FRANKLIN WARDCORPP INDIA PVT. LTD., MUMBAI V. ADDLL./JT/ACIT, NFAC, DELHI

ITA 2487/MUM/2021

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The case involves Franklin Wardcorp India Pvt. Ltd., which appealed against the transfer pricing adjustments made by the National e-Assessment Centre, Delhi, for the Assessment Years 2016-17 and 2017-18. The primary dispute was regarding the transfer pricing adjustment of INR 2,66,44,021 concerning the Arm's Length Price of international transactions for purchasing components from its Associated Enterprises. The assessee argued that the Resale Price Method was the most appropriate for benchmarking these transactions, while the Transfer Pricing Officer adopted the Transactional Net Margin Method. The Dispute Resolution Panel upheld the latter, leading to the appeal. The Tribunal found inconsistencies in the methods proposed by the assessee at different stages and directed a fresh examination of the matter by the Transfer Pricing Officer.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 299712 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: K
• Next Hearing Date: 27-04-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 28-12-2021
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Set aside
• Section: 143(3); 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND MS KAVITHA RAJAGOPAL, JM ITA No. 1279/MUM/2021 (Assessment Year 2016-17) ITA No. 2487/MUM/2021 (Assessment Year 2017-18) F r a n k li n W a r d c o r p p In d i a Pr i va t e L im it e d 8 Ca n d y Ho u s e , Ma n d l ik Ro a d , Co lab a , Mu m b a i-4 0 0 0 0 1 Vs. Addl./JT/ACIT National e-Assessment Centre, Delhi-110 003 (Appellant) (Respondent) PAN No. AAACD2017P Assessee by : Shri Ashok Rao & Shri Manoj Raghani, ARs Revenue by : Ms. Vranda U. Matkari, DR Date of hearing: 28.04.2023 Date of pronouncement : 26.07.2023 O R D E R PER PRASHANT MAHARISHI, AM: 01. This appeal for A.Y. 2016-17 is filed by Franklin Wardcorp India Pvt. Ltd. (assessee /appellant) against the assessment order passed under Section 143(3) read with section 144C(13) read with section 144B of the Act dated 19 th April, 2021, passed by the National e- assessment centre, Delhi, wherein the total income of the assessee was determined at ₹1,91,05,546/-, against the return of income filed on 29 th November, 2006 at a loss of ₹4,57,49,567/-. The only dispute in this appeal is with respect to the transfer pricing adjustment of ₹2,66,44,021/- with respect to the Arm’s Length Price Page | 2 ITA No.1279/MUM/2021 & ITA No. 2487/MUM/2021 Franklin Wardcorpp India Private Limited.; A.Y. 2016-17, 2017-18 of the international transaction for purchase of components from its Associated Enterprises. 02. The assessee has raised following grounds of appeal:- “1. On the facts and in the circumstances of the case, the Hon‟ble Dispute Resolution Panel (“DRP”) was not justified in endorsing the Transactional Net Margin Method („TNMM‟), as used the Transfer Pricing Officer („TPO‟), for the purpose of determining the Arms length Price („ALP‟) of the concerned transaction with as its Associated Enterprise and in making a Transfer Pricing Adjustment of ₹ 2,66,44,021. 2. On the facts and in the circumstances of the case, the DRP should not have endorsed the view of the TPO that the your Appellant‟s products were in the category of auto spare parts and in using data of auto spare parts companies for the purpose of arriving the ALP under the TNMM. 3. On the facts and in the circumstances of the case, the Hon‟ble DRP was not justified in rejecting the contention of the Appellant that either the Cost Plus method or the Comparable Uncontrol Price („CUP‟) Method should have been applied in arriving at the ALP of the concerned transactions with its Associated Enterprise. 4. On the facts and in the circumstances of the case, the Hon‟ble DRP was not justified in taking the view that the tested party could not have been the Associated Enterprise of your Appellant. 5. On the facts and in the circumstances of the case, the Hon‟ble DRP ought to have taken only loss-making enterprises, as pointed out in our submissions to the DRP, Page | 3 ITA No.1279/MUM/2021 & ITA No. 2487/MUM/2021 Franklin Wardcorpp India Private Limited.; A.Y. 2016-17, 2017-18 in arriving at the OP/OR under the TNMM for the purpose of arriving at the ALP.” 03. The brief facts of the case shows that assessee is engaged in the business of selling tank truck equipment for transportation of fuel from storage tank depot of oil companies in India to various retail outlets. The assessee has entered into international transaction for purchase of spares of ₹24,63,399/- and purchase of bottom loading tank truck fitting of ₹ 5,89,74,155/- from its Associated Enterprises. The assessee adopted Resale Price Method [ RPM] as the Most Appropriate Method. For benchmarking assessee submits that its Associated Enterprises has followed the practice of cost of purchase plus markup of 10% margin in all transactions with the assessee. The assessee submitted letter issued by that company along with the minutes of the assessee’s board of directors. Assessee also submitted the copies of all invoices and compared with global prices list of Associated Enterprises stating that the Associated Enterprises has sold the same product to third party at higher price as compared to the price charged by Associated Enterprises to the assessee. Therefore, the international transaction is at Arm’s Length Price. 04. The learned Transfer Pricing Officer rejected the above benchmarking methodology stating that to justify the resale price method, no other comparables margins were used by the assessee to demonstrate that international transaction is at Arm’s Length Price. Therefore, the resale price method as Most Appropriate method [MAM] is incorrect. According to the learned Transfer Pricing Officer, the assessee and the Associated Enterprises are operating in different economic circumstances and Associated Enterprises caters to different parties situated in different market conditions. Therefore, there cannot be comparison for price charged to third parties globally by the Associated Enterprises with the prices charged to the assessee. According to the learned Transfer Pricing Officer, the business model of the assessee is more similar to a retailer and Associated Enterprises business is more like a wholesaler. Thus, he rejected Page | 4 ITA No.1279/MUM/2021 & ITA No. 2487/MUM/2021 Franklin Wardcorpp India Private Limited.; A.Y. 2016-17, 2017-18 Resale Price Method (RPM) as the most appropriate method and adopted Transactional Net Margin Method as the most appropriate method taking assessee as the tested party and adopting PLI of operating profit/ operating revenue. The Transfer Pricing Officer conducted fresh search and found 11 comparables, whose median margin was 8.255%. The margin of the assessee was computed at (- )3.73% and accordingly, the Arm’s Length Price was considered at ₹10,13,76,356/- and made an adjustment of ₹5,02,95,312/-. Order under Section 92CA (3) of the Act was passed on 1 st November, 2019. Based on this, the draft assessment order was passed on 19 th December, 2019. 05. Assessee preferred the objection before the learned Dispute Resolution Panel, who passed direction on 18 th March, 2021. The directions were further rectified on 15 th April, 2021. The learned Dispute Resolution Panel held that the learned Transfer Pricing Officer has correctly applied Transactional Net Margin Method as The Most Appropriate method to compute Arm’s Length Price. It further rejected the claim of the assessee holding that no adjustment for payment of custom duty is to be given while computing the PLI. It further held that finance charges are non-operating in nature in consonance with the PLI of the comparables. However, it accepted that the PLI may be computed only in the respective segment of the transactions entered into by the assessee. Based on this, the final assessment order was passed on 19 th April, 2021, wherein the transfer pricing adjustment was restricted to ₹2,66,44,021/-. 06. The learned Authorized Representative vehemently referred to paragraph no. 4.6 and 4.7 of the learned Dispute Resolution Panel. It was stated that all products are manufactured by the Associated Enterprises on API standard and all the kits have to be mandatorily be approved by the Explosive Authority of India, Petroleum and Explosives Safety Organization (‘PESO’). After that only the product of the assessee is fitted to the petroleum transportation vehicle. After fitting of the kit once again the vehicles needs to be approved by Page | 5 ITA No.1279/MUM/2021 & ITA No. 2487/MUM/2021 Franklin Wardcorpp India Private Limited.; A.Y. 2016-17, 2017-18 Petroleum and Explosives Safety Organization. Therefore, in these circumstances, the products of the assessee are unique and not of general nature, therefore, adoption of the Transactional Net Margin Method by the learned Transfer Pricing Officer and the learned Dispute Resolution Panel is incorrect. The second argument raised is that the custom authorities have accepted the transfer price of import of kits at cost plus 10% margin in the hands of the assessee, when the one arm of the Government of India accepted the transaction of purchase from Associated Enterprises at Arm’s Length Price, the other authority on similar aspect cannot reject and say that the transaction is not at all at Arm’s Length. The learned Authorized Representative further stated that assessee has given a price list of Associated Enterprises. According to price list, it is apparent that the price at which the goods are supplied to the assessee is lesser price compared to the sale of similar products supplied to other parties. Therefore, the foreign entity should be taken as a tested party and the CUP method is the most appropriate method. 07. The learned Departmental Representative submitted that if the Comparable Uncontrolled Price method is to be applied there is no concept of tested party in that method. It is not the comparison of profit element, it was further stated that object of determination of Arms Length Price by the custom department is different than the object of determination of Arms Length Price in income tax Act. He submitted that it is an anti tax evasion provision. He further stated that the assessee is supplying only equipments. Merely, fitting of the equipment in petroleum transpiration vehicle does not make it specific and therefore, Transactional Net Margin Method is correctly applied. It was further stated that subsistence over form is required to be sent and economic issue and factors are required to be looked into for which assessee has not given any details. And therefore, the Resale Price Method adopted by the assessee is out of question. 08. In the rejoinder, the assessee has submitted five judicial precedents in a paper book stating that foreign tested party should be accepted. Page | 6 ITA No.1279/MUM/2021 & ITA No. 2487/MUM/2021 Franklin Wardcorpp India Private Limited.; A.Y. 2016-17, 2017-18 09. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also carefully looked at the paper book submitted by the assessee containing 182 pages. We find that assessee is importing truck tank equipment from its Associated Enterprises, USA. Same are used for transportation of fuel from storage tank to various retail outlets. Truck tank equipment is sold as fuel kit to actual users. These are not sold to any other customer in India. Assessee also import minor parts which can be used in assembly of these equipments. The products manufactured by the Associated Enterprises are tested as per American Petroleum Institute Standards. Further, kits are also to be mandatorily approved by the Explosive Authority of India. Only after approval of PESO, the kit can be sold. Whereas the Kit are fitted into the vehicle, Once again it needs to be approved by the petroleum and safety organizations. When the assessee filed form no.3CED, it adopted Resale Price Method. For the benchmarking it stated that the Associated Enterprises sold the product to the assessee at the markup of 10% margin. The learned Transfer Pricing Officer rejected the RPM as the most appropriate method. In response to show cause notice of the learned Transfer Pricing Officer adopting TNMM method as the most appropriate method, assessee stated that the most appropriate method is cost plus. The learned TPO rejected the same and adopted the Transactional Net Margin Method. Before the learned Dispute Resolution Panel, assessee contended that the CUP method is the most appropriate method. This has been contested before the learned Transfer Pricing Officer. Therefore, at different stages, assessee contended different transfer pricing method as the most appropriate method. In the paper book submitted before us containing of 182 pages, the assessee has not submitted the transfer pricing study report. The assessee also did not submit form no.3CB. The learned Authorized Representative also kept changing the most appropriate method before us. Therefore, in view of the above facts, we set aside the whole appeal back to the file of the learned Transfer Pricing Officer with a direction to the assessee to benchmark its Page | 7 ITA No.1279/MUM/2021 & ITA No. 2487/MUM/2021 Franklin Wardcorpp India Private Limited.; A.Y. 2016-17, 2017-18 international transaction by selecting the most appropriate method stating the facts with respect to the functions, Assets and risks of the assessee. It is not the case of the assessee that assessee is adopting any margin based method as the most appropriate method so that profit of the Associated Enterprises can be decided. If the assessee select any profit based method than only assessee is entitled to plea for Associated Enterprises taken as tested party, subject to certain conditions. As before the lower authorities, assessee has given differing answers about the most appropriate method for benchmarking international transaction, we direct the assessee to submit with proper benchmarking and contemporaneous document by showing what is the most appropriate method and then benchmark the international transaction. The learned Transfer Pricing Officer may examine the same and thereafter, decide the issue fresh. Accordingly, we set aside the whole appeal back to the file of the learned Assessing Officer/Transfer Pricing Officer with a direction to the assessee. 010. In the result, the appeal of the assessee is allowed for statistical purposes. 011. The facts of the case for A.Y. 2017-18 are also identical. Therefore, the appeal of A.Y. 2016-17, is also set aside with similar directions. 012. In the result, both the appeals are allowed for statistical purposes. Order pronounced in the open court on 26.07.2023. Sd/- Sd/- (MS. KAVITHA RAJAGOPAL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 26.07. 2023 Sudip Sarkar, Sr.PS Page | 8 ITA No.1279/MUM/2021 & ITA No. 2487/MUM/2021 Franklin Wardcorpp India Private Limited.; A.Y. 2016-17, 2017-18 Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai