Ognibence India Pvt.Ltd, Pune V. Deputy Commissioner of Income-tax, Circle - 3, Pune

ITA 299/PUN/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 8042 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-08-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 27-06-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 07-02-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRITA MISHRA
• Assessee Lawyers: KISHORE PHADKE SHRI MEHUL SHAH
• Keywords: Business income; Transfer pricing; International transaction; Question of law; Working capital adjustments; Set aside
• Section: 92C; 10B; 92

Judgement Text

, LH IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE , . , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI D. KARUNAKARA RAO, AM . / ITA NO.299/PUN/2018 / ASSESSMENT YEAR : 2012-13 OGNIBENE INDIA PVT. LTD., PLOT A-13, TALEGAON MIDC, VILLAGE AMBI NAVLAKH UMBHRE, TALEGAON DABHADE, PUNE-410507. PAN : AAACO8051C . /APPELLANT VS. DCIT, CIRCLE-3, PUNE. . / RESPONDENT . / ITA NO.678/PUN/2018 / ASSESSMENT YEAR : 2012-13 DCIT, CIRCLE-3, PUNE. . /APPELLANT VS. OGNIBENE INDIA PVT. LTD., PLOT A-13, TALEGAON MIDC, VILLAGE AMBI NAVLAKH UMBHRE, TALEGAON DABHADE, PUNE-410507. PAN : AAACO8051C . / RESPONDENT ASSESSEE BY : SHRI KISHORE PHADKE SHRI MEHUL SHAH REVENUE BY : MS. AMRITA MISHRA / DATE OF HEARING : 27.06.2019 / DATE OF PRONOUNCEMENT: 19.08.2019 / ORDER PER D. KARUNAKARA RAO, AM : THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE FOR THE ASSESSMENT YEAR 2012-13. ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 2 2. BRIEFLY STATED THE RELEVANT FACTS INCLUDE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF A LIST OF PRODUCTS FOR TRACTORS, EXCAVATORS, MATERIAL HANDLING EQUIPMENTS AND TRUCKS SUCH AS STEERING VALVES AND HYDRAULIC CYLINDERS AND COMPONENT PARTS. THE ASSESSEE FILED THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS.NIL. THE ASSESSEE REPORTED THE INTERNATIONAL TRANSACTIONS WITH AES AT RS.17,33,93,429/-. THE ASSESSEE COMPANY WAS INCORPORATED IN FEBRUARY, 2006 IN TALEGAON MIDC, PUNE. THE TURNOVER OF THE ASSESSEE IS RS.476.68 MILLION IN FINANCIAL YEAR 2011-12. DETAILS OF THE INTERNATIONAL TRANSACTIONS WITH AES ARE TABULATED IN PARA 6 OF THE TPOS ORDER. THE PLI I.E. PROFIT TO SALES IS RS.14.04%. 3. BEFORE THE TPO: THE VOLUME OF THE SAID INTERNATIONAL TRANSACTIONS IS OF RS.20,32,70,175/-. THE DETAILS ARE GIVEN IN PARA 4 OF THE ORDER OF THE TPO. THE TPO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE. IN THE SHOW CAUSE NOTICE, THE TPO PROPOSED TO REJECT THE COMPARABLES AND ADOPT THE TNMM AS MAM WITH OP/OC AS PLI. AS ADOPTED CUP AS MAM AND OP/SALES AS THE PLI, THE TPO SELECTED 6 COMPARABLES WHICH HAVE THE ARITHMETIC MEAN OF 10.04% (OP/OC). THE OP/OC OF THE ASSESSEE FOR THIS YEAR IS MINUS (-) 01.64%. IN REPLY, ASSESSEE OBJECTED TO THE SAID PROPOSAL OF CHANGE IN MAM, CHANGE IN PLI, COMPARABLES, NON-GRANTING OF THE ADJUSTMENTS FOR CAPACITY UTILIZATION ETC. ARGUING THAT THE ASSESSEE IS A START-UP COMPANY, WITH HUGE CAPITAL INFUSION, ASSESSEE ARGUED FOR GRANT OF VARIOUS ADJUSTMENTS. WITHOUT PREJUDICE, THE ASSESSEE SUBMITTED THAT THE ASSESSEE EARNED THE FOREX LOSS OF RS.2,51,23,996/- AND THE SAME NEEDS TO BE CONSIDERED IN WORKING OUT ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 3 THE FINANCE COST OF THE OPERATING COST. AS PER THE ASSESSEE, THE CUP IS THE MAM IN THIS CASE. EVENTUALLY, THE TPO CONSIDERED THE PLI AT OP/SALES AS ADOPTED BY ASSESSEE IN ITS TP STUDY AND GAVE UP HIS PROPOSAL IN FAVOUR OF OP/OC. THE ASSESSEES OP/SALES PLI IS WORKED OUT AT (-)4.91% (PARA 10.3 OF THE TPOS ORDER). FURTHER, THE OP/SALES OF THE 6 COMPARABLES I.E. ARITHMETIC MEAN IS 8.68% . REGARDING MAM QUA THE ASSESSEES CUP METHOD, THE TPO RELIED ON VARIOUS DECISIONS IN PARA 10.4 TO PARA 11 OF HIS ORDER AND DECIDED IN FAVOUR OF THE TNMM AS MAM. THUS, COMPARING THE PLIS OF THE ASSESSEE WITH THAT OF THE 6 COMPARABLES [AT (-)4.91% & 8.68%], THE TPO QUANTIFIED AND PROPOSED THE ADJUSTMENT AT RS.6,48,29,534/- ON ACCOUNT OF INTERNATIONAL TRANSACTIONS WITH RESPECT TO MANUFACTURING AND EXPORT OF HYDRAULIC COMPONENTS. THE TPO DID NOT GRANT ANY TP ADJUSTMENTS FOR START-UP COMPANY, CAPACITY UTILIZATION, ADJUSTMENT TO THE OPERATING COST QUA THE EXCHANGE LOSS ETC. 4. BEFORE THE CIT(A): AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A). THE ASSESSEE RAISED THE OBJECTION I.E. REJECTION OF CUP AS MAM, PLI WORKINGS, ADJUSTMENT OF TRANSACTIONS, ADJUSTMENT TO THE OPERATING PROFIT COST, GRANT OF OTHER ADJUSTMENT LIKE THE WORKING CAPITAL ADJUSTMENT ETC. ON THE MAM, THE CIT(A) SIDED WITH TPO DUE TO THE FAILURE OF THE ASSESSEE IN FURNISHING THE DETAILS AND RELIED ON THE PROVISIONS OF RULE 10B OF THE I.T. RULES (PARA 5.1 OF THE CIT(A)S ORDER). ON THE ISSUE OF QUANTIFICATION OF ADJUSTMENT I.E. RESTRICTING TO TRANSACTION LEVEL AND NOT AT ENTITY LEVEL, THE CIT(A) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND RELIED ON THE JURISDICTIONAL HIGH COURT JUDGEMENT IN THE CASE OF CIT VS. RATILAL ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 4 BECHARLAL & SONS, 288 CTR 31 (BOM.). THE CIT(A) APPROVED THE SPLIT PROFITABILITY METHOD AND DIRECTED THE TPO/ASSESSING OFFICER TO ADJUST THE FINANCE COST ACCOUNT QUA THE EXCHANGE LOSS OF RS.1,52,28,670/-. ACCORDINGLY, CIT(A) CONCLUDED HIS FINDING AS PER DISCUSSION GIVEN IN PARA 5.3 OF HIS ORDER. HOWEVER, THE PLI OF THE 6 COMPARABLES REMAINS UNALTERED AT 8.68%. THE PLI OF THE ASSESSEE IS ADJUSTED BY THE CIT(A) TO 3.34% INSTEAD OF THE AFORESAID FIGURE OF (-) 4.91%. THE DIFFERENT IN PLI IS 5.34% (8.68% - 3.34%). RESTRICTED TO THE INTERNATIONAL TRANSACTIONS, THE ADJUSTMENT WAS WORKED OUT AT RS.99,71,431/- (BOTH ON PURCHASES AND ON SALES SIDE) (PARA 5.3 OF THE CIT(A)S ORDER). FOR THE SAKE OF COMPLETENESS, THE SAID PARA 5.3 OF THE CIT(A)S ORDER IS EXTRACTED HEREUNDER :- 5.3 IN CONCLUSION, THE OP/SALES OF THE COMPARABLES IS NOT CONTESTED BY THE APPELLANT AND IS THEREFORE DETERMINED AT 8.68% AS COMPUTED BY THE AO. THE OP/SALES AFTER GIVING EFFECT TO THE ABOVE DISCUSSION IS DETERMINED AT 3.34% AS DETERMINED IN THE TABLE IN PARA 3.4 OF THE SUBMISSIONS OF THE APPELLANT. AS THE DIFFERENCE IS MORE THAN 5%, THE SAFE HARBOR RULES DO NOT APPLY IN THIS CASE. THE ADJUSTMENT OF 5.34% IS THEREFORE TO BE MADE TO THE TRANSACTION OF PURCHASE AND SALES WITH THE AE ADOPTING THE TRANSACTIONAL BASIS. THUS, THE ADJUSTMENT TO THE PURCHASE SIDE IS RS 75,54,898 AND THE ADJUSTMENT TO THE SALES IS RS 24,16,533. THE ADJUSTMENT MADE BY THE TPO IS THEREFORE RESTRICTED TO RS 99,71,431. GROUND 1 IS DISMISSED AND GROUND 2 IS ALLOWED. 5. THE CIT(A) CONSIDERED ASSESSEES REQUEST FOR WORKING CAPITAL ADJUSTMENT STATING THAT THE WORKING SUPPLIED BY THE ASSESSEE IN TABULAR FORM SUFFER FROM VARIOUS PRESUMPTIONS/SURMISES (PARA 5.4 OF THE CIT(A)S ORDER). ABSENCE OF DETAILS OF WORKING CAPITAL ADJUSTMENT OF THE ASSESSEES COMPARABLES IS THE OTHER APPEAL OF IT. THUS, THE CIT(A) PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 5 6. AGGRIEVED WITH THE ABOVE, ASSESSEE (ON WORKING CAPITAL ADJUSTMENT) AND REVENUE (ON RESTRICTING THE ADJUSTMENT TO THE INTERNATIONAL TRANSACTION ONLY) ARE IN CROSS APPEALS BEFORE THE TRIBUNAL. 7. NOW, WE SHALL TAKE UP EACH OF THE CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE FOR ADJUDICATION. 8. FIRST, WE SHALL TAKE UP THE APPEAL OF THE ASSESSEE IN ITA NO.299/PUN/2018 FOR ADJUDICATION. ITA NO.299/PUN/2018 - BY ASSESSEE 9. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER :- 1. THE LEARNED CIT(A)-13 PUNE, HAS ERRED IN LAW AND ON FACTS IN CONFIRMING AND THE LEARNED AO / TPO ERRED IN MAKING A REFERENCE U/S 92CA(1) TO THE TPO FOR DECIDING ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT, WITHOUT REACHING ANY OPINION ABOUT SITUATIONS SPECIFIED IN SECTION 92C(3) OF THE ITA, 1961. THE LEARNED AO OUGHT TO HAVE GRANTED A SPECIFIC HEARING TO THE APPELLANT BEFORE MAKING A REFERENCE TO THE LEARNED TPO IN THIS REGARD. 2. THE LEARNED TPO ERRED IN LAW AND ON FACTS AND CIT(A)-13 PUNE, ERRED IN CONFIRMING THE DECISION OF THE TPO IN NOT GRANTING APPROPRIATE WORKING CAPITAL ADJUSTMENT TO THE APPELLANT WHILE ARRIVING AT THE AVERAGE OP/OI MARGINS OF THE EXTERNAL COMPARABLES. LEARNED CIT(A) FAILED TO APPRECIATE THAT WORKING CAPITAL ADJUSTMENT DERIVED BY THE APPELLANT IS COMPUTED BASED ON THE NUMBERS FROM AUDITED FINANCIALS OF RESPECTIVE EXTERNAL COMPARABLE COMPANY AND IS AS PER OECD'S FORMULA AND NO ANY PRESUMPTION IS USED TO ARRIVE AT THE ADJUSTMENT FIGURE. 3. THE APPELLANT CRAVES LEAVE TO ADD / MODIFY / DELETE / AMEND ALL / ANY OF THE GROUNDS OF APPEAL. 10. BEFORE US, LD. AR FOR THE ASSESSEE SUBMITTED THAT THE GROUND NO.1 IS NOT PRESSED. ACCORDINGLY, THE SAME IS DISMISSED AS NOT PRESSED. ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 6 11. REFERRING TO GROUND NO.2, LD. AR SUBMITTED THAT THE SAME RELATES TO NON-GRANTING OF WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE WHILE WORKING AT THE MARGINS. 12. ON THIS ISSUE OF GRANT OF WORKING CAPITAL ADJUSTMENT, BEFORE US, LD. AR FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE CONTENTS OF PAGE 37 TO 43 OF THE PAPER BOOK AND SUBMITTED THAT WORKING CAPITAL ADJUSTMENTS WERE CALCULATED BASED ON THE AUDIT ACCOUNTS OF THE COMPARABLES. THERE IS NO PRESUMPTION INVOLVED IN MAKING SUCH CALCULATION. REFERRING TO THE FINDING OF THE CIT(A) IN PARA 5.4 WHERE THE CIT(A) REFUSED THE ASSESSEES REQUEST ON THE GROUND OF PRESUMPTIONS IN FIGURES OF THE COMPARABLES. THE LD. AR PRAYED FOR ACCEPTING THE CALCULATION SINCE THEY ARE ACTUAL FIGURES AND NO SURMISES OR PRESUMPTIONS ARE INVOLVED. ON THE PRINCIPLE OF GRANTING WORKING CAPITAL ADJUSTMENTS, LD. AR FOR THE ASSESSEE RELIED ON THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. EMPTORIS TECHNOLOGIES INDIA (P.) LTD. [2015] 61 TAXMANN.COM 439 (PUNE TRIB.) AND SUBMITTED THAT THE TRIBUNAL IS IN FAVOUR OF ALLOWING THE WORKING CAPITAL ADJUSTMENTS. IN THIS REGARD, LD. AR RELIED ON THE CONTENTS OF PARA 8 TO 11 OF THE SAID ORDER OF THE TRIBUNAL (SUPRA) IN SUPPORT OF SUCH ADJUSTMENTS. 13. ON THE OTHER HAND, LD. DR FOR THE REVENUE RELIED ON THE ORDER OF THE ASSESSING OFFICER AND THE CIT(A). 14. WE HEARD BOTH THE SIDES ON THIS ISSUE RAISED IN GROUND NO.2 I.E. WORKING CAPITAL ADJUSTMENTS AND FIND THE SIMILAR ISSUE WAS ADJUDICATED BY ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 7 THIS TRIBUNAL IN THE CASE OF EMPTORIS TECHNOLOGIES INDIA (P.) LTD. (SUPRA) AND THE SAID DECISION IS RELEVANT FOR THE FOLLOWING PROPOSITION :- WHERE ASSESSEE WAS PROVIDING SERVICES TO ITS ASSOCIATED ENTERPRISES ON 10 PER CENT MARK-UP ON COST AND WORKING CAPITAL POSITION OF ASSESSEE WAS BETTER IN COMPARISON TO COMPARABLE COMPANIES, WORKING CAPITAL ADJUSTMENT WAS TO BE MADE IN HANDS OF COMPARABLES TO BRING SAME TO LEVEL OF ASSESSEE, WHILE BENCHMARKING INTERNATIONAL TRANSACTIONS ENTERED INTO BY ASSESSEE. 15. CONSIDERING THE ABOVE SETTLED NATURE OF ISSUE, WE ARE OF THE OPINION THAT THE DRP/TPO/ASSESSING OFFICER SHOULD BE DIRECTED TO GRANT WORKING CAPITAL ADJUSTMENTS IN THE HANDS OF THE COMPARABLE TO BRING THE SAME TO THE LEVEL OF THE ASSESSEE AND THE SAME IS REQUIRED WHILE BENCHMARKING THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. THE FINDING OF THE CIT(A) IS NOT CORRECT WHEN HE STATED THAT THE FIGURES ARE BASED ON PRESUMPTIONS. ACCORDINGLY, THE GROUND NO.2 OF THE ASSESSEE IS ALLOWED . 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED . 17. NOW, WE TAKE UP THE APPEAL OF THE REVENUE IN ITA NO.678/PUN/2018 FOR ADJUDICATION. ITA NO.678/PUN/2018 BY REVENUE 18. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER :- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN RESTRICTING THE ADJUSTMENT ONLY TO THE VALUE OF INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISE WHICH IS CONTRARY TO THE PRESCRIPTION OF RULE 10B(1)(E), SINCE THE TPO HAD SELECTED TRANSACTION NET MARGIN METHOD (TNMM) AND APPLIED THE SAME ON THE ENTITY LEVEL AND BECAUSE THE PRESUMPTION UNDERLYING ARMS LENGTH PRINCIPLE IS THAT UNCONTROLLED TRANSACTIONS ARE AT ARMS LENGTH AND THEREFORE, IF THE OVERALL MARGINS ARE LESS THAN ARMS LENGTH MARGINS, THE SHORTFALL MUST BE ON ACCOUNT OF ASSOCIATED ENTERPRISES (AE) TRANSACTIONS ONLY AND NOT ON PRO RATA BASIS. ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 8 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN ALLOWING THE PROPORTIONATE ADJUSTMENT CLAIM EVEN THOUGH THE SLP ON SIMILAR ISSUE FILED BY THE REVENUE HAS BEEN ADMITTED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS FIRESTONE INTERNATIONAL PVT. LTD. VIDE ITS ORDER DATED 16.08.2016. 3. THE APPELLANT PRAYS TO BE ALLOWED TO ADD, AMEND, MODIFY, RECTIFY, DELETE OR RAISE ANY GROUNDS OF APPEAL DURING THE COURSE OF APPELLATE PROCEEDINGS. 19. THE SOLITARY ISSUE RAISED IN THE ABOVE GROUNDS RELATES TO THE MANNER OF QUANTIFICATION OF ADJUSTMENTS I.E. RESTRICTING TO THE VALUE OF INTERNATIONAL TRANSACTIONS ONLY AND NOT TO THE ALL TRANSACTIONS AT THE ENTITY LEVEL. 20. AT THE OUTSET, LD. AR FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE DECISION OF THIS TRIBUNAL IN THE CASE OF M/S. HYUNDAI CONSTRUCTION EQUIPMENT INDIA PVT. LTD. VIDE ITA NO.1472/PUN/2015 AND ITA NO.1670/PUN/2015 (CROSS APPEALS) FOR THE ASSESSMENT YEAR 2009-10 DATED 19.03.2019 AND RELIED ON THE CONTENTS OF PARA 25 TO 28 OF THE SAID ORDER OF THE TRIBUNAL. IN THE SAID DECISION, THE TRIBUNAL GRANTED RELIEF TO THE ASSESSEE RELYING ON THE JURISDICTIONAL HIGH COURT JUDGEMENT IN THE CASE OF CIT VS. FIRESTONE INTERNATIONAL (P.) LTD. , 378 ITR 558. IT IS ALSO DISCUSSED IN THE SAID DECISION OF THE TRIBUNAL (SUPRA), THE JUDGEMENT OF BOMBAY HIGH COURT (SUPRA) WAS APPROVED BY THE HONBLE SUPREME COURT IN THE SAME CASE VIDE SLP(C)CC NO.22512/2015 DATED 05.01.2016. 21. ON THE OTHER HAND, LD. DR FOR THE REVENUE RELIED ON THE ORDER OF THE ASSESSING OFFICER. ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 9 22. ON HEARING BOTH THE SIDES, WE FIND THE CONTENTS OF PARA 25 TO 28 ARE RELEVANT TO EXTRACT AND THE SAME ARE EXTRACTED HEREUNDER :- 25. ADDITIONAL GROUND : BEFORE US, THE ASSESSEE RAISED AN ADDITIONAL GROUND (EXTRACTED ABOVE) STATING THAT THE ADJUSTMENTS WERE MADE IDENTITY LEVEL INSTEAD OF INTERNATIONAL TRANSACTION ONLY. THE CIT(A) DECIDED THE ISSUE BY OBSERVING AS UNDER :- 2.6.3 I HAVE CONSIDERED THE ARGUMENTS OF THE APPELLANT. I FIND THAT THE LEARNED TPO HAS CHANGED THE TRANSFER PRICING METHOD TO TNMM FROM WHAT WAS USED BY THE APPELLANT (TNMM AND RPM) THEREFORE; ONUS IS ON THE LEARNED TPO TO MAKE THE ADJUSTMENT ON THE VALUE OF THE INTERNATIONAL TRANSACTION AS REQUIRED U/S 92 OF THE INCOME TAX ACT. IT IS CLEAR THAT THE ADJUSTMENT CAN BE MADE ONLY TO THE VALUE OF THE INTERNATIONAL TRANSACTION . UNDER TNMM, IN ABSENCE OF THE DETERMINATION OF THE NET MARGIN ON VALUE OF THE INTERNATIONAL TRANSACTION BY THE LEARNED TPO, IT WILL BE PRESUMED THAT THE NET MARGIN OF THE INTERNATIONAL TRANSACTION WILL BE THE SAME AS THAT OF THE AVERAGE NET MARGIN OF THE COMPARABLE COMPANIES. ACCORDINGLY, I DIRECT THE LEARNED AO TO MAKE THE ADJUSTMENT TO THE VALUE OF THE INTERNATIONAL TRANSACTION. 26. THE ISSUE OF RESTRICTING THE ADJUSTMENTS TO THE EXTENT OF INTERNATIONAL TRANSACTIONS WITH AES ONLY, HAS BEEN CONSIDERED BY US. WE HAVE ALSO CONSIDERED THE LEGAL PROPOSITION IN EXISTENCE ON THIS ISSUE AND FIND IT IS SETTLED LEGAL MATTER THAT THE ADJUSTMENTS CANNOT BE EXTENDED TO THE ENTIRE RECEIPTS/TURNOVER OF THE ENTITY WHICH MAY INCLUDE TRANSACTIONS WITH NON-AES. TP ADJUSTMENTS NEED TO BE RESTRICTED TO TRANSACTION WITH AES ONLY. IN THIS REGARD, THE JURISDICTIONAL HIGH COURT JUDGEMENT IN THE CASE OF CIT VS. FIRESTONE INTERNATIONAL (P.) LTD. (378 ITR 558) IS RELEVANT AND THE SAME IS BINDING ON US. THE SAID DECISION IS RELEVANT FOR THE CONCLUSION OF THE RATIO THAT THE ALP CAN BE CONSIDERED ON VALUE OF INTERNATIONAL TRANSACTION ALONE AND NOT ENTIRE TURNOVER OF THE ASSESSEE. IN THIS CASE, THE REVENUE WAS AGGRIEVED AGAINST THE ORDER OF THE TRIBUNAL AND THE SAME WAS AGITATED BEFORE THE HONBLE HIGH COURT VIDE QUESTION OF LAW 2(A) OF THE APPEAL AND IN PARA 3 OF THE SAID QUESTION OF LAW WAS NOT ENTERTAINED AS SUBSTANTIAL QUESTION OF LAW. FOR THE SAKE OF COMPLETENESS, THE SAID PARA 3 IS EXTRACTED HEREUNDER :- 3. AS FAR AS QUESTION (A) IS CONCERNED, THE LEARNED COUNSEL FOR THE REVENUE IS UNABLE TO SHOW HOW IT ARISES FROM THE IMPUGNED ORDER OF THE TRIBUNAL. IT APPEARS THAT THE QUESTION ITSELF IS ACADEMIC. IN THE ABOVE VIEW, THERE IS NO OCCASION TO ENTERTAIN QUESTION (A) AS SUBSTANTIAL QUESTION OF LAW. 27. THE SAID JUDGEMENT OF THE HONBLE HIGH COURT HAS BECOME FINAL BY VIRTUE OF THE HONBLE SUPREME COURT JUDGMENT IN THE SAME CASE VIDE SLP(C)CC NO.22512/2015 DATED 05.01.2016. IN FACT, THE CO-ORDINATE BENCH OF THE TRIBUNAL HAS ALSO TAKEN SIMILAR VIEW IN THE CASE OF DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. VS. DCIT VIDE ITA NO.120/PN/2011 ORDER DATED 04.01.2012. THE ISSUE OF MANNER OF COMPUTATION OF ADJUSTMENTS RESTRICTING TO THE INTERNATIONAL TRANSACTIONS WITH AES WAS DISCUSSED AT LENGTH IN PARAS 45 TO 49 IN THE SAID ORDER OF THE TRIBUNAL (SUPRA). FOR THE SAKE OF COMPLETENESS, THE SAID PARAS 45 TO 49 ARE EXTRACTED AS FOLLOWS :- 45. GROUND 10 REFERS TO INCORRECT COMPUTATION OF TP ADJUSTMENTS TO THE MANUFACTURING ACTIVITY. IN THIS REGARD, REFERRING TO THE ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 10 MANUFACTURING SEGMENT AND SALE AFFECTED IN THIS SEGMENT, SRI LOHIA READ OUT THAT THE TOTAL SALE OF THIS SEGMENT IS RS 23,32,42,565/- AND THE RELATABLE COST OF MATERIAL IS RS 1528.65 LAKHS, (OF COURSE, THE ASSESSEE SUBMITTED A DIFFERENT FIGURE OF RS 1557.39 LAKHS IN SOME OTHER CONTEXT). THUS, THIS COST OF MATERIAL (CONTROLLED AND UNCONTROLLED COST) OF RS 1557.39 LAKHS INCLUDES THE RS 602.19 LAKHS, RELATABLE TO THE TRANSACTIONS WITH AES IE CONTROLLED COST. AS PER THE COUNSEL, REVENUE HAS ERRED IN COMPUTING THE TP ADJUSTMENT ON THE ENTIRE MANUFACTURING SEGMENT SALES INSTEAD OF COMPUTING THE TP ADJUSTMENT ON THOSE SALES RELATABLE TO THE IMPORT OF THE COMPONENTS AND SPARES PROCURED FROM THE AES ONLY. WHILE ESTABLISHING THE ALP ON THIS SEGMENT, THE AO WORKED OUT THE SAID VARIANCE @ 4.77% (I.E. 7.18% - 2.41%) AND WORKED OUT THE CORRESPONDING QUANTUM OF ADJUSTMENT AT RS 1,11,25,670/- (I.E. 4.77*23,32,42,565/100). IN THIS REGARD, THE LD COUNSEL FOR THE ASSESSEE MENTIONED THAT IF TOTAL INTERNATIONAL TRANSACTIONS UNDER CONSIDERATION FOR ADJUSTMENT ON ACCOUNT OF IMPORT OF RAW MATERIALS, COMPONENTS AND SPARES FOR ASSEMBLY/MANUFACTURE OF MATERIAL HANDLING PRODUCTS WORTH RS 60,218,878/- WORKS OUT TO ONLY 40% OF THE TOTAL COST, THE SAME PROPORTION OF THE TOTAL SALES HAS TO BE CONSIDERED FOR MAKING TP ADJUSTMENTS. IF THE ASSESSEES MANNER OF ADJUSTMENT IS CONSIDERED THE ADDITIONS SHOULD BE RESTRICTED TO RS 43,82,783/- ONLY (RS 11,125,670 * RS 60,218,878/RS 152,865,285). IN THIS REGARD, LD COUNSEL RELIED ON THE PROVISIONS OF THE RULE 10B(1)(E) AND ALSO VARIOUS JUDICIAL PRONOUNCEMENTS ON THE SUBJECT IE (I) EMERSON PROCESS MANAGEMENT INDIA P LTD ITA NO 8118/M/2010; (II) T TWO INTERNATIONAL P LTD AND OTHERS; IL JIN ELECTRONICS I PLTD 36 SOT 227 DEL; STARLITE CASE 2010-TII-28-ITAT-DEL-TP; ABHISHEK AUTO INDUSTRIES LTD 2010-TII-54-ITAT-DEL-TP ETC. 46. WE HAVE HEARD THE PARTIES AND PERUSED THE RELEVANT PROVISIONS OF THE SAID RULE. SUB CLAUSE (I) AND (II) OF THE RULE 10B(1)(E) REFERRED TO THE EXPRESSIONS IN RELATION TO AND THE RELEVANT BASE. THEY READ AS FOLLOWS: (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; 47. FROM THE ABOVE, IT IS VIVID THAT IN TNMM, THE NET PROFIT MARGIN REALIZED BY THE TESTED PARTY, AN ASSESSEE, OUT OF THE INTERNATIONAL TRANSACTION IS COMPUTED IN RELATION TO SALE EFFECTED (AS IN ASSESSEE CASE), WHICH IS THE RELEVANT BASE. THE EXPRESSION IN RELATION TO MEANS IN CONNECTION WITH AND IT IMPLIES CONNECTION BETWEEN IMPUGNED INTERNATIONAL TRANSACTIONS WORTH RS 60,218,878/- ON ACCOUNT OF IMPORT OF RAW MATERIALS, COMPONENTS AND SPARES FOR ASSEMBLY/MANUFACTURE OF MATERIAL HANDLING PRODUCTS AND TO THE RELATED SALES AND NOT TO THE ENTIRE SALES OF THE MANUFACTURING SEGMENT OF THE ASSESSEE. THE SAID RELATIONSHIP/RATIO IS THE REQUIREMENT IN THE PRESENT COMPARABILITY ANALYSIS AND NOT THE ENTITY LEVEL SALES AS WRONGLY CONSIDERED BY THE TPO AND RELIED UPON BY THE DRP. IN PRINCIPLE, SUCH CLOSURE COMPARABILITY ANALYSIS IS NEEDED IN TNMM, WHEN SALES IS USED AS A BASE FOR DETERMINING NET PROFIT MARGIN. THUS, IT IS ERRONEOUS TO BRING ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 11 RELATIONSHIP BETWEEN THE RS 60,218,878/- AND RS 23,32,42,565/- IE THE TOTAL SALES. ASSESSEES FAILURE TO SUPPLY THE DATA ON RELEVANT SALES IS NO DEFENSE, WHEN THERE ARE SETTLED ALTERNATIVES FOR ADOPTION IN SUCH CIRCUMSTANCES, WELL TESTED PRINCIPLE OF PROPORTIONALITY IN OUR OPINION SHOULD HELP. THUS, THE BASE OF SALES DOES NOT NEED TO BE TOTAL SALES; BUT THE PROPORTIONATE SALES RELATABLE TO THE IMPUGNED INTERNATIONAL TRANSACTIONS. IT IS A COMMONSENSICAL APPROACH. 48. IN THIS REGARD, WE HAVE PERUSED THE EXISTING DECISIONS RELIED UPON BY THE ASSESSEE AND THE FOLLOWING EXTRACTS FROM SOME OF THE DECISIONS ARE RELEVANT AND THE SAME READ AS FOLLOWS. A. EMERSONS PROCESS MANAGEMENT INDIA P TD ITA NO 8118/M/2010 AY-2006-07 -PG 452 OF PAPER BOOK 19. FIFTHLY, AS HAS BEEN CONSISTENTLY HELD BY THE COORDINATE BENCHES, THE TRANSFER PRICING ADJUSTMENT IS TO BE MADE WITH RESPECT TO INTERNATIONAL TRANSACTION AND NOT THE ENTRIES SALES. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO COMPUTE THE TRANSFER PRICING ADJUSTMENT IN THE LIGHT OF THIS LEGAL POSITION. B. T TWO INTERNATIONAL P LTD AND TARA JEWELS EPORTS P LTD AND TARA ULTIMO P LTD ITA NO 5644, 5645 & 5646/M/2008 AY 2004-05 PARA 13 @ PAGE 460 OF PAPER BOOK 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY. WE PARTIALLY AGREE WITH THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE THAT ORIGINAL TPOS ORDER IS DEFINITELY ERRONEOUS BECAUSE HE HAS APPLIED THE NET PROFIT MARGIN OF 7.25% ON THE GROSS SALES AND FOLLOWED A COMPLICATED PROCEDURE TO ARRIVE AT THE AMOUNT OF ADJUSTMENT. IN SIMPLE TERMS IF THE SALES TO ASSOCIATED ENTERPRISES IS TAKEN AT RS. 25 CRORES AND STRAIGHT WAY 7.25% MARGIN IS APPLIED THEN APPROXIMATELY TOTAL MARGIN WOULD BE RS.1.81 CRORES, WHEREAS ADJUSTMENT HAS BEEN MADE AT RS2,57,26,138/-... C. IL JIN ELECTRONICS I P LTD V ACIT 36 SOT 227 PAGE 470 OF THE PAPER BOOK: 15. THE ASSESSEE HAS ALSO TAKEN ONE ALTERNATIVE GROUND OUT OF THE TOTAL RAW MATERIALS CONSUMED BY THE ASSESSEE FOR MANUFACTURING PRINTING CIRCUIT BOARDS, ONLY 45.51 PER CENT OF THE TOTAL RAW MATERIALS WERE IMPORTED THROUGH ASSESSEES ASSOCIATED CONCERNS, AND , THEREFORE, ANY ADJUSTMENT, IF ANY CALLED FOR, CAN ONLY BE MADE TO THE 45.51 PER CENT OF THE TOTAL TURNOVER, AND NOT TO THE TOTAL TURNOVER OF THE ASSESSEE. AFTER CONSIDERING THE FACTS OF THE CASE, WE DO NOT FIND ANY DIFFICULTY IN ACCEPTING THIS CONTENTION OF THE ASSESSEE THAT AT BEST ONLY 45.51 PER CENT OF THE OPERATING PROFIT CAN BE ATTRIBUTED TO IMPORTED RAW MATERIAL ACQUIRED FROM ASSESSEES ASSOCIATE CONCERNS. IN THE PRESENT CASE, THE AO HAS CALCULATED THE OPERATING PROFIT ON THE ENTIRE SALES OF THE ASSESSEE, WHICH IN OUR CONSIDERED OPINION, IS NOT JUSTIFIED, WHEN IT IS ADMITTED POSITION THAT ONLY 45.51 PER CENT OF RAW MATERIAL HAS BEEN ACQUIRED BY THE ASSESSEE FROM ITS ASSOCIATE CONCERNS FOR THE PURPOSE OF MANUFACTURING ITEMS.THE ASSESSEE HAS STATED THAT THE OPERATING PROFIT IF APPLIED TO 45.51 PER CENT OF THE TURNOVER WOULD COME TO RS.35,52,573 AS AGAINST OPERATING PROFIT OF RS.24,35,175 BOOKED BY THE ASSESSEE, AND THE DIFFERENCE THEREOF WOULD ONLY BE CALLED FOR TO BE MADE AS ADDITION TO THE PROFIT SHOWN BY THE ASSESSEE. WE, THEREFORE, DIRECT THE AO TO ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 12 MODIFY THE ASSESSMENT AND MAKE THE ADJUSTMENT ONLY TO THE EXTENT OF DIFFERENCE IN THE ARMS LENGTH OPERATING PROFIT WITH ADJUSTED PROFIT WITH REFERENCE TO THE 45.51 PER CENT OF THE TURNOVER, AND NOT TO THE TOTAL TURNOVER OF THE ASSESSEE. THEREFORE, TO THIS EXTENT, THE ADDITION MADE BY THE AO AND FURTHER CONFIRMED BY THE CIT(A) IS REDUCED. WE ORDER ACCORDINGLY. D. DCIT VS STARLITE 133 TTJ 425 MUM AY 2002-03 PAGE PARA 13 AT 478 OF THE PAPER BOOK 13. AS IN THIS CASE, TPO HAS NOT APPLIED TNMM, AS CONTEMPLATED IN THE ACT, WE HAVE NO OTHER ALTERNATIVE BUT TO SET ASIDE HER ORDER.. WE ALSO AGREE WITH THE ARGUMENTS OF LEARNED COUNSEL FOR THE ASSESSEE THAT ADJUSTMENTS, IF ANY, ARISING DUE TO COMPUTATION OF ALP SHOULD BE RESTRICTED ONLY TO THE INTERNATIONAL TRANSACTIONS AND NOT TO THE ENTIRE TURNOVER OF THE ASSESSEE COMPANY. NO ADDITION CAN BE MADE TO LOCAL TRANSACTIONS UNDER CHAPTER X OF THE ACT. SUCH THINGS ARE DONE ONLY WHEN THE AO INVOKES S. 144. WE DIRECT THE AO TO RESTRICT THE ADJUSTMENTS, IF ANY ONLY TO INTERNATIONAL TRANSACTIONS, WHICH ARE FOUND BY HIM TO HAVE TAKEN PLACE AT PRICE OTHER THAN ALP. E. ABHISHEK AUTO INDUSTRIES LTD VS DCIT 136 TTJ 530 DEL- PARA 8.2 AT PAGE 494 OF THE PAPER BOOK: 8.2 IT HAS NOT BEEN DISPUTED THAT PROVISIONS X, S. 92C DEALS WITH INTERNATIONAL TRANSACTIONS ONLY AND NOT WITH TRANSACTIONS WHICH HAVE NO INTERNATIONAL CROSS-BORDER ELEMENT AT ALL. THEREFORE, THE BASIS OF MAKING THE ADJUSTMENTS ON THE ENTERPRISE LEVEL BY TAKING RS.68.76 CRORES AS THE BASE IS NOT CORRECT. WHAT SHOULD HAVE BEEN TAKEN IS THE SALE TO DOMESTIC PARTIES USING TAKATA TECHNOLOTY AND TAKATA RAW MATERIAL AMOUNTING TO RS.12.74 CRORES. THE SEGMENT THAT WAS TO BE LOOKED AT WAS THE INTERNATIONAL SEGMENT, THAT IS DOMESTIC SALE USING FOREIGN TECHNOLOGY AND FOREIGN RAW MATERIAL. AS GIVEN BY THE APPELLANT, THE OPERATING PROFIT MARGIN ON AE SALES IS 10.49 PER CENT WHEREAS IN THE DOMESTIC SALES SEGMENT IT IS ONLY 2.88 PER CENT. .. WE, THEREFORE, ACCEPT THIS SECOND PROPOSITION ALSO THAT ONLY INTERNATIONAL TRANSACTION IS TO BE TAKEN INTO ACCOUNT WHILE CALCULATING THE ALP. 49. ALL THESE CITED DECISION IN GENERAL AND THE DECISION IN THE CASE OF M/S IL JIN ELECTRONICS I P LTD, SUPRA , IN PARTICULAR ARE UNIFORM IN ASSERTING THAT THE TP ADJUSTMENTS ARE TO COMPUTED NOT CONSIDERING THE ENTITY LEVEL SALES. RATHER IT SHOULD BE DONE IDEALLY CONSIDERING THE RELATABLE SALES DRAWING THE QUANTITATIVE RELATIONSHIP TO THE IMPORTS FROM THE AES, I.E. CONTROLLED COST. THE PRINCIPLE OF PROPORTIONALITY IS RELEVANT HERE AND IT IS A SETTLED LAW IN THIS REGARD. IN THE SITUATION LIKE THE ONE IN THE INSTANT CASE OF THE ASSESSEE, THERE IS DATA RELATING TO CONTROLLED AND UNCONTROLLED COST PARTICULARS. THIS UNDISPUTED DATA IS SUFFICE TO ARRIVE THE PROPORTIONATE SALES RELATABLE TO THE INTERNATIONAL TRANSACTION WITH THE AES IE CONTROLLED COST. ACCORDINGLY, THE GROUNDS 10 RELATING TO INCORRECT COMPUTATION OF TRANSFER PRICING ADJUSTMENT TO THE MANUFACTURING ACTIVITY IS ALLOWED PRO TANTO. 28. CONSIDERING THE ABOVE SETTLED LEGAL PROPOSITION ON THE ISSUE, WE ARE OF THE OPINION THAT THE SAID ISSUE RAISED IN THE ADDITIONAL GROUND HAS TO BE DECIDED IN FAVOUR OF THE ASSESSEE. CONSEQUENTLY, WE DIRECT THE ASSESSING OFFICER TO RESTRICT THE ADJUSTMENTS, IF ANY ONLY TO THE INTERNATIONAL ITA NO.299/PUN/2018 ITA NO.678/PUN/2018 13 TRANSACTION WITH AES . ACCORDINGLY, ADDITIONAL GROUND IS ADJUDICATED IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, THE ADDITIONAL GROUND IS ALLOWED. 23. CONSIDERING THE ABOVE SETTLED NATURE OF THE ISSUE, WE ARE OF THE OPINION THAT THE ORDER OF THE CIT(A) IS FAIR AND REASONABLE ON THIS ISSUE AND IT DOES NOT CALL FOR ANY INTERFERENCE. THUS, THE RELEVANT GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 24. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED . 25. RESULTANTLY, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON 19 TH DAY OF AUGUST, 2019. SD/- SD/- (SUSHMA CHOWLA) (D. KARUNAKARA RAO ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; DATED : 19 TH AUGUST, 2019. SUJEET / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-13, PUNE; 4. THE PR. CCIT, PUNE; 5. , , LH / DR C, ITAT, PUNE; 6. / GUARD FILE. / BY ORDER, //TRUE COPY// SENIOR PRIVATE SECRETARY , / ITAT, PUNE