Shriram foundry Private limited, Kolhapur V. Addl. CIT Range-1, Kolhapur

ITA 2043/PUN/2019

AI Insights

The case involves Shriram Foundry Pvt. Ltd., which appealed against the order of the CIT(A)-1, Kolhapur, concerning an assessment year 2016-17. The primary issue was the confirmation of a transfer pricing adjustment of Rs.1,31,57,100 made under section 143(3) of the Income-tax Act, 1961. The assessee argued that the adjustment was unnecessary as the average Arm's Length Price (ALP) under three methods was higher than the transacted value. The Assessing Officer (AO) had applied the Cost Plus Method (CPM) and accepted the ALP determined by the assessee but did not adjust the computation of income accordingly. The Tribunal found that the AO did not disturb the ALP determination but merely adopted it for making disallowance under section 40A(2). The Tribunal also addressed preliminary objections regarding the AO's authority to determine ALP and the applicability of transfer pricing provisions when both entities are taxed at the same rate. The Tribunal dismissed these objections and remanded the matter for a correct application of the provisions by the assessee.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 137586 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-01-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 10-01-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 17-12-2019
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Gross profit estimation; Transfer pricing; Retrospective amendment; Fair market value
• Section: 92C; 250; 73

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “C”, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER ITA No.2043 /PUN/2019 िनधा रण वष / Assessment Year: 2016-17 Shriram Foundry Pvt. Ltd., 47, Shivaji Park, Kolhapur – 416 001 Maharashtra PAN : AADCS7789Q Vs. Addl.CIT, Range-1, Kolhapur Appellant Respondent आदेश / ORDER PER R.S.SYAL, VP : This appeal by the assessee is directed against the order passed by the CIT(A)-1, Kolhapur on 04-09-2019 in relation to the assessment year 2016-17. 2. The only issue raised in this appeal is against the confirmation of the transfer pricing adjustment of Rs.1,31,57,100/- made u/s.143(3) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’). Assessee by: Shri Nikhil Mutha Revenue by: Shri Suhas Kulkarni Date of hearing 11-01-2023 Date of pronouncement 13-01-2023 ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 2 3. Pithily put, the facts of the case are that the assessee is engaged in the business of Cast Iron foundry activity. A return declaring total income of Rs.29.93 crore was filed, which was accompanied by Form 3CEB containing details of transactions under Chapter X of the Act. The Assessing Officer (AO) observed that Specified Domestic Transactions (SDTs) of purchase of casting were to the tune of Rs.72.51 crore. He found that casting purchases amounting to Rs.36,85,63,818/- from S.J. Iron & Steels Pvt. Ltd. (SJI) were shown in Form 3CEB at its Arm’s Length Price (ALP) of Rs.35,55,00,953/- under the Cost Plus (CPM) as the most appropriate method. The assessee had not offered the resultant transfer pricing adjustment in its computation of income. On being called upon to explain the reasons, the assessee submitted that albeit the ALP under the CPM was Rs.35.55 crore, but average ALP under the three methods was Rs.38.27 crore. Since such average ALP was more than the transacted value of Rs.36.85 crore, the assessee pleaded that no transfer pricing adjustment was offered. The AO observed from the transfer pricing study report of the assessee that the CPM was applied by the auditor as the most appropriate method and it was also stated in ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 3 such report that the external data required for the other two methods, namely, the Transactional Net Margin method (TNMM) and the Comparable Uncontrolled Price method (CUP) was not available. In view of the fact that the assessee had itself determined the ALP of the purchase transactions at Rs.35.55 crore under the CPM as the most appropriate method, the AO made addition u/s.40A(2) of the Act amounting to Rs.1,30,62,865/-, being, the difference between the purchase price and the ALP as determined by the assessee in its own report. The ld. CIT(A) countenanced the view point of the AO, against which the assessee has come up in appeal before the Tribunal. 4. We have heard the rival submissions and gone through the relevant material on record. Out of total Specified Domestic Transactions (SDTs) of purchases amounting to Rs.72.51 crore from the Associated Enterprises (AEs), the AO considered only the transaction of purchase of casting amounting to Rs.36.85 crore from SJI, whose ALP was determined and declared by the auditor of the assessee in Form No.3CEB at Rs.35.55 crore under the CPM. It is thus evident that the assessee adopted the CPM as the most appropriate method for determining the ALP of the ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 4 transaction of purchase of casting from SJI; determined the ALP of the disputed transaction indicating the required transfer pricing adjustment of Rs.1.30 crore; but did not offer such adjustment in the computation of income. As against that, the AO did not dispute the application of the CPM as the most appropriate method for determining the ALP of the transactions of purchase of casting from SJI; adopted the figure of the ALP of the disputed transaction as determined by the assessee; and made the transfer pricing adjustment of Rs.1.30 crore on the basis of figures given in the audit report itself. The ld. AR, apart from espousing the issue of merits, raised two preliminary legal objections to contend that the transfer pricing adjustment was not called for. The first objection is that the AO was not entitled to make transfer pricing determination; and second, that the AE was also taxed at same rate of taxation of 35% as was the assessee and hence no transfer pricing exercise was called for. We will take up these two objections in seriatim. I. WHETHER AO NOT ENTITLED TO DETERMINE ALP OF THE SDT? 5. The ld. AR invoked Instruction No.03/2016 dt. 10-03-2016, replacing the earlier Instruction No.15/2015, providing guidelines ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 5 for implementation of transfer pricing provisions. Relying on the Instruction of 2016, the ld. AR submitted that no power vests with the AO to suo motu determine the ALP. In case the ALP is to be determined, based on the cases selected for scrutiny on transfer pricing risk parameters or non-transfer pricing risk matters, the same can be done only by TPO on a reference made by AO. Since the transfer pricing adjustment in this case was made by the AO himself, the ld. AR contended that, the same deserved to be negatived. 6. The CBDT, replacing its earlier Instruction of 2003, issued a fresh Instruction No.15/2015 dated 16-10-2015 on the subject by providing that the cases were to be selected for scrutiny only on certain parameters and there was no requirement of referring an international transaction to the TPO for determination of its ALP merely because the value of transactions exceeded a particular threshold. This led to the dispensing with the earlier limits of Rs.5 crore/Rs.15.00 crore requiring the making of a mandatory reference by AO to TPO for determination of the ALP. Thereafter, Instruction No.03/2016 dated 10-03-2016 was issued by the CBDT replacing the Instruction of 2015. The new Instruction of 2016, ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 6 invoked by the ld. AR, provides for mainly two categories of cases in which reference can be made by AO to TPO for the ALP determination. The first main category consists of the cases that are selected for scrutiny on the basis of “transfer pricing risk parameters” and second category comprises of cases that are selected for scrutiny on the basis of “non transfer pricing risk parameters”. It has been stated for the first category, dealt with at para no.3.2 of the 2016 Instruction, that all these cases have to be mandatorily referred by AO to TPO for determination of ALP. Para 3.2 of the 2016 Instructions does not apply to the facts of the instant case requiring any mandatory reference to be made by AO to TPO. The second main category of the cases selected for scrutiny on the basis of non-transfer pricing risk parameters has been dealt with at para 3.3 of the 2016 Instruction. This mandates making a reference by the AO to the TPO for the ALP determination in one or more of the three circumstances enumerated in paras (a) to (c). The case of the assessee does not fall in any of the three categories. Para 3.1 of the 2016 Instruction clearly enumerates that: `the Board has decided that the AO shall henceforth make reference to the TPO only under the ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 7 circumstances laid out in this Instruction.’ This position has been reiterated in para no. 7 by providing that: `For administering the transfer pricing regime in an efficient manner, it is clarified that though AO has the power under section 92C to determine the ALP of international transactions or specified domestic transactions, determination of ALP should not be carried out at all by the AO in a case where reference is not made to the TPO.’ From the above reading of Instruction No.03/2016, it is overt that AO must necessarily make a reference to TPO for the ALP determination in the requisite cases. In no case, AO can himself take up the exercise of the ALP determination unto himself. The nitty gritty of the 2016 Instruction is that the competence to do determination of ALP in the given circumstances is only with TPO on a reference made by AO and it totally prohibits AO from taking up the exercise of the ALP determination in his own hands. On an overview of the Instruction, it clearly emerges that its writ comes into play only when a fresh ALP is to be determined in disregard to the ALP determination already done by the assessee in its transfer pricing study report or the assessee not having determined ALP of certain transactions. No benefit of the Instruction can be taken in any ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 8 other situation. Instantly, we are confronted with a situation in which the AO did not determine any ALP of the SDT of purchase of casting from SJI. He merely gave effect to the assessee’s ALP determination, in which the suo motu determined ALP by the assessee at Rs.35.55 crore against the transacted value of Rs.36.85 crore of the transaction of purchase, went without any corresponding transfer pricing adjustment having been offered by the assessee in the computation of income. When the AO just adopted the figure of the ALP as determined by the assessee for making disallowance u/s.40A(2), it cannot be said that he embarked upon any determination of ALP, which, he is otherwise debarred by virtue of the Instruction No.03/2016. Thus, the argument of the ld. AR invoking the Instruction of 2016 is jettisoned because the AO did not determine any ALP of the SDT. II. SJI ALSO TAXED AT SAME TAX RATE – WHETHER T.P. APPLIES? 7. The ld. AR contended that SJI was also subjected to tax at 35%, being, the same rate at which the assessee was subjected to and hence, the transfer pricing provision should not have been invoked. ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 9 8. We are unable to accept the contention. Section 92(2A) of the Act categorically provides that: “Any allowance for an expenditure .... in relation to the specified domestic transaction shall be computed having regard to the arm’s length price”. The mandate of the section is clear that whenever there is an SDT, say, of purchase of goods, the allowance for such purchases has to be made having regard to its ALP. There is no qualification in the statute allowing exemption of the covered SDTs from the application of Chapter X of the Act in the circumstances as are extantly prevailing. The core of the matter is that the ALP of the SDT must be computed and the income determined having regard to such ALP. The concept of necessity to prove tax base erosion or tax avoidance for invoking the ALP determination are alien to the application of the transfer pricing provisions. The contention of the ld. AR in this regard is, ergo, devoid of merits and is ex consequenti dismissed. Be that as it may, the AO in the instant case has made addition under section 40A(2) of the Act. Even section 40A(2) also does not provide that if the two related entities are subjected to tax at the same rate, disallowance under this provision cannot be made. It goes without saying that income of each ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 10 assessee has to be separately determined in accordance with the provisions of the Act. The mere fact that two related assessees are subjected to tax at the same rate does not mean that there can never be a case of loss to exchequer because of recording purchases/expenses at a value higher than its fair market value. Here is a case in which the assessee itself determined the arm’s length price of the purchase transaction in the context of transfer pricing, which can also be termed as the fair market value in the context of section 40A(2), at a price less than the transacted value, indicating that the purchases were recorded at a price higher than their fair market value. The AO has not computed the fair market value in terms of section 40A(2) of the Act. He simply made the addition u/s 40A(2) on the basis of the assessee’s declaration of the fair market value of the goods purchased from SJI. In view of the foregoing discussion, we are satisfied that the contention of the ld. AR in this regard is sans merit and fails. III. ON MERITS 9. Having disposed of the preliminary objections raised by the ld. AR, we now move on to the question on merits. Before proceeding further, it is necessary to accentuate that albeit the ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 11 assessee took an additional ground challenging the applicability of the transfer pricing provisions to the transaction covered u/s 40A(2) of the Act on the omission of clause (i) of section 92BA by the Finance Act, 2017 w.e.f. 1.4.2017 having retrospective effect, but did not press it at the time of hearing. The effect is that the assessee is accepting the applicability of the transfer pricing provisions to section 40A(2) in the period anterior to the omission of clause (i) and wants adjudication on the basis of the ALP determination. 10. The assessee in its transfer pricing study report determined the ALP of the transaction of purchase of casting from SJI at Rs.35.55 crore as against the transacted value of Rs.36.85 crore. The ALP was determined by the assessee treating the CPM as the most appropriate method. Though the assessee applied the TNMM and CUP methods also, in addition to CPM, but it clearly mentioned that the external data required for applying the TNMM/CUP methods was not available and accordingly treated the CPM as the most appropriate method and declared the ALP under this method in Form No. 3CEB. The AO also did not disturb any aspect of the ALP determination of the SDT by the assessee. ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 12 In other words, the CPM declared by the assessee as the most appropriate method got impliedly accepted as such without any question. Before proceeding further on merits, it would be apposite to note down the manner of the ALP determination under the CPM, as prescribed under Rule 10B(1)(c), reading as under : `(c) Cost plus method, by which,— (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm’s length price in relation to the supply of the property or provision of services by the enterprise;’ 11. This method envisages, firstly, the determination of direct and indirect cost of production incurred by the entity transferring the goods. The amount of normal gross profit in a comparable uncontrolled transaction is determined. The normal gross profit ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 13 mark up so determined earlier is adjusted to bring the SDT and comparable uncontrolled transaction at par. Such adjusted normal gross profit mark up is applied to the costs incurred, which, when added to such costs, gives the ALP of the transaction of purchase. 12. Let us examine the actual ALP determination by the assessee of the international transaction under the cost plus method. The transactions of purchases made from all the AEs along with necessary details, which are part of transfer pricing study report, have been reproduced at page 73 onwards of the paper book mentioning name of the AE, Item name, Nature of transaction, Quantity, Rate, Basic amount as per books of account, Invoice amount as per the books of account, Amount as per arm’s length price, Difference, Percentage of difference. The transactions of purchase of casting under consideration from SJI are part of such transactions, whose working starts from page 114 of the paper book. Further, application of the CPM in respect of such purchase transactions and also the bill-wise determination of the ALP has been done under the head `For Cost Plus Method’, giving Cost of production of the AE, Gross profit margin of AE and Net ALP. For example, the SDT at Sl.No.80 with SJI is for purchase of 12460 ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 14 quantity of casting with basic amount as per books of account at Rs.24,54,769/- with the invoice value of Rs.28,99,709/- and the ALP determined at Rs.24,76,689/-, giving difference of Rs.21.920/-. Similar exercise in respect of other bills of SJI has led to the ALP determination as shown in Form No. 3CEB. Under the CPM, the assessee has shown cost of production of AE at Rs.179.88, gross profit margin at 10.50% for working out the net ALP at Rs.198.77. This is how the figure of ALP has been determined at Rs.24,76,689/-. Thus, it can be seen that the ALP has been determined under the CPM by taking direct and indirect costs of the AE at Rs.179.88 on which normal gross profit rate of 10.50% has been applied. Normal gross profit rate of SJI emerges from its tax audit report in Form 3CD as given at page 241 onwards of the paper book. Page 250 is the relevant page which shows total turnover of SJI at the entity level at Rs.50,34,29,715/- with the overall gross profit of Rs.5,28,60,697/-, giving GP rate of 10.50%. Copy of the Profit and loss account of SJI has been placed at page 226 onwards of the paper book, which depicts Revenue from Operations at Rs.50,34,29,715/-. This shows that the gross profit rate of 10.50% has been determined on the entity ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 15 level transactions of SJI. It is this rate which has been applied by the assessee under the CPM for determining the ALP. Howbeit, the sales of SJI to the assessee are to the tune of Rs.36.85 crore. This deciphers that SJI made differential sales of Rs.13.50 crore either to non-AEs and/or other AEs. The contention of the ld. AR is that such sales of Rs.13.50 crore were made to the non-AEs only. 13. We have noted above sub-clause (ii) of Rule 10B(1)(c) which provides for considering `normal gross profit mark-up to such costs .... in a comparable uncontrolled transaction..’. The mandate of this sub-clause is in line with essence of the transfer pricing provisions for adopting comparable uncontrolled transactions to determine the ALP and not the controlled transactions. The gross profit margin of 10.50% applied is from the entity level transactions consisting both the AEs and non-AEs. As against this combined gross profit rate on the entity level transactions, only the gross profit margin from the non-AE transactions was required to be considered for applying as a normal gross profit margin under the CPM. This delineates that the ALP of the SDT by the assessee under the CPM is not properly ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 16 computed inasmuch as it considered the gross profit margin of both AE and non-AE transactions of SJI as against the gross profit margin required from transactions with non-AEs only. The ld. AR submitted that if the assessee is given an opportunity, it can prove its contention that the remaining transactions were with non-AEs and also separately place on record the gross profit margin of SJI from its transactions with non-AEs to the satisfaction of the lower authorities. Given the fact that there can be no estoppel against the provisions and also that the entire purpose of assessment is to determine the correct amount of income chargeable to tax, the mistake committed by the assessee cannot be allowed to continue. The same manner in which the AO is duty-bound to correct the wrong application of provisions by the assessee to the prejudice of the Revenue, the assessee cannot be debarred from claiming the right application of the provisions, which were wrongly applied by it to its own prejudice. The wrongdoing of the assessee, which is contrary to law, needs to be corrected. 14. We are confronted with a peculiar situation prevailing in this case in which the assessee itself determined the incorrect ALP of the transaction and further such ALP has not been disturbed by the ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 17 AO. The problem is further aggravated because of the fact that the AO did not make any reference to the TPO for determining the ALP. If we send the matter back to the AO for re-computing the ALP in the hue of the assessee’s limited claim for adoption of correct gross profit margin from the transactions with non-AEs of SJI under the CPM, the command of Instruction No.03/2016 would operate as a bar on the AO to suo motu determine the ALP of the SDT. The only option left for correcting the mistake of the assessee is to send the matter back to the ld. CIT(A) for doing this exercise. We order accordingly by setting aside the impugned order pro tanto. Although, the ld. first appellate authority is not entitled under law to restore the matter to the AO, yet he can very much get remand report. It is clarified that the restoration is for the limited purpose of giving reprieve to the assessee for correcting its own mistake by substituting the correct gross profit margin of SJI from comparable uncontrolled non-AE transactions with the one applied by it on entity level transactions in the ALP determination of its SDTs. No other aspect of the ALP determination can be called in question. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh exercise. ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 18 15. The second component of the transfer pricing addition of Rs.94,235/- is towards purchases made by Uttaranchal unit of the assessee which is entitled to deduction u/s.80IC from its non- eligible Kolhapur unit. The AO, while framing the assessment, observed that the Uttaranchal unit made purchases with basic value of Rs.66.90 lakh whose ALP was determined by the assessee at Rs.65.96 lakh, giving the differential amount of Rs.94,235/-. This amount was added by the AO u/s.40A(2) of the Act. The ld. CIT(A) echoed the addition. 16. It is seen that the Uttaranchal unit of the assessee, which is eligible for deduction u/s.80IC, made purchases from Kolhapur unit at price higher than the ALP by Rs.94,235/- This shows that the Uttaranchal unit recorded purchases at a value higher than the ALP with the consequential lower gross profit. Since it is a case of purchase transaction by the eligible unit at a value higher than the ALP, there can be no question of making any addition in this regard. Addition would have been warranted if the purchase value had been lower than its ALP. We, therefore, order to delete the addition of Rs.94,235/-. ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 19 17. No other ground or additional ground was pressed by the ld. AR. The same, therefore, stand dismissed. 18. In the result, the appeal is partly allowed. Order pronounced in the Open Court on 13 th January, 2023 Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 13 th January, 2023 Satish आदेश की ितिलिप अ ेिषत/ Copy of the Order is forwarded to: 1. अपीलाथ / The Appellant; 2. थ / The Respondent; 3. The CIT(A)-1, Kolhapur 4. 5. The Pr.CIT-1, Kolhapur िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे “C” / DR ‘C’, ITAT, Pune 6. गाड फाईल / Guard file आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune ITA No.2043/PUN/2019 Shriram Foundry Pvt. Ltd., 20 Date 1. Draft dictated on 11-01-2023 Sr.PS 2. Draft placed before author 13-01-2023 Sr.PS 3. Draft proposed & placed before the second member JM 4. Draft discussed/approved by Second Member. JM 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *