/153B of the Act. Under sub-section (14), the Board may make rules for the purpose of the efficient functioning of the DRP and expeditious disposal of the objections filed under sub-section (2) by the eligible assessee.
Under the Income Tax (DRP) Rules, 2009 (in short ‘DRP Rules), first rule talks of constitution of Panel and as per rule 4, the procedure for filing the objections are provided. As per sub-rule (1), objections, if any, of the eligible assessee to the draft order has to be filed within specified period in form No.35A. Under sub-rule (3), it is provided that objections have to be filed in quadrennial accompanied by copies of draft order and evidence, if any, which the assessee intends to rely upon including the admission or statement or papers submitted to the Assessing Officer. The proviso thereunder reads as under:- “Provided that where the eligible assessee intends to rely upon any additional evidence other than those submitted to the Assessing Officer, such additional evidence shall not form part of the paper book but may be filed along with a separate application stating the reasons for filing such additional evidence.”
As per proviso to rule 4(3), where the eligible assessee intends to rely upon any additional evidence other than those submitted to the Assessing Officer, such additional evidence as may be filed along with separate application stating reasons for filing such additional evidence and shall not form part of the Paper Book. In other words, while filing the additional evidence, the requirement is to file such additional evidence as not part of Paper Book but to file the same along with separate application stating reasons for filing such additional evidence. Under rule 9, there is power with the DRP to call or permit additional evidence. It is provided in rule 9 of DRP Rules that where Panel deems fits necessary, then it may call upon or as the case may be, permit the eligible assessee to produce any document or examine any witness or file any affidavit to enable it to issue proper directions provided that Panel shall while permitting eligible assessee records its reasons for
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such permission. Thereafter, the DRP after hearing eligible assessee or his Authorized Representative within specified time, issue such directions as it thinks proper, which have to be communicated to the parties. As per rule 10(2), it is provided that while hearing objections, the Panel shall not be confined to the grounds set forth in the objections, but shall have power to consider any matter or ground arising out of proceedings.
Reading the provisions of section 144C of the Act with special reference to sub-section (6), wherein it is provided that the DRP has to issue directions after considering the evidence furnished by the assessee as per clause (c) and in view of the proviso under the said Rule (4) of DRP Rules, wherein it is provided that the assessee can rely upon any additional evidence other than evidence submitted before the Assessing Officer. The requirement is only to file the same in a separate Paper Book along with an application stating reasons for filing such additional evidence. Under sub-rule 9, the DRP has the power to call for and even permit the additional evidence. In the totality of the above said facts and circumstances, we hold that where the proceedings before the DRP are continuation to the proceedings before the Assessing Officer, who shall first pass draft assessment order and where objections have been filed against the said draft assessment order before the DRP, then it is incumbent upon the DRP to issue directions for the guidance of the Assessing Officer in order to enable him to complete assessment. Then, in such circumstances, in cases where the assessee thinks it fit / necessary to furnish additional evidence before the DRP, then the same needs to be taken into consideration and not brushed aside. Under the provisions of the Income Tax Act vis-à-vis powers of CIT(A) while hearing the appeal against assessment order passed by the Assessing Officer, rule 46A of the IT Rules provides similar powers to the CIT(A), wherein it can admit, consider and adjudicate upon the additional evidence, which the assessee wants to rely upon which was not filed before the
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Assessing Officer. However, under clauses (a) and (b) to said rule 46A of IT Rules, the assessee has to satisfy the conditions laid therein why such document was not filed before the Assessing Officer and what prevented the assessee from filing additional evidence before the Assessing Officer. However, no such negative covenant is provided in the DRP Rules and even otherwise, proceedings before the DRP are not proceedings before the two authorities, it is continuation of the proceedings before the Assessing Officer / TPO, wherein for making transfer pricing adjustment, it has been provided that the Assessing Officer is empowered to refer determination of arm's length price of international transactions to the TPO, for which reference is made under section 92CA(1) of the Act. On receipt of the order of TPO, the Assessing Officer passes draft assessment order, copy of which is issued to the eligible assessee, who in turn, either accepts the same or files objections before the DRP. The DRP after adjudicating upon the objections raised, gives guidance to the Assessing Officer and on the basis of such guidance, the Assessing Officer passes final assessment order. In this chronology of events, the assessee after receiving the draft assessment order in which transfer pricing adjustments are proposed, is empowered to file additional evidence before the DRP, which is next authority in the sequence of events and the DRP has power to consider the evidences furnished by the assessee, which is so provided in section 144C(6)(c) of the Act. In case such evidence is furnished before the Assessing Officer / TPO, then the same is covered in clause (e) of section 144C(6) i.e. records relating to draft order and after considering the additional evidence, the DRP has to comment upon the same and dispose of the objections of eligible assessee. Such a proposition has also been laid down by the Hon’ble Bombay High Court while deciding Writ Petition filed by Vodafone India Services (P.) Ltd. Vs. Union of India in Writ Petition No.1877 of 2013. The said proposition has been applied by the Delhi Bench of Tribunal in BG Exploration & Production India Ltd. Vs. JCIT (IT) (supra) in holding that directions of DRP in admitting additional evidence filed before it does
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not suffer from any infirmity. While deciding the powers of DRP in refusal to consider additional evidence filed before the DRP, the Tribunal held that where additional evidence was filed by the assessee and the DRP obtained remand report, then it erred in not considering the same on incorrect appreciation of relevant provisions of law.
Coming to the facts of the present case, wherein the claim of assessee in TP study report and during the TP proceedings was that it had imported raw materials from its associated enterprises, wherein associated enterprise had charged cost plus markup, then foreign associated enterprise should be taken as tested party and CPM method should be applied. The assessee in order to substantiate its claim of CPM method, had furnished additional evidence before the DRP to show what was cost of goods to associated enterprise and also documents to analyze the margins of associated enterprise and the same being benchmarked with other Asia companies to prove its case of associated enterprise earning margins less than margins earned by other concerns. Such a stand was taken by the assessee from transfer pricing stage and is not a new stand taken before the DRP. Only evidence by way of additional evidence was filed in a separate Paper Book before the DRP with an application for admission of additional evidence, then the said additional evidence which are placed at pages 481 to 786 of the Paper Book, needs to be admitted, considered and adjudicated upon by the DRP. The DRP had forwarded the same to the Assessing Officer / TPO, who in turn, had furnished its comments but the DRP rejected the additional evidence on the ground that it was furnished late, even overlooking the remand report submitted by the TPO. We find merit in the plea of assessee in this regard that the DRP should have admitted the additional evidence, consider the same and then decide the issue. The DRP having failed to do so, the action of DRP in this regard is not justified in view of the provisions of the Act. Accordingly, we remit this issue back to the file of DRP, who
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shall admit, consider and adjudicate the additional evidence and decide the issue, in accordance with law. It may be pointed out herein itself that further plea of assessee in this regard was that no adjustment on this count was made in any of the earlier years. The said submission of assessee needs verification and in case an approach has been adopted from year to year, the same may not be disturbed unless and until there is change in facts and circumstances. Reasonable opportunity of hearing shall be provided to the assessee by DRP in this regard. Further, the assessee is directed to comply with the notices issued and submit information and clarification before the DRP for adjudicating the issue. In view thereof, the issue raised vide grounds of appeal No.2 and 3 is allowed for statistical purposes.
Now, coming to the ground of appeal No.4 i.e. transaction of import of finished goods.
Brief facts relating to the issue are that the assessee was importing trading material from its associated enterprises only when projected customer orders were to be executed in a particular manner which were in excess of projected production of specific items in the said month. Thus, the import of trading material was only for the purpose of meeting customer schedule and timely deliver the entire quantity of the orders accepted. The assessee before the TPO pointed out that the associated enterprise sold the said material at concessional / same CIF price vis-à-vis charged by associated enterprise to outside unrelated Indian customers; however, the landed cost increased due to freight, customs duty and other related expenses. Hence, there was marginal loss of ₹ 4,24,343/- in the trading segment. The assessee also filed percentage of trading sales to total sales and the arithmetic mean of profit margin earned by the comparable trading companies. On without prejudice basis, it was submitted that associated enterprise had received markup of
19 ITA No.2376/PUN/2012 Bekaert Industries Pvt. Ltd.
7% in respect of trading material imported by the assessee during the year and detailed worksheets of markup earned by the associated enterprise was also filed before the TPO. The assessee also pointed out that the said markup was within +/- 5% range of markup earned by the comparables. The TPO noted that the assessee for benchmarking international transactions of finished goods from associated enterprise had adopted RPM method. However, the assessee in fact, had not applied RPM method to benchmark transactions wherein, it had computed profit margins considering PBDIT / total cost at the entity level, which was not acceptable. The TPO noted that the assessee had incurred net loss of ₹ 4,24,343/- in trading segment and the markup / total cost worked out to (-) 0.48%. The TPO also notes that the average profit markup over cost of comparable companies for trading activities worked to 2.43%. The TPO also took into consideration the submissions of assessee that associated enterprise had received markup of 7% in their capacity as manufacturer. However, this fact was for the purpose of import of spares from associated enterprise but in case the spares were purchased by them for trading, then markup was @ 11%. Accordingly, proposed margin of 11% was adopted by the TPO for benchmarking international transactions. In view thereof, the TPO worked out an adjustment of ₹ 91,36,453/-, which was proposed by the Assessing Officer in the draft assessment order. The DRP rejected the objections of assessee and the Assessing Officer thereby passed final assessment order making the aforesaid addition.
The assessee is in appeal against the same.
The learned Authorized Representative for the assessee pointed out that in the transaction of import of finished goods, no value addition was made and in such circumstances, the Re-sale Price Method (RPM) should have been applied. Referring to the observations of TPO, wherein it is said that when the assessee
20 ITA No.2376/PUN/2012 Bekaert Industries Pvt. Ltd.
was importing raw materials, associated enterprise was charging 7% but when it was importing finished goods, it was charging 11% and then, he went on to apply trading markup of 11% to benchmark the arm's length price of international transactions undertaken by the assessee. However, the learned Authorized Representative for the assessee stressed that gross profit margin level should be compared with the margins of comparable concerns and if the same were +/-5% range, then the same should be accepted. The assessee however, stresses that RPM method was the most appropriate method in the aforesaid circumstances. In this regard, reliance was placed on the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. L’Oreal India P. Ltd. in Income Tax Appeal No.1046 of 2012, judgment dated 07.11.2014. He further pointed out that margins of assessee and of comparables by applying RPM method may be verified by the Assessing Officer / TPO.
The learned Departmental Representative for the Revenue placed reliance on the orders of Assessing Officer / TPO/ DRP.
We have heard the rival contentions and perused the record. The transaction which is under consideration is import of finished goods, wherein the claim of assessee is that while making delivery of its products to its customers in case there is shortfall in production of specific items in a particular month, then the said items are imported from its associated enterprise for meeting the customers schedule and making the timely delivery of quantity of orders accepted. The assessee was importing the said finished goods from its associated enterprise, which was also selling the same to unrelated Indian customers. The assessee claims that the prices charged by associated enterprise are at concessional or may be at same price as charged to other Indian customers by its associated enterprise. The plea of assessee is that RPM method should be applied in this regard as the
21 ITA No.2376/PUN/2012 Bekaert Industries Pvt. Ltd.
assessee was selling imported goods without making any valuation addition. Another contention before the TPO was that associated enterprise was receiving markup of 7% in respect of trading material imported and the same may be applied. The TPO however, observed that while importing raw materials, the associated enterprise was charging markup of 7% but while importing finished goods, associated enterprise was charging 11% to the assessee. He thus, computed the arm's length price of the transaction by applying markup of 11%. The assessee is aggrieved by the same and hence, the present ground of appeal before us. The learned Authorized Representative for the assessee before us is however, stressed that application of RPM method as most appropriate method. In this regard, it submits that even the Hon’ble Bombay High Court has accepted the said proposition of assessee in CIT Vs. L’Oreal India Pvt. Ltd. (supra). In the facts of the case before the Hon’ble Bombay High Court, RPM method was accepted in prior and subsequent assessment years and since the method was one of the standard method and even where OECD guidelines were applied in case of distribution or marketing activities, where the goods are purchased from associated enterprises and sales were effected to unrelated parties without any further processing, then such a method was to be adopted. The Hon’ble High Court observed that the findings of fact were based on materials which was produced before the authorities below and since RPM method was accepted by the TPO in preceding as well as in succeeding assessment years in respect of distribution segment activity of the assessee, then the same should not be disturbed.
Now, coming to the facts of the present case before us, where the assessee was importing finished goods from its associated enterprise and without making any value addition was delivering the same along with other items to its customers in India, then question which arises is the most appropriate method to be applied. In the totality of the above said facts and circumstances, Re-sale Price Method is the
22 ITA No.2376/PUN/2012 Bekaert Industries Pvt. Ltd.
most appropriate method to be applied in such circumstances since the assessee is purchasing finishing goods from its associated enterprise at a price, which in turn, re-sells to the unrelated enterprises. The Assessing Officer / TPO is thus, directed to apply RPM method and determine the margins of assessee and of the comparables. The assessee has filed the working of assessee’s margins and the margins of comparables which may be verified and in case the same is within +/- 5% range, no transfer pricing adjustment needs to be made in the hands of assessee. Reasonable opportunity of hearing shall be given to the assessee. The ground of appeal No.4 is allowed as indicated above.
The ground of appeal No.5 raised by the assessee is transfer pricing adjustment made in respect of transaction of export of packing materials.
The learned Authorized Representative for the assessee pointed out that the said issue is covered in assessee’s own case by the order of Tribunal in appeals filed by assessee in ITA Nos.1093 & 1094/PN/2011, relating to assessment years 2002-03 & 2003-04 and appeals of Revenue in ITA Nos.1058 to 1060/PN/2011, relating to assessment years 2002-03 to 2004-05, order dated 31.01.2013. The learned Authorized Representative for the assessee in this regard pointed out that the assessee had exported spools to its associated enterprise, wherein cost plus 10% of product cost was charged. However, the TPO was of the view that 10% of indirect cost also to be charged and hence, proposed adjustment of ₹ 4,31,274/- was made in the hands of assessee.
The learned Departmental Representative for the Revenue however, placed reliance on the orders of authorities below.
We have heard the rival contentions and perused the record. The assessee had exported packing material in the shape of spool to its associated enterprise, on
23 ITA No.2376/PUN/2012 Bekaert Industries Pvt. Ltd.
which tyre cord or the hose wire was wound to send the same to the customers. The assessee charged associated enterprise actual cost of calculation of spools with margin of 10%. The TPO was of the view that indirect cost also needs to be considered for undertaking transaction of export of spools to associated enterprise.
We find that the Tribunal in assessee’s own case in appeals filed by assessee in ITA Nos.1093 & 1094/PN/2011, relating to assessment years 2002-03 & 2003-04 and appeals of Revenue in ITA Nos.1058 to 1060/PN/2011, relating to assessment years 2002-03 to 2004-05, order dated 31.01.2013 had deleted the addition observing as under:- “10. After going through the above material and submissions, we find that addition of Rs.49,62,075/- made by the Assessing Officer on the basis of order of the TPO passed u/s.92CA(3) for export of spools. The assessee was incorporated in 1996 as wholly owned subsidiary of N.V.Bekaert S.A. Belgium and was engaged in the manufacturing of Steel Tyre Cord and Hose Reinforcement Wire, used as a reinforcing material in radial tyres etc. The major purchasers in India are CEAT, J.K.Industries, MRF etc. These tyre manufacturing companies had been sourcing these materials from Bekaert group companies located outside India. In this background, the assessee company thought it prudent to establish a unit in India itself to meet the market requirement to the extent possible. Accordingly, plant was established at MIDC Ranjangaon Pune. Spools are packaging material made of either steel or plastic on which the steel tyre cord is wound and packaged. These spools are reusable. These were used for the supply of goods made by the assessee as well as other companies of this group engaged in manufacturing of similar products. The goods being manufactured by the assessee company are an import substitution and therefore, foreign group companies do supply similar products to the Indian consumers. As the spools are reusable and has no utility to the buyers, as a measure to benefit local group companies, wherever possible, are involved in collection of empty spools for free from buyers for the packaging of their own products and its export in case the same are in excess of their requirement. The Assessing Officer made the addition on the basis of the order of the TPO u/s.92CA(3) of the Act on export of spools. Spools are reusable and have a considerable value and therefore the arrangement by which the assessee company gets the same free by only making expenses relating to cost of collection, is beneficial to the business of the assessee. The collection of spools, therefore is incidental but for the purpose of the business. The assessee has not involved in the process in an activity which is separate from the regular activity. There is nothing on record to suggest that huge activities involving cost would be involved. In the initial years the assessee had lesser requirement of these spools as the business was in the process of being established and stabilized. The system of collecting these spools also had to be put in place and stabilized to ensure its supply on a sustained basis. The system adopted by the TPO to allocate indirect expenses on the basis of turnover in initial assessment years was not justified. There is nothing on record to suggest any indirect expenses for determining the ALP of export of spools. However, no such adjustments were made by the TPO in A.Y. 2004-05. Accordingly, the CIT(A) was not justified in restricting the addition to Rs.5,07,651/- as there was no element of indirect cost involved.”
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The issue raised before us is similar to the issue before the Tribunal in assessee’s own case and following the same parity of reasoning, we reverse the order of Assessing Officer/TPO/DRP and hold that no adjustment has to be made in the transaction of export of packing material to the associated enterprise, wherein the assessee had charged cost of calculation of spools with markup of 10% i.e. on account of direct cost to its associated enterprise, such a transaction is at arm's length and no adjustment in this regard needs to be made. Hence, the ground of appeal No.5 is allowed.
The issue vide ground of appeal No.6 does not require any adjudication since the matter is being set aside to the file of DRP, as submitted by the learned Authorized Representative for the assessee.
In the result, appeal of the assessee is allowed as indicated above.
Order pronounced on this 14th day of May, 2018.
Sd/- Sd/- (D.KARUNAKARA RAO) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 14th May, 2018. GCVSR आदेश की प्रयिलऱपप अग्रेपषि/Copy of the order is forwarded to : 1. The Appellant; 2. The Respondent; 3. The DRP, Pune; The DIT (TP/IT), Pune; 4. 5. The DR ‘A’, ITAT, Pune; 6. Guard file. आदेशािुसार/ BY ORDER, सत्यापऩत प्रतत //True Copy// वररष्ठ तनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण, ऩुणे / ITAT, Pune