M/S MYTEX POLYMERS INDIA PVT. LTD., ALWAR V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-6, JAIPUR

ITTPA 03/JPR/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7395 (ITAT-JAIPUR)
• Duration Of Justice: 1 year(s) 2 month(s) 8 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 31-01-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 22-11-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANISHA CHANDRA DHK
• Keywords: Depreciation; Transfer pricing; International transaction; Rule of consistency; Cost of acquisition; Unabsorbed depreciation; Set aside
• Section: 13; 90

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES B, JAIPUR JH FOT; IKY JKO] U;KF;D LNL; ,OA JH FOE FLAG ;KNO ] YS[KK LNL; DS LE{K BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM VK;DJ VIHY LA -@ IT(TP)A NO. 03/JP/2018 FU/KZKJ.K O'KZ@ ASSESSMENT YEAR : 2014-15 M/S MYTEX POLYMERS INDIA PVT. LTD., PLOT NO. SP-2-44, NEW INDUSTRIAL COMPLEX, NEEMRANA, ALWAR. CUKE VS. D.C.I.T., CIRCLE-6, JAIPUR. LFKK;H YS[KK LA -@THVKBZVKJ LA -@ PAN/GIR NO.: AAFCM 4533 L VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ LS @ ASSESSEE BY : SHRI P.C. PARWAL (CA) JKTLO DH VKSJ LS @ REVENUE BY : SMT. MANISHA CHANDRA (CIT-DR) LQUOKBZ DH RKJH[K@ DATE OF HEARING : 16/12/2019 MN?KKS 'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT : 31/01/2020 VKNS'K@ ORDER PER: VIJAY PAL RAO, J.M. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 24/10/2018 PASSED U/S 143(3)/144C(13) OF THE INCOME TAX ACT, 1961 (IN SHORT, THE ACT) IN PURSUANT TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL-1, NEW DELHI (IN SHORT, THE DRP) DATED 27/08/2018 PASSED U/S 144C(5) OF THE ACT FOR THE A.Y. 2014-15. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1. THE LD. A.O. HAS ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRICING ADJUSTMENTS OF RS. 6,70,13,030/- IN RESPECT OF PURCHASE OF RAW IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 2 MATERIAL FROM ASSOCIATED ENTERPRISE FOLLOWING THE DIRECTION OF DISPUTE RESOLUTION PANEL (DRP). 1.1 THE LD DRP HAS ERRED ON FACTS AND IN LAW IN UPHOLDING THE ORDER OF TPO IN DETERMINING THE ARMS LENGTH PRICE (ALP IN RESPECT OF PURCHASE OF RAW MATERIAL FROM AE ON TRANSITIONAL NET MARGIN METHOD (TNMM) INSTEAD OF COMPARABLE UNCONTROLLED PRICE METHOD (CUP)/COST PLUS METHOD (CPM) ADOPTED BY THE ASSESSEE BY INCORRECTLY HOLDING THAT RATES CHARGED TO THE ASSESSEE AND UNRELATED PARTIES BY THE AE WERE NOT UNIFORM AND VARYING IN NATURE IGNORING THAT MORE THAN 95% PURCHASES MADE FROM AE IS SUPPORTED BY BACK TO BACK INVOICE OF THE PARTIES FROM WHOM AE HAS PURCHASED THE RAW MATERIAL. 1.2 THE LD. DRP AND ALSO THE TPO HAS ERRED ON FACTS AND IN LAW IN CONSIDERING THE ARIHANT GOLD PLAST PVT. LTD. AND FORMULATED POLYMERS PVT. LTD. AS COMPARABLE ENTITIES WHILE APPLYING TNMM METHOD. 1.3 THE LD DRP HAS ERRED ON FACTS AND IN LAW IN MAKING THE FOLLOWING INCORRECT OBSERVATIONS WHILE UPHOLDING THE TPOS ACTION OF APPLICATION OF TNMM:- (A) THE ASSESSEE HAS INCURRED FREIGHT, TRANSPORT AND HANDLING CHARGES OF RS. 1,39,98,006/- ON IMPORT OF RAW MATERIAL FROM AE IGNORING THAT NO SUCH EXPENDITURE IS INCURRED. (B) THE NET FOREIGN EXCHANGE LOSS OF RS. 6,82,66,919/- SHOULD BE INCLUDED FOR THE PURPOSE OF PROPORTION OF COST ATTRIBUTABLE TO THE TRANSACTION OF IMPORT OF RAW MATERIAL FROM AE. (C) THE TNMM WAS THE CORRECT METHOD IN LIEU ON THE INCOMPLETE AND UNRELIABLE CUP DATA. (D) THE DECISION TO IMPORT FROM AE INSTEAD OF PURCHASING THE RAW MATERIAL FROM INDIA SOURCES CANNOT BE HELD TO BE AT ALP. 2. THE LD. A.O. HAS ERRED ON FACTS AND IN LAW IN CONSIDERING THE INCOME DECLARED UNDER THE HEAD PROFITS FROM BUSINESS AT LOSS OF RS. 1,17,73,648/- AS AGAINST LOSS OF RS. 1,25,36,765/- DECLARED BY THE ASSESSEE. IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 3 3. THE LD. AO HAS ERRED ON FACTS AND IN LAW IN NOT ADJUSTING THE INCOME FROM OTHER SOURCES AT RS. 1,10,813/- AGAINST THE CARRIED FORWARD UNABSORBED DEPRECIATION. 4. THE ASSESSEE CRAVES TO AMEND, ALTER AND MODIFY ANY OF THE GROUNDS OF APPEAL. 5. THE APPROPRIATE COST BE AWARDED TO THE ASSESSEE. 2. AT THE TIME OF HEARING, THE LD AR OF THE ASSESSEE HAS STATED THAT THE ASSESSEE DOES NOT PRESS GROUNDS NO. 2 AND 3, THE SAME MAY BE DISMISSED BEING NOT PRESSED. THE LD DR HAS NOT RAISED ANY OBJECTION IF GROUNDS NO. 2 AND 3 OF THE ASSESSEES APPEAL ARE DISMISSED AS NOT PRESSED, ACCORDINGLY, GROUNDS NO. 2 AND 3 OF THE ASSESSEES APPEAL ARE DISMISSED BEING NOT PRESSED. 3. GROUND NO. 1 TO 1.3 OF THE APPEAL ARE REGARDING TRANSFER PRICING ADJUSTMENT IN RESPECT OF RAW MATERIAL PURCHASED FROM ASSOCIATED ENTERPRISES (IN SHORT, THE AE) PROPOSED BY THE TPO/AO AND CONFIRMED BY THE DRP. THE ASSESSEE IS ENGAGED IN MANUFACTURING OF POLYPROPYLENE (PP) BASED COMPOUND. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE, INTER ALIA, HAS ENTERED INTO AN INTERNATIONAL TRANSACTION WITH ITS AE IN RESPECT OF PURCHASES OF RAW MATERIAL. THE INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE ARE AS UNDER: NO. NATURE OF TRANSACTION METHOD VALUE OF TRANSACTION I. PURCHASE OF RAW MATERIAL CPM/CUP 62,12,10,217 II. SALE OF FINISHED GOODS CPM 3,29,43,803 IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 4 III. BUSINESS SUPPORT SERVICES OTHER METHOD 10,16,810 IV. GUARANTEE FEE OTHER METHOD 9,27,501 V. REIMBURSEMENT OF EXPENSES RECEIVED OTHER METHOD 1,34,45,669 VI. REIMBURSEMENT OF EXPENSES PAID OTHER METHOD 25,82,627 SINCE THE DISPUTE IN THE PRESENT APPEAL IS ONLY REGARDING THE INTERNATIONAL TRANSACTION OF PURCHASE OF RAW MATERIAL FROM TWO AES, THEREFORE, THE OTHER INTERNATIONAL TRANSACTIONS ARE NOT RELEVANT SO FAR AS THE PRESENT APPEAL IS CONCERNED. THE DETAILS OF THE RAW MATERIAL PURCHASED BY THE ASSESSEE FROM ITS AE ARE AS UNDER: (I) MITSUBISHI CHEMICAL (THAILAND) CO. (MCT) RS. 46,62,68,683/- (II) JAPAN POLYPROLENE CORPORATION (JPP) RS. 15,49,41,644/- THUS, THE ASSESSEE HAS MADE PURCHASES OF RAW MATERIAL FROM ITS AE NAMELY MITSUBISHI CHEMICAL (THAILAND) COMPANY (IN SHORT, MCT) AND JAPAN POLYPROLENE CORPORATION (IN SHORT, JPP) IN ITS TRANSFER PRICING STUDY ANALYSIS. THE ASSESSEE HAS BENCH MARKED ITS INTERNATIONAL TRANSACTION BY APPLYING COMPARABLE UNCONTROLLED PRICE METHOD (IN SHORT, CUP)/COST PLUS METHOD (IN SHORT, CPM) AS MOST APPROPRIATE METHOD (IN SHORT, MAM) FOR TESTING THE TRANSACTION. THE ASSESSEE HAS TAKEN OPERATING PROFIT/OPERATING COST AS PROFIT LEVEL INDICATOR (PLI) AND MCT AS A TESTED PARTY. THE ASSESSEE APPLIED CUP AS MAM IN RESPECT OF PURCHASES MADE FROM JPP. THE TPO DID NOT ACCEPT THE TRANSFER PRICING STUDY OF THE ASSESSEE AND IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 5 PARTICULARLY ADOPTION OF MAM BEING CPM IN CASE OF PURCHASES FROM MCT AND CUP IN CASE OF PURCHASES MADE FROM JPP. THE TPO APPLIED TRANSACTIONAL NET MARGIN METHOD (IN SHORT, TNMM) AS MAM FOR DETERMINING THE ARMS LENGTH PRICE (IN SHORT, ALP). THE TPO FINALLY SELECTED TWO COMPARABLE NAMELY M/S AROHANT GOLD PLAST PVT. LTD. AND M/S FORMULATED POLYMERS PVT. LTD. THE TPO HAS ALSO RECASTED THE PROFIT MARGIN OF THE ASSESSEE BY MAKING CERTAIN ADJUSTMENTS AND COMPUTED THE OPERATING PROFIT OF THE ASSESSEE AS LOSS AT 4.92% AS AGAINST THE AVERAGE OPERATING PROFIT OF THE TWO COMPARABLE AT 5.27%. CONSEQUENTLY THE TPO PROPOSED ADJUSTMENT U/S 92C(2) OF THE ACT OF RS. 66,03,77,896/-. THE A.O. PASSED DRAFT ASSESSMENT ORDER DATED 29/11/2017 THEREBY THE ADJUSTMENT AS PROPOSED BY THE TPO WAS ALSO PROPOSED TO BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE ASSESSEE FILED ITS OBJECTION BEFORE THE LD. DRP AGAINST THE DRAFT ASSESSMENT ORDER. THE LD. DRP WHILE PASSING THE IMPUGNED DIRECTIONS DATED 27/08/2018 HAS UPHELD THE ACTION OF THE TPO IN REJECTING THE MAM ADOPTED BY THE ASSESSEE AND APPLICATION OF TNMM AS MAM FOR DETERMINATION OF ALP. THE LD. DRP HAS FURTHER DIRECTED THE TPO/AO TO CONSIDER THE FOREIGN EXCHANGE LOSS AS PART OF COST OF PURCHASE OF RAW MATERIAL FROM AE AND THEN RECOMPUTED THE CONSEQUENTIAL ADJUSTMENT. THUS, IT IS A CASE OF ENHANCEMENT OF ASSESSMENT AND TRANSFER IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 6 PRICING ADJUSTMENT. THE A.O. HAS PASSED FINAL ASSESSMENT ORDER ON 24/08/2018 IN PURSUANT TO THE DIRECTION OF THE DRP. 4. BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE APPLIED CUP METHOD FOR DETERMINING THE ALP FOR PURCHASES OF POLYPROPYLENE FROM ITS AE, MCT, THAILAND. THE LD AR HAS CONTENDED THAT THE MAJORITY OF THE TRANSACTIONS ARE SUPPORTED BY BACK TO BACK INVOICES OF EXXOM MOBIL CHEMICAL, SINGAPORE. HE HAS POINTED OUT THAT THE ASSESSEE GOT TWO BENEFITS BY MAKING PURCHASES FROM THE AE ONE IS ON ACCOUNT OF EXTENDED CREDIT PERIOD OF 90 DAYS AND SECOND THE ASSESSEE SAVED ON ACCOUNT OF ANTI-DUMPING DUTY @ 40.70 USD PER TON. HAD THE ASSESSEE PURCHASED RAW MATERIAL DIRECTLY FROM EXXOM MOBIL CHEMICAL, SINGAPOREM IT HAD TO PAY THE ANTI-DUMPING DUTY. THE AE IS CHARGING AVERAGING MARGIN OF 2.5% ON COST FROM THE ASSESSEE. THUS, THE LD AR HAS SUBMITTED THAT IN VIEW OF THE ANTI-DUMPING DUTY AS WELL AS EXTENDED CREDIT PERIOD ALLOWED BY THE AE 2.53% MARGIN CHARGED BY THE AE FROM THE ASSESSEE IS AT ALP. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF SALCOMP MANUFACTURING INDIA PVT. LTD. VS ACIT (2016) 161 ITD 35 AND SUBMITTED THAT THE TRIBUNAL HAS ACCEPTED THE BENEFIT OF ENJOYING OF LARGER CREDIT TO JUSTIFY THE MORE PRICE CHARGED BY THE AE TO THE ASSESSEE THEN THE PRICE CHARGED TO THIRD PARTY. THE LD AR HAS FURTHER SUBMITTED THAT THE DRP HAS ACCEPTED THE FACT THAT IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 7 THERE IS A SAVING ON ACCOUNT OF ANTI-DUMPING DUTY AND INTEREST DUE TO EXTENDED CREDIT PERIOD, HOWEVER, THE DRP HAS STILL UPHELD THE ADJUSTMENT MADE BY THE TPO BY CONSIDERING INCORRECT FACTS THAT THE ASSESSEE INCURRED SUBSTANTIAL FREIGHT, TRANSPORT AND HANDLING CHARGES FOR SHIPMENT AND EXCHANGE LOSS WHICH COULD HAVE BEEN AVOIDED BY PRODUCING RAW MATERIAL FROM INDIAN SOURCES. THE LD AR HAS POINTED OUT THAT THE FREIGHT, TRANSPORT AND HANDLING CHARGES ARE NOT PAID IN RESPECT OF IMPORT OF GOODS BUT THESE ARE INCURRED IN RESPECT OF SALE OF GOODS. HE HAS REFERRED THE LEDGER ACCOUNT PLACED AT PAGE NO. 292 TO 294 OF THE PAPER BOOK AS WELL AS INVOICES AT PAGE NO. 295 TO 309 OF THE PAPER BOOK AND SUBMITTED THAT THE FINDING OF THE DRP IS BASED ON ASSUMPTION OF INCORRECT FACTS. HE HAS ALSO REFERRED TO RULE 10TA OF THE INCOME TAX RULES, 1962 (IN SHORT, THE RULES) REGARDING SAFE HARBOUR RULES FOR INTERNATIONAL TRANSACTION AND SUBMITTED THAT THE OPERATING EXPENSES AS DEFINED IN RULE MEANS COST INCURRED BY THE ASSESSEE IN RELATION TO THE INTERNATIONAL TRANSACTION DURING THE COURSE OF NORMAL OPERATIONS WHICH DO NOT INCLUDE, INTER ALIA, LOSS ARISING ON ACCOUNT OF FOREIGN CURRENCY FLUCTUATION. THE LD AR HAS THUS CONTENDED THAT THE CUP IS THE MAM FOR DETERMINING ALP IN CASE OF PURCHASE MADE FROM MCT, THAILAND AS THE SAME GOODS ON THE SAME DATE WHICH THE MCT HAS PURCHASED FROM THE UNRELATED CONCERNED EXXON MOBILE CHEMICAL, SINGAPORE HAS BEEN SOLD BY IT TO THE ASSESSEE. THE LD IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 8 AR HAS THUS CONTENDED THAT IT IS SETTLED PROPOSITION OF LAW THAT CUP BEING A PRICE-ORIENTED METHOD HAVE PRECEDENCE OVER TNMM WHICH IS THE PROFIT ORIENTED METHOD AS HELD IN THE VARIOUS DECISIONS. 5. AS REGARDS PURCHASES OF RAW MATERIAL FROM JAPAN POLYPROPYLENE CORPORATION (JPP), THE LD AR HAS SUBMITTED THAT OUT OF THE TOTAL PURCHASES OF RS. 15,49,41,644/-, PURCHASE TO THE TUNE OF RS. 3,43,11,409/- ARE DIRECTLY SUPPLIED BY THE AE TO THE ASSESSEE BY PURCHASING FROM UNRELATED PARTY AND THEREFORE, THERE ARE BACK TO BACK INVOICED IN RESPECT OF THE SAID PURCHASES. SIMILARLY, THE PURCHASES OF TAFMER WERE ALSO MADE OUT OF THE DIRECT UNRELATED PARTY TRADING THE AE. THUS, THE PURCHASES TO THE TUNE OF RS. 13,04,12,167/- FROM JPP ARE IN RESPECT OF TRADING MADE BY THE AE AS THE SAME WERE PURCHASED FROM UNRELATED PARTY AND THESE TRANSACTIONS ARE SUPPORTED BY BACK TO BACK INVOICES. THE LD AR HAS POINTED OUT THAT THE PURCHASES OF POLYPROPYLENE/TAFMER OF RS. 2,45,27,687/- AND OTHER CONSUMABLE ITEMS WERE MADE OUT OF THE GOODS MANUFACTURED BY THE JPP. IN RESPECT OF MANUFACTURED POLYPROPYLENE, THE ASSESSEE APPLIED CUP METHOD TO BENCH MARK ITS TRANSACTION AS THE JPP HAS SOLD THE SAME PRODUCT TO UNRELATED PARTY. THUS, THE LD AR HAS SUBMITTED THAT THERE IS AN INTERNAL CUP WHICH IS MAM FOR DETERMINATION OF ALP FOR PURCHASES OF POLYPROPYLENE MANUFACTURED BY THE AE. SIMILARLY, IN RESPECT OF THE PURCHASES OF ADDITIVES, CONSUMABLES, LUBRICANT OILS ETC., THE ASSESSEE IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 9 APPLIED OTHER METHOD AS THESE PURCHASES ARE OF SPECIFIC GRADE AS PER THE SPECIFICATION OF THE ASSESSEE. AS REGARDS THE DETERMINATION OF ALP OF PURCHASE OF POLYPROPYLENE AND TAFMER FROM ITS AE JPP, THE ASSESSEE APPLIED CUP AS MAM BECAUSE ALL THE PURCHASES FROM JPP ARE SUPPORTED BY BACK TO BACK INVOICES OF CORRESPONDING VENDORS FROM WHOM JPP PURCHASED GOODS. THE JPP HAS CHARGED AVERAGE MARGIN OF 1.76% ON SUPPLY OF POLYPROPYLENE AND 1.54% ON SUPPLY OF TAFMER. HE HAS FURTHER CONTENDED THAT THE ASSESSEE IS ALSO AVAILING BENEFIT OF CREDIT PERIOD OF 300 DAYS AS AGAINST THE CREDIT PERIOD OF 45 DAYS IN NORMAL TRANSACTIONS. THUS, THE LD AR HAS SUBMITTED THAT THE MARGIN OF 1.6% AND 1.54% CHARGED BY THE AE IS JUSTIFIED WHEN THE BENEFIT OF CREDIT PERIOD OF 300 DAYS IS TAKEN INTO CONSIDERATION. THE LD AR HAS SUBMITTED THAT THE TPO AS WELL AS DRP HAS FAILED TO CONSIDER THE FACT THAT OUT OF THE TOTAL PURCHASES OF RS.15.49 CRORES MADE FROM JPP THE PURCHASES OF RS. 13.04 CRORES ARE SUPPORTED BY BACK TO BACK INVOICES AND THE PURCHASE PRICE IN THE HAND OF AE IS FULLY VERIFIABLE. IN RESPECT OF REMAINING PURCHASES OF RS. 2.45 CRORES, THE ASSESSEE FURNISHED THE EVIDENCES THAT SOME OF THE PURCHASES ARE REGARDING SAME GRADE OF MATERIAL FOR WHICH THE AE HAS ALSO CHARGED FROM THE THIRD PARTY WHICH IS MORE THAN THE RATE CHARGED TO THE ASSESSEE. THUS, THE LD AR HAS SUBMITTED THAT THE TNMM IS NOT THE MAM WHEN THE ASSESSEE HAS PRODUCED ALL THE RELEVANT DETAILS OF CUP. THE LD AR HAS IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 10 FURTHER CONTENDED THAT IN THE PRECEDING YEARS, THE TPO ACCEPTED THE ALP OF THE PURCHASES MADE FROM THE AE DETERMINED ON THE BASIS OF THE CPM. THUS, THE LD. AR HAS SUBMITTED THAT WHEN THERE IS NO CHANGE IN THE FACTS AS COMPARED TO THE PRECEDING YEAS BEING A.Y. 2011-12 AND 2012-13 THEN THE TPO/AO IS NOT JUSTIFIED IN TAKING A DIFFERENT STAND. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG VS CIT 193 ITR 321 AS WELL AS IN THE CASE OF CIT VS. EXCEL INDUSTRIES 358 ITR 295. THE LD AR HAS FURTHER SUBMITTED THAT THE ASSESSEE HAS ALSO MADE PURCHASES OF POLYPROPYLENE FROM RELIANCE INDUSTRIES LTD. AT A HIGHER THAN RATE AT WHICH PURCHASE IS MADE FROM THE AE, THEREFORE, EVEN BY APPLYING THE CUP AS PURCHASES MADE FROM RELIANCE INDUSTRIES AS WELL AS THE CREDIT PERIOD EXTENDED BY THE AE OF THE ASSESSEE, THESE PURCHASES ARE AT ALP. ALTERNATIVELY, THE LD AR HAS SUBMITTED THAT THE TPO HAS SELECTED TWO COMPARABLE BUT INCORRECT OPERATING MARGINS WERE TAKEN INTO ACCOUNT. HE HAS POINTED OUT THAT THE OPERATING MARGIN OF M/S FORMULATED POLYMERS IS AT 1.56% AS AGAINST 5.29% TAKEN BY THE TPO. FURTHER THE TPO HAS WORKED OUT THE OPERATING PROFIT OF THE ASSESSEE AT MINUS (-) 4.92%WHEREAS THE CORRECT OPERATING PROFIT OF THE ASSESSEE WOULD BE 2.13%. THEREFORE, CONSIDERING THE CORRECT FACTS AND DETAILS EVEN BY APPLYING TNMM AND THE COMPARABLE PROPOSED BY THE TPO, NO ADJUSTMENT IS CALLED FOR. THE LD AR HAS POINTED OUT THAT IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 11 THE TPO INITIALLY PROPOSED TO SELECT THREE COMPARABLE NAMELY ARIHANT GOLD PLAST PVT. LTD., FORMULATED POLYMERS LTD. AND POLYCHEM LTD. IF THE AVERAGE PROFIT MARGIN OF THESE THREE ENTITIES IS TAKEN INTO CONSIDERATION IT COMES TO 2.97% AS AGAINST THE OPERATING MARGIN OF THE ASSESSEE AT 2.13% WHICH IS WITHIN THE TOLERANCE LIMIT OF 3% PROVIDED IN SECOND PROVISO TO SECTION 292C(2) OF THE ACT. 6. ON THE OTHER HAND, THE LD CIT-DR HAS SUBMITTED THAT THE ASSESSEE HAS BENCH MARKED ITS INTERNATIONAL TRANSACTION BY SELECTING ITS AE AS TESTED PARTY WHICH IS NOT INCONSONANCE WITH TRANSFER PRICING RULES AS TESTED PARTY FOR ANY CONTROLLED TRANSACTION IS THE LEAST COMPLEX OF THE ENTERPRISES INVOLVED IN THE CONTROLLED TRANSACTION AND DOES NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSETS. WHEN THE FOREIGN ENTITY DATA ARE NOT RELIABLE AND VERIFIABLE BEING BEYOND THE JURISDICTION OF THE AO/TPO THEN THE ASSESSEE IS CONSIDERED AS LEAST COMPLEX ENTERPRISES AND BEARS LESSER SHARE OF RISK THEREFORE, THE TPO HAS RIGHTLY APPLIED TNMM AS MAM FOR DETERMINING THE ALP. HE HAS FURTHER CONTENDED THAT THE CLAIM OF ASSESSEE THAT THE PURCHASES MADE FROM AES ARE SUPPORTED BY BACK TO BACK BILLS IS NOT CORRECT AS THE TPO HAS CLEARLY BROUGHT ON RECORD THAT THE AE HAVE EARNED A MARKUP ON THE SUPPLY MADE TO THE ASSESSEE. FURTHER THE CLAIM OF SAVING ON ACCOUNT OF INTEREST DUE TO EXTENDED CREDIT PERIOD ALLOWED BY THE AE IS ALSO UPSET BY THE FOREIGN EXCHANGE LOSSES OF MORE IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 12 THAN RS.6.82 CRORES ON ACCOUNT OF PAYMENTS MADE IN USD TO THE AE. THE LD CIT-DR HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THE DISPUTE IS REGARDING TRANSFER PRICING ADJUSTMENT MADE BY THE TPO IN RESPECT OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS TWO AES NAMELY MCT AND JPP. THE ASSESSEES CLAIM TO HAVE BENCH MARKED ITS INTERNATIONAL TRANSACTION BY APPLYING CUP AS MAM, HOWEVER, THE COMPARABLE UNCONTROLLED PRICE TAKEN UP BY THE ASSESSEE IS THE PURCHASES MADE BY THE AE AND THEN SUPPLIED TO THE ASSESSEE. THEREFORE, THE ASSESSEE HAS NOT COMPARED THE ACTUAL COST OF PURCHASES MADE BY THE AE TO TEST THE PRICE CHARGED BY THE AE FROM THE ASSESSEE BUT THE ASSESSEE HAS CLAIMED THAT THE AE HAS CHARGED VERY REASONABLE MARGIN FROM THE ASSESSEE WHICH IS AT ARMS LENGTH.THEREFORE, THIS FACT ITSELF SHOWS THAT THE ASSESSEE HAS NOT APPLIED CUP AS MAM FOR TESTING ITS INTERNATIONAL TRANSACTION BUT THE ASSESSEE HAS CLAIMED THAT THE MARGIN CHARGED BY THE AE IN RESPECT OF RAW MATERIAL SUPPLIED TO THE ASSESSEE ON THE PURCHASE COST IN THE HAND OF THE AE IS A REASONABLE AND AT ARMS LENGTH. THE ASSESSEE ALSO CLAIMED THAT SINCE THE AE OF THE ASSESSEE HAS EXTENDED EXTRA CREDIT PERIOD OF 90 DAYS AS WELL AS 300 DAYS, THEREFORE, CONSIDERING THE BENEFIT OF INTEREST COST, THE MARGIN CHARGED BY THE AE FROM THE ASSESSEE IS AT ARMS LENGTH. THERE IS NO QUARREL ON THE IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 13 POINT THAT IF A COMPARABLE UNCONTROLLED PRICE (CUP) IS AVAILABLE FOR TESTING THE INTERNATIONAL TRANSACTION THEN THIS METHOD SHOULD BE GIVEN PREFERENCE TO THE OTHER METHOD AS PRESCRIBED UNDER RULE 10C OF THE RULES. HOWEVER, SELECTING A CUP AS MAM FOR DETERMINATION OF ALP SHALL BE A PERFECT COMPARABLE AND THERE IS NO SCOPE OF ANY TOLERANCE OR VARIATION AS IT IS AVAILABLE IN CASE OF TNMM. AT THE OUTSET WE NOTE THAT WHAT IS CLAIMED BY THE ASSESSEE IS NOT IN STRICT SENSE IS CUP BECAUSE EVEN IF THE PRICE AT WHICH THE AE OF THE ASSESSEE HAS PURCHASED THE MATERIAL IS CONSIDERED AS CUP THEN IT IS THE PURCHASE PRICE IN THE HAND OF THE AE WOULD BE CONSIDERED AS CUP AND NOT THE PRICE AFTER MAKING CERTAIN MARKUP. IF THE AE IS MAKING ANY MARKUP ON THE COST OF PURCHASE AND CHARGED FROM THE ASSESSEE THEN THE APPROPRIATE METHOD WOULD BE COST PLUS METHOD. THE COST PLUS METHOD IS APPLIED ONLY WHEN THE COST OF INTERNATIONAL TRANSACTION IN THE HAND OF THE SUPPLIER AE IS VERIFIABLE WITHOUT ANY DOUBT. THEREFORE, SO FAR AS THE AE HAS SUPPLIED RAW MATERIAL TO THE ASSESSEE WHICH REPRESENTS THE TRADING OF AE BEING THE PURCHASES MADE FROM THE THIRD PARTY, THE MAM ON SUCH TRANSACTION FOR DETERMINATION OF ALP WOULD BE COST PLUS METHOD AS THE AE HAS UNDISPUTEDLY CHARGING PRICE FROM THE ASSESSEE AFTER MAKING SOME MARKUP ON THE COST PRICE. IN SUCH A CASE, THE QUESTION ARISES IS WHETHER THE CHANGE OF MARGIN/MARKUP BY THE AE ON THE COST PRICE IS AT ARMS LENGTH OR NOT AND THE EXERCISE OF DETERMINING IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 14 THE ALP IS CONFINED ONLY TO THE MARKUP CHARGED BY THE AE FROM THE ASSESSEE. THEREFORE, THE TRANSACTIONS OF PURCHASES MADE FROM MCT TO THE TUNE OF RS. 46,62,68,683/- HAS TO BE TESTED BY APPLYING COST PLUS METHOD AS MAM BECAUSE FOR THE A.Y. 2011-12 AND 2012-13, THE TPO WHILE PASSING THE ORDER DATED 29/01/2016 HAS ACCEPTED THE CPM AS MAM FOR DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TRANSACTION OF PURCHASING OF RAW MATERIAL FROM THE AE. WHEN THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES FOR THE YEAR UNDER CONSIDERATION THEN THE TPO/AO IS NOT PERMITTED TO TAKE A DIFFERENT STAND AND VIEW WHICH IS CONTRARY TO THE VIEW TAKEN FOR THE A.Y. 2011-12 AND 2012-13. IT IS ALSO UNDISPUTED LEGAL PROPOSITION THAT RES JUDICATA DOES NOT APPLY TO THE INCOME TAX PROCEEDING, HOWEVER, THE INCOME TAX AUTHORITIES HAVE TO MAINTAIN RULE OF CONSISTENCY. THEREFORE, ONCE THE CPM WAS ACCEPTED AS MAM IN THE PRECEDING YEAR BEING A.Y. 2011-12 AND 2012-13 THEN THE SAME METHOD HAS TO BE APPLIED FOR THE YEAR UNDER CONSIDERATION FOR DETERMINATION OF ALP SO FAR AS THE TRANSACTION OF PURCHASE OF RAW MATERIAL FROM AE REPRESENTS THE TRADING OF THE AE IN THE SAID GOODS WITHOUT ANY VALUE ADDITION. 8. AS REGARDS THE PURCHASES MADE FROM JPP, THE ASSESSEE HAS ENTERED INTO THREE KIND OF INTERNATIONAL TRANSACTION WITH THE SAID AE. THE DETAILS OF WHICH ARE AS UNDER: IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 15 (I) POLYPROPYLENE WHICH JPP HAS PURCHASED FROM UNRELATED PARTY (TRADING)-RS. 3,42,11,409/- (II) TAFMER WHICH JPP HAS PURCHASED FROM UNRELATED PARTY (TRADING)- RS. 9,61,02,548/- (III) POLYPROPYLENE, ADDITIVES AND OTHER CONSUMABLE ITEMS PURCHASED OUT OF OWN MANUFACTURING OF JPP- RS. 2,45,27,687/-. THE FIRST TWO TRANSACTIONS OF PURCHASES OF POLYPROPYLENE AND TAFMER ARE ALSO REPRESENTING THE PURCHASES MADE BY THE AE FROM THE THIRD PARTY AND SUPPLIED THE ASSESSEE WITHOUT ANY VALUE ADDITION, THEREFORE, THESE TWO TRANSACTIONS ARE TO BE TESTED BY APPLYING CPM AS MAM AS IT WAS APPLIED BY THE ASSESSEE IN THE PRECEDING YEARS AND ALSO ACCEPTED BY THE TPO/AO. THEREFORE, INSTEAD OF APPLYING ANY OTHER METHOD BEING CUP OR TNMM THESE TWO TRANSACTIONS CAN BE TESTED BEING AT ALP BY APPLYING CPM AS MAM. WE FIND THAT THE APPROACH OF THE ASSESSEE IS NOT PERMISSIBLE AS PER THE TRANSFER PRICING REGULATION AS THERE IS NO PROVISION FOR TAKING THE AE AS TESTED PARTY FOR DETERMINATION OF THE ALP OF PRICE PAID BY THE ASSESSEE. EVEN OTHERWISE AS WE HAVE DISCUSSED IN THE FOREGOING PARAS THAT THE CUP WOULD BE TAKEN AS THE COST OF PURCHASES IN THE HAND OF THE AE AND THERE IS NO SCOPE OF ANY ADJUSTMENT OR ADDITION OF MARGIN OR MARKUP CHARGED BY THE AE FROM THE ASSESSEE. THEREFORE, IF WE STRICTLY APPLY THE CUP FOR THESE TRANSACTIONS THEN WHATEVER EXTRA CHARGES PAID BY THE ASSESSEE TO IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 16 THE AE WOULD BE CONSIDERED AS A PRICE BEYOND ARMS LENGTH AND WOULD RESULT AN ADDITION. HOWEVER, WITHOUT GOING INTO THE SAID CONTROVERSY, SINCE THESE TRANSACTIONS ARE IN THE NATURE OF TRADING IN THE HAND OF THE AE WITHOUT ANY VALUE ADDITION, THEREFORE, THE SAME ARE REQUIRED TO BE TESTED BY APPLYING CPM AS MAM. 9. AS REGARD THE THIRD TRANSACTION OF PURCHASES, THESE ARE THE AES OWN MANUFACTURED PRODUCT AND THEREFORE, THE ALP FOR THE THIRD TRANSACTION WHICH INCLUDES VARIOUS ITEMS OF PURCHASES OF RAW MATERIAL AND CONSUMABLES, THEREFORE, A SEPARATE EXERCISE OF TRANSFER PRICING ANALYSIS IS REQUIRED IN RESPECT OF THIRD INTERNATIONAL TRANSACTION WITH THE JPP. THE ASSESSEE HAS NOT GIVEN THE DETAILS AS WHICH METHOD THE ASSESSEE HAS APPLIED TO TEST THESE TRANSACTIONS. THOUGH THE ASSESSEE HAS CLAIMED THAT THERE ARE SOME SALE BY THE AE TO THE THIRD PARTY AS WELL AS THERE ARE SOME PURCHASES OF THE SAME PRODUCT BY THE ASSESSEE FROM THIRD PARTY AND THEREFORE, CUP IS AVAILABLE FOR TESTING THE SAID TRANSACTION, HOWEVER, NEITHER THE ASSESSEE NOT THE TPO HAS SEPARATELY UNDERTAKEN THIS EXERCISE OF TESTING THESE TRANSACTIONS BY APPLYING MAM. AS WE HAVE DISCUSSED EARLIER THAT IF THE CUP IS AVAILABLE THEN THE SAME SHOULD BE PREFERRED AS MAM IN COMPARISON TO THE OTHER METHODS, HOWEVER, WHILE ADOPTING CUP AS MAM IT IS REQUIRED TO SEE THAT THERE IS NO SCOPE OF ANY VARIATION AND THE COMPARABLE PRICE SHOULD BE PERFECTLY MATCHING WITH THE TRANSACTION OF IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 17 THE ASSESSEE. HENCE THE ALP OF THESE TRANSACTION IS REQUIRED TO BE DETERMINED IN ABOVE TERMS. 10. AS REGARDS THE ASSESSEES CONTENTION THAT THE ASSESSEE IS AVAILING EXTENDED CREDIT PERIOD FROM THE AE AND THEREFORE, THE MARGIN CHARGED BY THE AE IS AT ALP. THIS CONTENTION OF THE ASSESSEE IS CONTRADICTORY TO ITS CONTENTION THAT THE LOSS ON ACCOUNT OF FOREIGN EXCHANGE RATE FLUCTUATION CANNOT BE CONSIDERED AS PART OF OPERATING COST, HENCE ON THE SIMILAR ANALOGY, COST OF INTEREST ALSO CANNOT BE CONSIDERED AS PART OF OPERATING COST. THE LD AR HAS REFERRED TO RULE 10TA OF THE I.T. RULES REGARDING SAFE HARBOUR RULES FOR INTERNATIONAL TRANSACTION WHICH PRESCRIBES THE DEFINITION OF OPERATION COST AND EXCLUDES, INTER ALIA, FOREIGN EXCHANGE LOSS AND INTEREST FROM THE OPERATING COST, THEREFORE, IF A GUIDANCE IS TAKEN FROM RULE 10TA OF THE I.T. RULES THEN BOTH EXCHANGE LOSS AS WELL AS INTEREST COST WOULD NOT FORM PART OF THE OPERATING COST OR OPERATING REVENUE. IT IS PERTINENT TO NOTE THAT THE TRANSACTIONS OF PURCHASES FROM MCT ARE IN ORDER TO AVOID THE ANTI-DUMPING DUTY ON IMPORT ON THE SAID MATERIAL DIRECTLY FROM EXXON MOBIL CHEMICAL, SINGAPORE, THEREFORE, IT IS ASSESSEES OWN BUSINESS DECISION AND TO AVOID ANTI-DUMPING DUTY, THE ASSESSEE HAS MADE THE PURCHASES THROUGH ITS AE AND HENCE, IN THOSE CIRCUMSTANCES, THE ALP OF THE SAID TRANSACTION HAS TO BE DETERMINED BY APPLYING CPM AS IT WAS ACCEPTED IN THE PRECEDING YEAR. IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 18 11. AS REGARDS THE TRANSACTION FROM JPP AND REPRESENTING TRADING IN THE HAND OF JPP, ON PRINCIPLE, THE SAID TRANSACTION CANNOT BE TESTED BY APPLYING CUP BEING COST PLUS MARGIN AT THE HAND OF THE JPP AS THE INTERNATIONAL TRANSACTION HAS TO BE COMPARED WITH A COMPARABLE UNCONTROLLED TRANSACTION WHICH MEANS IF THE SAME PRODUCT IS PURCHASED BY THE ASSESSEE DIRECTLY FROM THE UNRELATED PARTY FROM WHOM THE AE HAS PURCHASED THE MATERIAL THEN THE SAID PRICE WOULD BE THE CUP. THEREFORE, THE CONTENTION OF THE ASSESSEE IS WITHOUT ANY SUBSTANCE OR MERIT AS IT CLAIMS THAT THE TRANSACTION IS TESTED BY APPLYING CUP. SINCE THE CPM WAS ACCEPTED BY THE TPO/AO IN THE PRECEDING YEAR, THEREFORE, WE DO NOT WISH TO DISTURB THE SAID METHOD ACCEPTED IN THE PRECEDING YEARS TO BE APPLIED FOR THE YEAR UNDER CONSIDERATION. SINCE WE HAVE ALREADY TAKEN A VIEW THAT THE CPM SHOULD BE APPLIED AS MAM THEN THE OTHER ISSUE RAISED BY THE ASSESSEE REGARDING THE INCORRECT COMPUTATION OF OPERATING MARGIN OF THE ASSESSEE AS WELL AS COMPARABLE BECOMES IRRELEVANT. ACCORDINGLY, IN VIEW OF THE ABOVE DISCUSSION AND FACTS AND CIRCUMSTANCES OF THE CASE, WE SET ASIDE THE ISSUE OF DETERMINATION OF ALP AND CONSEQUENTIAL ADJUSTMENT IF ANY TO THE RECORD OF THE A.O./TPO FOR FRESH ADJUDICATION AFTER GIVING AN OPPORTUNITY OF HEARING TO THE ASSESSEE. IT(TP)A 03/JP/2018_ M/S MYTEX POLYMERS INDIA PVT. LTD. VS DCIT 19 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST JANUARY, 2020. SD/- SD/- FOE FLAG ;KNO FOT; IKY JKO (VIKRAM SINGH YADAV) (VIJAY PAL RAO) YS[KK LNL;@ ACCOUNTANT MEMBER U;KF;D LNL;@ JUDICIAL MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 31 ST JANUARY, 2020 *RANJAN VKNS'K DH IZFRFYFI VXZSFKR @ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ @ THE APPELLANT- M/S MYTEX POLYMERS INDIA PVT. LTD., ALWAR. 2. IZR;FKHZ @ THE RESPONDENT- THE D.C.I.T., CIRCLE-6, JAIPUR. 3. VK;DJ VK;QDR @ CIT 4. VK;DJ VK;QDRVIHY @ THE CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ @ DR, ITAT, JAIPUR 6. XKMZ QKBZY @ GUARD FILE (IT(TP)A NO. 03/JP/2018) VKNS'KKUQLKJ @ BY ORDER, LGK;D IATHDKJ @ ASST. REGISTRAR