LLM APPLIANCES PRIVATE LIMITED, CHENNAI V. DCIT CENTRAL CIRCLE 2(4), CHENNAI

ITTPA 72/CHNY/2018

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 4172 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 6 month(s) 7 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 26-05-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2014-2015
• Appeal Filed On: 19-11-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SANJEEV ADITYA
• Keywords: Related party transaction; Transfer pricing; Search and seizure; Opportunity of being heard; International transaction; Application of stay; Tax effect; Set aside
• Section: 92C; 92A; 144C; 13

Judgement Text

आयकर अपीलीय अिधकरण, ‘डी’ यायपीठ, चे ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI ी जी मंजूनाथा, लेखा सद के सम , ी अिनके श बनज , ाियक सद एवं BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER AND SHRI ANIKESH BANERJEE, JUDICIAL MEMBER I.T.(TP)A Nos.:71 & 72/Chny/2018 Assessment Years: 2013-14 & 2014-15 & Stay Application Nos.28 & 29/Chny/2021 [in I.T.(TP)A Nos.:71 & 72/Chny/2018] M/s. LLM Appliances Private Limited, No.E-34, 2 nd Floor, Rajiv Gandhi Salai, Egattur Village, Navalur, Kancheepuram Distrist Chennai – 600 103. PAN : AAACL 1900F Vs. The Deputy Commissioner of Income Tax, Central Circle – 2(4), Chennai – 600 034. (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओर से/Appellant by : Shri Sanjeev Aditya, CA यथ क ओर से/Respondent by : Dr. S. Palani Kumar, CIT सुनवाई क तारीख/Date of Hearing : 23.05.2022 घोषणा क तारीख/Date of Pronouncement : 27.05.2022 आदेश आदेशआदेश आदेश /O R D E R PER ANIKESH BANERJEE, JM: The instant appeals were filed by the Assessee is directed against the final Assessment Order passed by the learned Assessing Officer, DCIT, Central Circle – 2(4), Chennai (in brevity “the AO”) order passed u/s.143(3) r.w.s.144C(13) r.w.s.153A of the Income Tax Act, 1961 (in brevity “the Act”) in pursuance to the directions of :: 2 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 the Dispute Resolution Panel-2, Bengaluru, (in brevity “the DRP”), order passed u/s.144C(5) of the Act pertaining to Assessment Years 2013-2014 & 2014-2015. 2. Both the appeals have the same issues related Transfer Pricing and in Corporate Tax. So, I.T. (TP).A. No.71/Chny/2018 is being adjudicated as the lead case. 3. The Assessee agitated the following which are reproduced as follows: “1. The order of the Deputy Commissioner of Income Tax, Central Circle-2(4), Chennai dated 15.10.2018 is against law and facts and circumstances of the case. Tax Effect – NIL. 2.1 The Dispute Resolution Panel [DRP] failed to note that the reference made to the Transfer Pricing Officer is not in accordance with the requirements of instructions given by the Central Board of Direct Taxes in Instruction No.15/2015 and 3/2016 and hence the order of the Transfer Pricing Officer is beyond jurisdiction. Tax Effect - 2,85,49,446. 2.2 The DRP erred in holding that the comparables contested by the Appellant to be not functionally comparable are in fact comparables. The DRP ought to have noted that the Appellant is a manufacturer of electrical appliances and the comparables selected are in cooker manufacture, kitchenware manufacture, etc. Tax Effect – Rs.2,85,49,446. :: 3 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 2.3 The DRP failed to note that while adopting TNMM method for calculating Arm’s Length Price, the Profit Level Indicator shall have to be adopted on a proportionate basis to the international transactions and not for the entity as a whole. Tax Effect – Rs.2,52,88,398. 3. The Assessing Officer failed to note that the income that is reflected in 26AS has already been offered by the Assessee to tax and the same cannot be taxed again. Tax Effect – Rs.1,16,802/-.“ For these reasons and for any reason that may be adduced at the time of hearing, it is prayed that the Hon’ble Tribunal may be pleased to direct that the order of the Deputy Commissioner of Income Tax, Central Circle – 2(4), Chennai to the extent agitated herein is not in accordance with law and facts and circumstances of the case and allow the Apellant’s contention.” 4. Brief facts of the case is that search was initiated and with the effect of the search, the assessment proceeding was initiated and the learned AO & completed the assessment u/s.143(3) r.w.s.144C(13), r.w.s.153A of the Act. The addition was made amounting to Rs.8,79,93,359/- for a downward adjustment in respect of the international transaction with the Associated Enterprises [AE]. Also, an addition was made under the Corporate Tax amounting to Rs.3,60,000/- for the difference in income posted in 26AS with the income returned by the Assessee. The Assessee company is being incorporated under the Companies Act, 1956 during the Financial Year :: 4 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 1994 – 1995. The Assessee was engaged in the business of trading and manufacturing of Electronic Induction Cooker, Tea Vending Machines, Table and Ceiling Fans, Home Appliances and Kitchen Utensils under the brand name “BUTTERFLY”. The Assessee was reported to have an international transaction with Wintronix (HK) Holdings Limited for purchasing of goods amounting to Rs.15,51,25,785/- and reimbursement of expenses amounting to Rs.47,817/-. In both the transactions, the Assessee adopted the Transactional Net Margin Method [TNMM]. With the international transaction, the Assessee had specific domestic transaction for the purchase of goods amounting to Rs.5,25,35,207/- and reimbursement and remuneration amounting to Rs.56,35,083/-. During the assessment proceedings, the learned AO utilized the filters on three companies and accordingly the addition was made on the basis of the downward adjustment (Entity Level) to the tune of Rs.8,79,93,359/-, as per the directions of the DRP. A further addition was made in the Corporate Tax for the difference in receipts declared in the Income Tax Return and 26AS amounting to Rs.3,60,000/- which was directly added back to the total income of the Assessee. Aggrieved, the Assessee filed an appeal before the Hon’ble Tribunal for further adjudication. :: 5 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 5. The learned Counsel for the Assessee first relied on the Ground Nos. 1 & 2 before the Bench. As per the learned Counsel of the Assessee, the learned AO violated the instructions of the CBDT Instruction No.3/2016. Hence, the transfer pricing jurisdiction is beyond its limit. 5.1. In this respect, the learned CIT-DR argued & pointed out that the issue was duly resolved by the learned ACIT, Central Circle – 2(4) vide letter dated 01.12.2016. Copy of the letter is annexed herewith, as under: “====================================== ACIT-CC2(4)/LLM App/2016-17 01.12.2016 To, M/s. LLM Appliances Limited, No.E-34, Second Floor, Rajiv Gandhi Sala, Egattur Village, Navalur, Kancheepuram (D.T.) Chennai – 603 130. Sir, Sub: Reference to the Transfer Pricing Authority for the determination of ALP (Arm’s Length Price) in respect of International Transactions – your own case – A.Y. 2013 – 14 – Regarding 4. Ref: 1. This office letter dated 25.11.2016 2. Your letter dated 30.11.2016 Please refer to the above. As per the 3CEB report enclosed to the return of income for the A.Y. 2013-14, the Assessee company entered into an International Transaction by way of purchase of goods worth Rs.15,51,25,785/- from M/s. Wintronix (HK) Holdings Limited, an offshore company incorporated in Hongkong on 03.03.2011. It is to mention that Shri V.M. Balasubramanium, is the :: 6 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 managing director of M/s. LLM Appliances Limited and is having a share holding to the extent of 14.60%. He is also a share holder in the associate enterprise M/s. Wintronix (HK) Holdings Limited holding 60% of the share holding. Further it is to mention that Shri V.M. Balasubramaniam is controlling the affairs of both the companies. Hence it is proposed to refer to the Transfer Pricing Authority the purchase transactions for ascertaining the arm’s length price. Accordingly, a letter was issued to you, vide this office letter dated 25.11.2016 calling for objections. In response you filed your objection vide your letter dated 30.11.2016. In your case, a search and seizure operation was conducted on 19.03.2015. The seized material annexured as ANN/VS/LLM/LS/S contains the details of substantial investments made by Shri V.M. Balasubramanium in the associate enterprise M/s. Wintronix (HK) Holdings Limited. These investments in M/s. Wintronix (HK) Holdings Limited made by Shri V.M. Balasubramanium are found to have been sent from his personal bank account (HSBC savings account number 041-545518-006 as per the seized material gathered during the course of the search proceedings. Shri V.M. Balasubramanium has not furnished the HSBC Bank account details from which the account the funds were transferred for the purpose of investment in Wintronix (HK) Holdings Limited on verification of Return of Income filed for the Assessment Year 2014-15. But for the search proceedings his substantial investments made in M/s. Wintronix (HK) Holdings Limited could not have come to light. Against this background the purchase of goods by M/s. LLM Appliances Limited from M/s. Wintronix (HK) holdings limited needs to be scrutinized for ascertaining the ALP in view of the common directorship of Mr. V.M. Balasubramaniam, who is also the main person controlling the affairs of both the company. Therefore the case has to be referred to the Transfer Pricing Officer as per para 3.3.(c) of the instruction No.3 of 2016. Yours faithfully, Sd/- (M. BHARADWAJA) Asst. Commissioner of Income Tax Central Circle – 2(4), Chennai – 600 034. ======================================” 5.2 Considering both the issues, it is pertinent to mention that, in the point of jurisdiction, the learned AO did not make any infirmity which is not in contrary with the instructions issued by the CBDT. :: 7 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 During the proceedings, the Transfer Pricing Officer [TPO] in the transfer pricing study of the Assessee had proceeded to determine the arm’s length price in relation to the international transaction in accordance with Section 92C(1) and Section 92C of the Act on the basis of such material or information or documents available with him. Accordingly, the Assessee adopted the TNMM method during the transfer pricing study. The learned TPO utilizing the search filters identified the four comparables and calculated the profit margin using the TNMM method of 9.94%. Whereas the Assessee’s profit margin [OP / OI] is only 3.73% for the year under consideration. In response to the show-cause notice, the Assessee made a submission and accordingly the TPO modified the observations which are extracted as under: “Comparability Analysis: The objections of the Assessee company on the comparability analysis is not acceptable as the comparables selected by the TPO are in trading and manufacturing of home appliances that of the Assessee and hence cannot be held as dissimilar as contended by the Assessee. All the companies are in manufacturing and trading in multiple home appliances including cooker hoods, etc. and therefore, they are fit to be compared with the Assessee. Further the Assessee’s submission regarding the comparable M/s. PKL Limited is concerned. It has not qualified the persistent loss making filters applied. It is pertinent to mention here that prowess is a neutral database and this office has applied standard filters to locate, potential comparables primarily they are tested for related party transactions, persistent loss making and to locate functional similarity. The selection of comparables is objective, hence no cherry picking exercise has been :: 8 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 adopted and the objection of the Assessee is not acceptable. Also, the said companies are primarily engaged in the manufacturing and trading of home appliances and in TNMM broad functional similarity only can be achieved and surgical precision is not required. Turn over filter: Assessee submission regarding the use of turnover criteria is considered and the comparable M/s. TTK Prestige has been excluded from the final list of comparables. Based on the discussions, the ALP is determined as under: PLI of the tested party: Rs. In Lakhs Operating Income 19,402.22 Operating Cost 18,677.59 Operating Profit 724.63 OP / OI 3.73 Margins of the comparable companies: (1) Actionware India Private Limited 11.04 (2) Hawkins Cookers Limited 10.03 (3) Bajaj Electricals Limited 3.72 AVERAGE 8.27% ALP Calculation : The Assessee has not been able to submit the results of segmentation for AE and non-AE transactions. For the show-cause notice issued from this office, the Assessee has relied on various judicial precedents. The Assessee’s objections are considered. If the Assessee’s objections against entity level adjustment were to be accepted, the adjustment would work out as under: Sl. No Particulars Amount [1] Operating Income (A) 194,02,22,000 [2] Operating Cost (B) 186,77,59,000 [3] Operating Profit (C) 7,24,63,000 [4] Assessee’s Profit Margin (D) 3.73 :: 9 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 [5] AE Cost (E) 21,33,43,892 [6] Proportionate of AE Cost to OC in % (F)=E/B*100 11.42 [7] Comparable Margin (G) 8.27 [8] Expected Profit According to TPO (H)=A*G/100 16,04,56,359.4 [9] ALP of AE Cost (I)=A-H 177,97,65,641 [10] Proportionate AE Cost (J)=I*F 20,32,92,892 [11] Adjustment = E – J 1,00,51,000 As cited by the Assessee, there are umpteen number of decisions of various Tribunals and also Hon’ble Mumbai High Court in the case of Firestone International Private Limited against the entity level adjustment. But there is also a recent decision of the jurisdictional ITAT, Madras Bench in the case of M/s. Caterpillar India Private Limited in I.T.A. No.204 & 365/2012 in favour of entity level adjustment. The Department’s SLP against the Mumbai High Court’s decision has been admitted by the Hon’ble Supreme Court (TS-806-SC-2016). Thus, it is clear that the issue has not reached finality. Since, the issue is pending before the Hon’ble Supreme Court, with utmost respect and reverence to the various judicial for a which held against the entity level adjustment, the adjustment is proposed at the entity level in order to keep the issue alive till the Hon’ble Supreme Court decides the matter. Accordingly, the entity level adjustment is computed as under: Sl. No. Particulars Amount [1] Operating Income (A) 194,02,22,000 [2] Operating Cost (B) 186,77,59,000 [3] Operating Profit (C) 7,24,63,000 [4] Assessee’s Profit Margin (D) 3.73 [5] Comparable Margin (E) 8.27 [6] Expected Profit According to TPO (F)=A*E/100 16,04,56,359 [7] ALP of AE Cost (G)=A-F 177,97,65,641 [8] Adjustment = B – G 8,79,93,359 Based on the above discussions, a downward adjustment (entity level) to the tune of Rs.8,79,93,359/- is suggested on AE cost.” 6. The learned Counsel of the Assessee vehemently argued and placed that the comparables are not to be accepted and further for :: 10 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 calculation of the ALP, the domestic transaction was included. The observation of the learned Counsel is as under: “Under section 40A(2)(b), a Company is deemed to be a person covered under section 40A(2)(b), if Director of that Company has substantial interest in the business or profession of the Assessee. Similarly, where a Director of the Assessee Company has substantial interest in business of other company, then other company is deemed to be a person covered under this section. During the year the value of goods purchased from Butterfly Gadhimathi Appliances Limited is Rs.3.46 crores and the sum of value of transactions with other associated enterprises (domestic parties) amounts to Rs.2.36 crores. It is submitted that, Butterfly Gadhimathi Appliances Limited, the aggregate value of other domestic party transactions does not exceed Rs.5.00 crores and hence the provisions of section 92BA pertaining to specified domestic transaction does not apply to the Assessee. The TPO while making adjustment to the AE cost, has also included the specified domestic transactions reported in Form 3 CEB under operating cost and its corresponding income has also be included in the operating income, thus making the adjustment to ALP erroneous. Further, the TPO has not provided any reasons for rejecting your Appellant’s contention. Butterfly Gadhimathi Appliances Limited is not a party covered under section 40a(2)(b) on account of the following facts. • The Directors of the LLM Appliances Limited, Mr. V.M. Balasubramaniamm, Mr. V.M. Gangadharam, Mr. V.M. Kumaresan hold equity shares of 14.6% each in LLM Appliances Limited (proof of shareholding more than 5 percent – Annex 10). • Though these Directors are Directors of Butterfly Gadhimathi Appliances Limited also, Mr. V.M. Balasubramaniamm, Mr. V.M. Gangadharam, Mr. V.M. Kumaresan hold equity shares of 3.19%, 2.76% and 2.73% only in the company. • LLM Appliances Limited holds only 17.04% of equity in Butterfly Gadhimathi Appliances Limited. :: 11 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 As none of the holdings exceed 20% they do not constitute substantial interest (proof of shareholding – Annex – 11). Considering the above stated facts as per Section 92A r.w.s.40A(2)(b), Butterfly Gadhimathi Appliances Limited does not fall within the definition of Associated Enterprises and thus the transactions with Butterfly Gadhimathi Appliances Limited is not a Specified Domestic Transaction as defined in the Act. On contention raised before the DRP on the above grounds, the DRP has held as under: “We are of the considered view that it would be sufficient for invoking provision of section 92CA(1) if it is shown that there existed circumstances which prompted the Assessing Officer to consider it necessary or expedient to refer the computation of ALP to the TPO. The AO only to look at the aggregate value of international transactions disclosed by the Assessee and then follow instructions of the CBDT. The AO is left with very limited role under Section 92CA(1). Hence, the objections on this count is not acceptable”. DRP also stated “in the case of on Aztec Software and Technology Services Limited Vs. Assistant CIT [2007] 107 ITD 41/5 SOT 49/162 Taxman 119 (Mag.) (Bang) (SB) this was held that the AO has only to look at the aggregate value of the international transactions and specified Domestic Transactions disclosed by the Assessee in its 3CEB Report and then follow directions of the CBDT. The AO is left with very limited role under Section 92CA(1).” But DRP failed to note that the transactions disclosed as Specific Domestic Transaction in its 3CEB are made out of mistake and was not considered when cited and requested for correction in the submissions made by your Appellant. It is also a mistake on the part of the TPO making additions without analyzing the transactions disclosed.” 7. The learned Counsel of the Assessee has argued about the comparables which are not acceptable in nature and entity wise with :: 12 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 the Assessee. The learned Counsel of the Assessee filed a written submission before the Bench. The grievance of the Assessee was pointed out in the written submission that is extracted as follows: Sl.No. Name of the entity OP / OI Margin (1) Actionware India Private Limited 11.04 (2) Hawkins Cookers Limited 10.03 (3) Bajaj Electricals Limited 3.72 i) Actionware India Private Limited: From the website of the company it may be noted that Actionware India Pvt. Limited is created with the novel idea of continuously providing qualitative product range viz. Houseware (buckets and mugs, stool & patlas, milk cans, tubs, jugs, furniture, tray, trolley, basket, hanger, waste bin etc.,) ,Kitchenware (storage, cutters & choppers, knives & peelers, mixer, juicer, cutlery, kitchen utensils, plate etc.,) and Cleaning Products (wipers, mops, brushes, wastebins, stands, door mat etc.,) and not into Electrical Appliances. Further the company is predominantly into manufacturing the above said products unlike your appellant who is predominantly into trading of goods. The screenshot from the website of the company where the products which they deal with is enclosed herewith (Annex- 4). As against your appellant is into trading of electrical appliances predominantly en electrical appliances and manufacturing of kitchen appliances as discussed above. The product line of your appellant does not have any of the items dealt with by Actionware India Pvt. Ltd. Kitchenware and houseware include Plastic items, for manufacturing of which the kind of plant and machinery , market, risks are completely different from that of the Electrical appliances industry. Hence this company is not functionally comparable with appellant. Further is it also submitted that the TPO has not applied the trading sales being more than 75% of sales filter and considered this entity as a comparable and the TPO has not provided any reason for not applying this filter. DRP too failed to consider that an entity which is into manufacturing sector cannot be considered as a :: 13 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 functionally comparable to an entity which is predominantly into trading and the products dealt with by Actionware India Pvt. Ltd. is completely different from that of your appellant. ii) Hawkins Cookers Ltd : Hawkins Cookers Limited is primarily into manufacturing and they predominantly deal with pressure cookers and cook wares(Annex — 5) which amounts to 97.56% of the total sales of the entity. Whereas your appellant is predominantly into trading which contributes more than 75 b of its total sales and they deal with electrical appliances predominantly kitchen electrical appliances and manufactures kitchen appliances as discussed above. Plant & Machinery which is used to produce pressure cookers and cook wares are much different from the plant which is used to produce products of your appellant. Based on the above, it cannot be said that Hawkins Cookers Ltd is a functionally comparable entity to your appellant. Further, the TPO has not applied the trading sales being more than 75% of sales filter and has not provided any reasons for not considering the same. On contention raised before DRP on these two comparable. the DRP has held as under: “it is pertinent to bring on record that these companies are broadly comparable as they are engaged in the manufacturing and sale of Kitchenware, Houseware and Cleaning products and are similar in functions and products to that of the Assessee and qualifies all the quantitative and qualitative filters applied by the TPO. Further TNMM is less affected by any transactional and functional differences. While using TNMM to benchmark the international transactions, there could be differences in product and in the functions undertaken by the comparables as compared to the tested party. It envisages that the comparability under TNMM is more tolerant as compared to other methods and hence the comparables need to be broadly similar on functions, risks and assets. Further, the overall comparability of a company is vital while carrying out the comparability analysis, Para 1.41 of :: 14 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 OECD guidelines prescribes that it is acceptable to broaden the scope of the comparability analysis to include uncontrolled transaction involving products that are different, but where similar functions are undertaken.” DRP has referred the following cases in its direction: [1] GE India Technology Centre Private limited Vs. Dy. Director of Income Tax ITA Yo. 789/Bang/201 0 & ITA Nos 487 & 925/Bang/2011) [2] Pr-Lo Bisazza Glass Pvt. Ltd. Vs. ACIT, C-5, Ahmedabad 2005-06 & 2007-08. ITA No. 1690 & 1 622/Ahd/201 0 & 3201/Ahd/2011 [3] Aztec Software Technology Vs ACIT (2007)294 ITR (A.T.) 32 (Bang) [4] TCL holdings Pvt. Ltd., vs. Assistant Commissioner of Income Tax, (ITA No. 29/ Mum/2011) These cases are not applicable to the appellant’s case on account of the following reasons: 1) GE India Technology Centre Private limited Vs. Dy. Director of Income Tax (ITA No. 789/Bang/2010 & ITA Nos 487 & 925/Bang/2011) In this case it was held that the TNMM requires only broad functional and product/service comparability. It may be used only when proper coinparables are not available and if such comparison is made then suitable adjustment must be made to PU of the comparables to eliminate industry! product differences. An entity which is dealing with plastic products and house wares or pressure cookers cannot be said as broadly functional to an entity which is into electrical appliances. As said above Functions, Assets& Risk analysis of these entities clearly says that they are totally different from each other. Even assuming that the other entities are comparable then suitable adjustment as mentioned in this case should have been made. 8. As per the DRP’s report, the Assessee comparables are not considered as it had violated Rule 10B(4) mandates use of current year data only to determine the ALP and not to use of multiple year :: 15 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 data. The Revenue utilizes the comparables and accordingly calculated the average profit margin and which is higher than the Assessee’s profit margin. The learned Counsel for the Assessee mentioned that the Assessee is a manufacturer and Trader of different home appliances and electronic goods and accordingly referred to the judgement of the Hon’ble Co-ordinate Bench of the Tribunal in the case of Prodapt Solutions (P.) Limited Vs. Deputy Commissioner of Income Tax, Company Circle – 5(2), Chennai reported in [2019] 109 taxmann.com 282 (Chennai . Trib.). As per the judgment, the ld. TPO was required to determine the arm’s length price in respect of the international transactions undertaken with the associated enterprise by making internal comparison of profitability from international transactions with unrelated parties after allocating respect revenues and expenses to both segments. Respectful consideration of the judgment of the Hon’ble Madras High Court in the case of the Commissioner of Income Tax, Chennai Vs. M/s. Doowan Automotive Systems Private Limited, Kancheepuram District reported in Tax Case Appeal No.722 of 2019. 9. We heard both the parties and considered the documents available on record. Primary activity of the assessee is trading. As per the records, submitted before us the Trading Sales was Rs. 171,81,01,017/- & Manufacturing sales was Rs. 21,50,08,713/- :: 16 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 during the financial year. In our opinion, this particular issue is fairly settled by the Judgment of the Hon’ble Bombay High Court in the case of Commissioner of Income Tax Vs. Phoenix Mecano (India) Private Limited [2019] 414 ITR 704 holding transfer pricing adjustments made at the entity level should be restricted to international transaction only. It is pertinent to mention that the Department filed SLP against the judgment as since been dismissed by the Hon’ble Supreme Court. Similar view has been taken by the Hon’ble Bombay High Court in the case of Commissioner of Income Tax Vs. Thyssen Krupp Industries Private Limited [2016]381 ITR 413 (Bom). It is also stated that, during the year the value of goods purchased from Butterfly Gadhimathi Appliances Limited was Rs. 3.46 cr and the sum of value of transactions with other associated enterprise (domestic parties) amount to Rs. 2.36cr. It is submitted that Butterfly Gadhimathi Appliances Limited had been erroneously reported to be an AE under SDT in Form 3 CEB as well as by the TPO. Now also the aggregate value of the other domestic party transactions does not exceed Rs.5.00 crores and hence the provisions of Section 92BA of the Act pertaining to specified domestic transaction does not apply to the Assessee. Similar view was taken by the Co-ordinate Bench of the Tribunal, Chennai Benches in the case of M/s. Yongsen Automotive India Private Limited, Thiruvallur District Vs. The Assistant :: 17 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 Commissioner of Income Tax, Corporate Circle – 3(2), Chennai reported in I.T.A. No.357/Mds/2017, pronounced on 16.11.2017. The relevant portion is reproduced, as under: “6. We have considered the rival submissions on either side and perused the relevant material available on record. The first issue arises for consideration is whether the entire transaction of the assessee needs to be taken into consideration for the purpose of transfer pricing adjustment or the TPO and DRP have to confine themselves only to international transaction? This issue was examined by the Delhi High Court in CIT v. Keihin Panalfa Ltd. 92016) 381 ITR 407. The Delhi High Court found that the international transaction constitutes only 23.38%, therefore, the transfer pricing adjustment proportionate to that extent can be made in respect of such international transaction. This judgment of Delhi High Court was followed by Bombay High Court in Alstom Projects India Limited (supra). The Bombay High Court found that Chapter X of the Act is not triggered to make adjustment to considerations received or paid unless they are Specified Domestic Transactions. The transaction with non-Associated Enterprises are presumed to be at arm's length as there is no relationship which is likely to influence the price. In the absence of any segmental accounting, proportionate basis can also be adopted as done by the Delhi High Court in Keihin Panalfa Ltd. (supra). In view of these judgments of Delhi High Court and Bombay High Court, it is obvious that for the purpose of transfer pricing adjustment, the transaction of the assessee with Associated Enterprise outside the country alone has to be taken into consideration. The domestic transaction unless it is a Specified Domestic Transaction, cannot be a basis for making any adjustment. Therefore, the order of this Tribunal in Caterpillar India Pvt. Ltd. (supra) may not be applicable to the facts of the case. 7. This Tribunal is of the considered opinion that under the scheme of the Income-tax Act, the transfer pricing adjustment has to be made only in respect of the transaction of the assessee being a tested party, with Associated Enterprise outside the country after comparing the transaction made by similarly placed company in uncontrolled transaction with non-Associated Enterprise. Therefore, we are unable to uphold the order of the Dispute Resolution Panel Accordingly the order of the DRP is set aside and the entire issue is remitted back to the file of the Assessing Officer. :: 18 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 8. Since the main issue is remitted back to the file of the Assessing Officer, this Tribunal is of the considered opinion that reversal of royalty to the extent of Rs.1,27,05,764/- also needs to be reconsidered. Accordingly, the order of the TPO as confirmed by the DRP is set aside and the entire issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter once again to the file of the TPO. The TPO shall reexamine the issue in respect of the international transaction of the assessee with Associated Enterprise outside the country and compare the same with the transaction of similarly placed company with non-Associated Enterprise and thereafter, decide the issue in accordance with law. Similarly, the reversal of royalty also needs to be examined by the TPO and the procedure prescribed under 144C of the Act needs to be followed both by the assessee and the DRP.” 9.1. The same view was taken by the Hon’ble Bombay High Court in the case of Commissioner of Income Tax-1, Mumbai Vs. Alstom Projects India Limited reported in [2017] 88 taxmann.com 465 (Bombay). The relevant portion is reproduced as under: “12. We are in respectful agreement with the view of the Delhi High Court in Keihin Panalfa Limited (supra). One must not loose sight of the fact that the transfer pricing adjustment is done under Chapter X of the Act. The mandate therein is only to re-determine the consideration received or given to arrive at income arising from for International Transactions with Associated Enterprises. This is particularly so as in respect of transaction with non-Associated Enterprises, Chapter X of the Act is not triggered to make adjustment to considerations received or paid unless they are Specified Domestic Transactions. The transaction with non-Associated Enterprises is presumed to be at arm’s length as there is no relationship which is likely to influence the price. If the contention of the Revenue is accepted, it would lead to artificial increase in the profits of transactions entered into with non-Associated Enterprises by applying the margin at entity level which is not the object of Chapter X of the Act. Absence of segmental accounting is not an insurmountable issue, as proportionate basis could be adopted as done by the Delhi High Court in Keihin Panalfa Limited (supra).” 9.2. Accordingly, we are directing the Revenue to reconsider the comparables in calculating of the average profit and utilizing the :: 19 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 respective filters in this case. During the calculations of the ALP, the domestic transaction should be considered. The view should not be taken in contrary with the different judicial forums as mentioned above. The domestic transfer pricing should be adjudicated in the light of the quantum. The matter accordingly set aside to the learned AO for further considering the matter de novo in relation to the discussions above. The Assessee should get a proper opportunity to substantiate his claim during the assessment proceedings. 10. Corporate Tax : This particular issue is agitated before us through the ground of the Assessee in the difference between the income posted in 26AS and declared in the return of the Assessee. In the submissions, the Assessee also mentioned that this particular issue was taken care through the rectification petition before the Assessing Authority u/s.154 of the Act. Accordingly, the Assessee filed the petition before the learned AO and the matter is still pending. The factual issue is to set aside before the learned AO to consider the factual matrix. The issue should be adjudicated by allowing the Assessee a reasonable opportunity of being heard. Accordingly, the matter is set aside and remitted back to the file of the learned AO for adjudicating afresh. :: 20 :: I.T.(TP)A. Nos.71 & 72/Chny/2018 AND S.A. Nos.28 & 29/Chny/2021 11. The Assessee had also filed two Stay Application Petitions bearing Nos. 28 & 29/Chny/2021 for the Assessment Years 2013-14 & 2014-15. As the appeal petitions in I.T.(TP)A. Nos.:71 & 72/Chny/2018 are adjudicated and the matter set aide to the learned AO. Thus, both the Stay Applications bearing nos. 28 & 29/Chny/2021 are disposed of and are rejected accordingly. 12. In the result, both the appeals of the Assessee in I.T.(TP)A. Nos.:71 & 72/Chny/2018 are allowed for statistical purposes Order pronounced in the court on 27 th May, 2022 at Chennai. Sd/- Sd/- (जी मंजूनाथा) (G. MANJUNATHA) लेखा सद /ACCOUNTANT MEMBER (अिनके श बनज ) (ANIKESH BANERJEE) ाियक सद एवं / JUDICIAL MEMBER चे ई/Chennai, िदनांक/Dated, the 27 th May, 2022 IA, Sr. PS आदेश की #ितिलिप अ&ेिषत/Copy to: 1. अपीलाथ /Appellant 2. #(थ /Respondent 3. आयकर आयु+ (अपील)/CIT(A) 4. आयकर आयु+/CIT 5. िवभागीय #ितिनिध/DR 6. गाड0 फाईल/GF