Income Tax Appellate Tribunal - Delhi
Johnson Matthey India (P) Ltd, New Delhi vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'D' : NEW DELHI)
BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER
and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.344/Del./2010
(ASSESSMENT YEAR : 2003-04)
M/s. Johnson Matthey India Private Ltd., vs. DCIT, Circle 4 (1),
C/o Luthra & Luthra, Law Offices New Delhi.
103, Asoka Estate, Barakhamba Road,
New Delhi - 110 001.
(PAN : AAACJ2919A)
ITA No.4767/Del./2009
(ASSESSMENT YEAR : 2003-04)
DCIT, Circle 4 (1), vs. M/s. Johnson Matthey India Private Ltd.,
New Delhi. C/o Luthra & Luthra, Law Offices
103, Asoka Estate, Barakhamba Road,
New Delhi - 110 001.
(PAN : AAACJ2919A)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Vikas Srivastava, CA
REVENUE by : Ms. Reena Sinha Puri, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
Both these cross appeals emanate from the order of CIT (Appeals)-XX, New Delhi dated 26.11.2009 for the assessment year 2003-04. The grounds in assessee's appeal in ITA No.344/Del/2010 read as under :-
2 ITA No.4767/Del./2009ITA No.344/Del./2010 "1. The order passed by the Learned Commissioner of Income Tax (Appeals)-XX (hereinafter referred as 'CIT (A)' under section 250 of the Act is bad in law and on the facts and circumstances of the case.
2. The Learned CIT (A), as well Learned Assessing Officer (AO) / Transfer Pricing Officer (TPO) have erred in law as well as facts of the case in not accepting the Arm's Length Price (hereinafter referred as 'ALP') determined by the appellant.
3. The Learned CIT (A), as well as Learned AO / TPO have erred in facts of the case by rejecting the PLI considered by the appellant in the transfer pricing documentation maintained by it.
The Learned CIT (A) has mentioned only one instance where ROCE may not be an appropriate PLI i.e. in the case of a seasonal business. However, even though he himself admitted that the appellant is not engaged in a seasonal business, he still held that ROCE cannot be used in the case of the appellant without providing any cogent reason.
4. The Learned CIT (A), as well as Learned AO / TPO have erred in facts of the case by introducing a new PLI i.e. Operating Profit as a percentage of total cost. The Learned CIT (A) has erred in facts and circumstances of the case by holding that the raw material cost is not a pass through cost and thus rejecting the appellant's contention that raw material cost should be excluded from total cost.
5. The Learned CIT (A) has erred in not allowing an adjustment of ± 5% while determining the ALP, as provided by proviso to section 92C (2) of the Act.
6. The above grounds of appeals are independent and without prejudice to one another.
7. The appellant craves leave to add / withdraw or amend any ground of appeal at the time of hearing."
The grounds in revenue's appeal in ITA No.4767/Del/2009 read as under :-
"01. The order of the learned CIT(APPEALS) is erroneous & contrary to facts & law.3 ITA No.4767/Del./2009
ITA No.344/Del./2010
02. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in restricting the addition of Rs.8,33,86,859/- to Rs.7,03,05,000/- made by the AO on account of arm's length pricing.
2.1. The Ld. CIT (A) erred in ignoring the reasoning given by the TPO and AO by recalculating the arm's length pricing.
03. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in directing to AO to include interest income in the business income qualified for deduction under section 80HHC of the Income Tax Act.
3.1 The Ld. CIT (A) had ignored the fact that interest income is to be assessed as income from other sources and not as business income.
04. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of hearing."
2. Ground Nos.1, 6 & 7 of assessee's appeal and ground nos.1 & 4 of revenue's appeal are general in nature and the specific issues are covered under the remaining grounds in respective appeals, hence these grounds do not require separate adjudication. In view of this, for statistical purposes, these grounds are treated as dismissed.
3. In the assessee's appeal, the ground nos.2, 3, 4 & 5 are related to the transfer pricing adjustment and in revenue's appeal, ground nos.2 & 2.1 are also related to transfer pricing. Hence, all these grounds are inter-related and inter-connected to the determination of Arms Length Price (ALP, in short).
Hence, all these grounds are being considered on cumulative basis.
4. The brief facts of the case are as under :-
4 ITA No.4767/Del./2009ITA No.344/Del./2010 Johnson Matthey India Private Limited, the assessee, is a Private Limited Company registered under the Companies Act, 1956. The assessee was incorporated on 16th January 1998 and 90% of its shares are held by Johnson Matthey Plc. UK ('JMUK') through Matthey Finance, B.V. Netherlands. The assessee is engaged in the business of manufacturing automobile catalysts in India from its manufacturing unit located at IMT, Maneser in Haryana. The assessee sells finished catalysts to its customers.
The assessee uses two basic raw materials for manufacture of catalyst i.e. Precious Metals and Wash Coated Substrates. The assessee procures such precious metals (Platinum, Palladium and Rhodium) from its associated enterprise JMUK and wash coated substrates from its associated enterprise Johnson Matthey Malaysia ('JMM'). JMM purchase raw substrates, for further processing, from independent suppliers and performs wash coating operations before supplying to the assessee. The economic analysis carried out by the assessee in the transfer pricing report submitted with the Assessing Officer can be summarized as below :-
"(i) On the basis of easy availability of financial data and non possession of intangibles, the appellant selected itself as the tested party in order to benchmark the international transactions with its AEs.
(ii) On the basis of functional and risk profile and on examining the available comparable data, the Transactional Net Margin Method QJ ('TNMM') was determined to be the most appropriate method for determination of Arm's Length Price ("ALP").5 ITA No.4767/Del./2009
ITA No.344/Del./2010
(iii) For application of TNMM the 'Rate of return on capital employed' was selected as the Profit Level. Indicator ('PLI') for all the international transactions except for transactions involving sale of catalysts to the AEs for which Net Profit Margin (i.e. Profit after tax) as a percentage of Sales was selected as the PLI.
(iv) Based on the search conducted the appellant selected a set of 11 comparable companies and on the basis of data for the financial year 2002-03, the average Return on Capital Employed of the comparable companies came to 18.33%, which was less than that of the appellant being 28.42%. The appellant therefore concluded that its International Transaction is at arm's length.
In order to benchmark the transaction of sale of catalyst to the AEs, the appellant's Net Margin (Profit after Tax as a percentage of Sales) in relation to export Sales was 6.98% which was more, when compared with Net 6 Margin on local sales to unrelated parties (3.73%). The appellant therefore concluded that the international transaction of sales to AE's was also at ALP."
In the reference to the Transfer Pricing Officer (TPO) by the Assessing Officer under section 92CA (1) of the Income-tax Act, the computation of the ALP in respect of the following international transactions was made :-
S.NO. Name of the AE Method Value (in Rs.)
1. Payment of Royalty TNMM 1,30,85,200
2. External Commercial Borrowings TNMM 53,32,377
3. Cessation of Liability --- 73,14,100
4. Purchase of 599.91 kgs. Of precious metal TNMM 38,72,34,757
5. Purchase of 90,616 wash coated substrates TNMM 30,56,53,787
6. Purchase of 8920 raw substrates TNMM 23,19,859
7. Sale of 36,494 unit of Catalysts TNMM 5,17,54,216
8. Sale of 535 units of Catalysts TNMM 1,99,994
9. Purchase of Manual Benches & Accessories TNMM 1,66,000
10. Support Service Contract TNMM 99,40,900
11. Payment of Testing Charges TNMM 3,76,326
6 ITA No.4767/Del./2009
ITA No.344/Del./2010
After receiving the TPO's report, Assessing Officer decided the issue as under:-
" Assessee had enclosed report in Form No. 3CE8 in accordance with Section 92E of the Act. On examining the same, it is noted that the assessee has entered into international transactions with associated enterprises to the tune of Rs.78.20 crores. Therefore, the matter was referred to the TPO u/s 92CA(3) of the Act. The TPO In his order u/s 92CA(3) dated 22.3.2000 determined the value of the international transactions, with their associate enterprises, at Rs.62,49,06,744/- as against the purchase price of Rs.70,82,93,603/- giving a difference of Rs.8,33,86,859/-. Accordingly, assessee was confronted with the findings of tile TPO vide Note sheet entry dated 24.3.2006. Assessee has filed its reply vide letter dated 28.3.2006 which is placed on record.
Assessee's submission in this regard has been considered. In the submission, assessee has more or less reiterated the arguments that were put forth before the TPO. The TPO while analyzing the case of the assessee adopted the Operating profit/ Total cost ratio method as the Profit Level Indicator (PLI). Assessee had shown an OP/TC of 6.79%. However, on comparing the OP/TC of the assessee company with that of the comparable companies, it is seen that assessee had under stated such profit level indicator and the variants in more than the permissible limit of +/5%. The Average OP/TC of the comparable companies worked out to 16.85%. On the other hand the OP/TC shown by the assessee is 6.79%. So the difference between the two ratios is 10.06% which is almost double of the normal acceptable range of +/- 5% variance. Therefore, it is held that assessee has under disclosed his OP/TC which when quantified results in an upward revision of his income by Rs.8,33,86,859/-. In view of the same assessee's income is enhanced by such amount.
5. The issue of Profit Level Indicator (PLI) had been decided by the CIT (A) as under :-
"10.2.1 I have gone through the above submission of the appellant and have also perused the TPO's order, the main argument of appellant revolves around the contention that the 7 ITA No.4767/Del./2009 ITA No.344/Del./2010 TPO had incorrectly rejected the PLI taken by appellant and substituted the same with his own PLI.
10.2.2 PLIs are the ratios that measure relationship between profits with costs or resources. The use of particular PLI depends on number of factors, including.
a) Nature of activities of tested partly
b) The reliability of available data with respect to
uncontrolled comparables
c) The extent to which the PLI a likely to produce
available measure of income.
10.2.3 The selection of PLI is therefore made on the basis
of its appropriateness for the transaction under review (which is determined with reference to the detailed functional analysis of the transaction) and the meaning assignable to the results obtained by its application.
A PLI does not represent just an abstract absolute number with no meaning assignable to it but it represents a logical financial relationship amongst the two components / variables. Therefore, the PLI should be selected keeping in mind the peculiarities of a particular business.
10.2.4 In the instant case, the appellant has applied Return on Capital Employed as PLI in the transfer pricing documentation prepared by it. I have perused the justification provided in the transfer pricing report for selection of Return on Capital Employed as PLI. As per the said justification, since the profit of appellant is dependent on 'manufacturing charge' and not on 'Invoice value', comparison of 'Sales value' with 'net profits' would give misleading picture of profitability. The justification only provides the reasoning for not comparing profits with sales value, however, it nowhere provides the justification for selection for Return on Capital Employed.
In this regard, I agree with the TPO's observation that the reliability of the return to capital employed as a PLI is also dependent upon the extent to which the composition of assets / Capital employed is similar and valuation of the same. Moreover, in those instances in which the operating assets 8 ITA No.4767/Del./2009 ITA No.344/Del./2010 reported in the balance sheet do not reliably measure the capital employed, ROA may be a less reliable PLI than the financial ratios. Also, if the average balance sheet does not accurately reflect the average use of capital throughout the year, ROA may be a less reliable PLI. Such situations occur, for instance, when the business of a company is seasonal.
10.2.5 From the above discussion, since the appellant is not engaged in a seasonal business and the appellant is engaged in the manufacturing of automobile exhaust catalysts and making import of raw-material from its AE, in these circumstances, I am of the view that Return on Capital Employed is not an appropriate PLI in the case of appellant and thus the TPO was right in rejecting such PLI."
CIT (A) dismissed the assessee's appeal on this ground.
6. The issue regarding the treatment of raw material which was raised as an alternate contention by the assessee, the CIT (A) decide the issue as under:
"10.3.1 The appellant has raised another contention that if the PLI suggested by TPO (i.e. Operating Profits as a percentage of Total Cost) were to be accepted then instead of Operating Profit as a percentage of Total Cost, Operating Profit as a percentage of Total Cost minus raw material cost should be considered. I have carefully considered the detailed submissions along with the explanations made by the appellant in support of this argument.
10.3.2 In this regard the appellant has tried to explain its business model and pricing arrangement with its customer. The appellant has stated that the appellant's income is based on a fixed manufacturing charge per unit (agreed and negotiated with the customer) which has no relation with the cost of raw material incurred for the manufacturing operations carried out by the appellant. Entire cost of raw material comprising of precious metals and substrates is passed on to / recovered from the ultimate customer without any mark up. In fact the appellant has no control over the cost of raw material in view of the specific arrangement with its customers.9 ITA No.4767/Del./2009
ITA No.344/Del./2010 The appellant claims that as per the arrangement with its customers, the appellant has no role to play in selecting either the supplier of raw material or determining the terms of pricing of the raw material and these are determined by the customers only. The entire cost of raw material is recovered from the customers and is in the nature of pass through cost for the appellant. The appellant also submits that any change in the cost of raw material does not impact its profitability and therefore such costs should be excluded from total cost for computing the PLI i.e. Operating Profit as a percentage of Total Cost.
10.3.3 During the course of appellate proceedings it was also noticed that no doubt the raw-material is purchased on the instructions of Maruti Udyog Limited, but after the manufacturing of automobile catalyst, the same is sold not to Maruti Udyog Limited but it is sold to the vendors of Maruti Udyog Limited.
Inspite of number of opportunities given to the appellant during the appellate proceedings to produce the agreement between the appellant and the "Vendors" to whom the catalysts are sold by the appellant they have not been produced so as to know the know the real terms conditions of the transactions and business model.
In the above back grounds my findings are as under.
10.4.1 In the given case, the appellant purchases the material for the manufacture of finished goods to be supplied to Maruti Udyog Limited and there is no dispute in this regard that the purchase of the materials is as per the advice of Maruti Udyog Limited. Maruti Udyog Limited advises the appellant the price and the quantity which is to be purchased and the appellant acts accordingly. Further the usage of the material also has to be done for the purposes of manufacturing the items which are to be sold to vendors of the Maruti Udyog Limited.
Based on the above facts, the appellant claims that the purchase of the materials should be treated as a pass through 10 ITA No.4767/Del./2009 ITA No.344/Del./2010 cost and the appellant should be treated as contract manufacturer and the margins be computed excluding the cost of the material.
10.4.2 It is necessary to examine the role of the appellant in detail both in light of the above facts and also in light of the agreements entered into between the appellant and Maruti Udyog Limited and the AE with respect to the above purchase.
10.4.3 The appellant has an agreement with Maruti Udyog Limited under which it IS obliged to purchase the material on the basis of price quotes advised by Maruti Udyog Limited. In the course of the manufacture, the appellant is permitted a set amount of manufacturing loss and nay unutilized material is to be disposed off as per the advice of Maruti Udyog Limited.
It is pertinent to note that the material in question is a very expensive material and as such its price heavily influences the cost of the material which is being manufactured by the appellant. Another important feature of this material is that the prices fluctuate heavily and frequently. As such is such cases, when Maruti Udyog Limited places the purchase order for the end product, it is in Maruti Udyog Limited interest to ensure that the cost of the material is frozen otherwise it runs the risk of price variations in the end product pricing. There is a possibility that immediately after placing the order, the prices of the precisions metal may crash and this may result in a bumper price being paid to the appellant. Conversely if the prices of precisions metal are not frozen at the time of placing of the order, the appellant may end up losing huge amounts of money in the event the prices of precisions metal shoot up immediately after placing of the order.
Hence in such cases, it is and an established industry practice that the two parties evolve a mechanism to ensure that neither party suffers an adverse financial shock because of the price movement of precisions metal after placing of the order. The industry practice in such cases is that the manufacture (in this case the appellant) will never purchases and stock the precisions metal unless there is a set and confirmed order in which the material can be utilized.11 ITA No.4767/Del./2009
ITA No.344/Del./2010 10.4.4 This is exactly what the appellant is doing, it is purchasing the material only when Maruti Udyog Limited advises it and places a confirmed order for the purchase of the end product in which the precisions metal is to be used. Further, it is interesting to note that the Maruti Udyog Limited does not guarantee the recoverability of the cost of the material. The end product manufactured b the appellant is sold not to Maruti Udyog Limited but to third party vendors of Maruti Udyog Limited who in turn sells the product to Maruti Udyog Limited.
Hence for the appellant the cost of purchase of the material is to be recovered by selling the product to vendors of Maruti Udyog Limited and not Maruti Udyog Limited. Had it been a true pass through cost Maruti Udyog Limited should have ensured that the price of the precisions metal being purchased by the appellant is made available in advance to the appellant. Let alone being made available in advance, in the given case, the appellant is supposed to recover it not from Maruti Udyog Limited but from the vendors of Maruti Udyog Limited and that too after a prolonged credit period. Even at the end of the credit period, Maruti Udyog Limited does not give a guarantee that in the event of a default by the vendor, Maruti Udyog Limited will make the payment.
10.4.5 In this regard it is worth mentioning here that inspite of opportunities given at the appellate stage, no agreement between the appellant and the "vendors of Maruti Udyog Limited" have been made available so as to know the terms / conditions and the business model.
10.4.6 Further, it is also important to note the accounting entries which are effected by the appellant and the AE in the course of the transaction. The AE at the time of selling the material to the appellant includes it in its turnover and the appellant includes the corresponding purchase in its expenditure side. Once the material is processed and sold to the vendors of Maruti Udyog Limited, the appellant includes the total sale value in its turnover. Nowhere, the accounting entries show that the material purchased is to be treated as pass through cost. No doubt that the accounting entries are not conclusive proof for the purposes of taxation, but they do indicate the intention of the 12 ITA No.4767/Del./2009 ITA No.344/Del./2010 transacting parties. In this case the accounting entries clearly indicate that the cost of the material is to be treated as a value added cost and not as a pass through cost.
10.4.7 It is also worth mentioning here that not only the appellant even its "AE" which is also using the precision metal and manufacturing catalyst, they are also accounting the precision metal in the same manner and no where it is being treated as a pass through cost.
10.4.8 Keeping in view the above discussion, the appellant's contention that the cost of purchases of precision metal is to be treated as a pass through cost and no profit element be charged on such a cost is not acceptable. In therefore hold that the cost of purchase of precision metal is a value added cost and should be a part of the cost base for computing the profit element."
7. While pleading on behalf of the assessee, the learned AR has submitted that the revenue has accepted the position in different years. For that, learned AR submitted a chart before us. Learned AR has also submitted written submission in respect of the use of PLI in different years, which is reproduced as under :-
Assessment PLI used in TP Study Status of PLI as per TP order year contract manufacturer 2002-03 ROCE Yes ROCE 2003-04 ROCE Yes OP/TC 2004-05 OP/TC - Raw material Yes OP/TC - Raw material 2005-06 OP/TC - Raw material Yes OP/TC - Raw material 2006-07 OP/TC - Raw material Yes OP/TC - Raw material "AY 2002-03 Return on Capital Employed was considered as the appropriate Profit Level Indicator ('PLI') in the transfer pricing study. In the transfer pricing order, the Transfer Pricing Order ('TPO') has mentioned that the appellant is a contract manufacturer and also accepted the PLI considered by the appellant.13 ITA No.4767/Del./2009
ITA No.344/Del./2010 AY 2003-04 Return on Capital Employed was considered as the appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO has mentioned that the appellant is a contract manufacturer. However, he rejected the PLI considered by the appellant and substituted the same with his own PLI which is OP / TC (without excluding the cost of raw material).
AY 2004-05 OP / TC - Raw Material was considered as the appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO has mentioned that the appellant is a contract manufacturer and also accepted the PLI considered by the appellant.
AY 2005-06 OP / TC - Raw Material was considered as the appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO has mentioned that the appellant is a contract manufacturer and also accepted the PLI considered by the appellant.
AY 2006-07 OP / TC - Raw Material was considered as the appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO has mentioned that the appellant has classified itself as a contract manufacturer and also accepted the PLI considered by the appellant."
Ld. AR pleaded that for the assessment year 2003-04, the return on capital employed was considered as the most appropriate PLI in the transfer pricing study. The TPO has stated that the assessee is a contract manufacturer.
However, he rejected the PLI considered by the assessee and substituted the same with his own PLI which is OP / TC (without excluding the cost of raw material). In assessment year 2002-03, the assessee considered the return on 14 ITA No.4767/Del./2009 ITA No.344/Del./2010 capital employed as appropriate PLI in the transfer pricing study. In the transfer pricing order, the TPO mentioned that assessee is a contract manufacturer and also accepted the PLI considered by the assessee. In the assessment year 2004-05, the assessee considered OP / TC minus raw material cost as an appropriate PLI in the transfer pricing study. The TPO has mentioned in his order that the assessee is a contract manufacturer and also accepted the PLI considered by the assessee. Similarly, in 2005-06 and 2006- 07, the OP / TC minus raw material was considered as the appropriate PLI in the transfer pricing study. The TPO mentioned that assessee is a contract manufacturer and also accepted the PLI considered by the assessee. Ld. AR submitted that in view of various decisions on the rule of consistency by following the principles of res judicata, the PLI as worked out by the assessee must have been accepted. For this, he relied on the following case laws :-
"1. H.A Shah & Co. Vs. Commissioner of Income Tax & Excess Profits Tax, Bombay city - [1956 -(3) -ITR -0618 - BOM]
2. Commissioner of Income-tax, Punjab Vs. Dalmia Dadri Cement Ltd. - [1970-(077)-ITR -0410 -P&H]
3. Russell Properties Pvt. Ltd. Vs. A. Chowdhury, Addl.
Commissioner of Income-tax, West Bengal And Others - [1977-(109)-ITR -0229-CAL]
4. Sardar Kehar Singh Vs. Commissioner of Income-tax And Others - [1992-(195)-ITR -0769 -Raj.] 15 ITA No.4767/Del./2009 ITA No.344/Del./2010
5. Commissioner of Income-tax Vs. Godavari Corporation Ltd - [1985-(156)-ITR -0835 -MP]
6. Radhasoami Satsang Vs. Commissioner of Income Tax -
[1992-(193)-ITR-321 -SC]
7. Director of Income Tax (Exemption) & Anr. Vs. Apparel Export Promotion Council - [2000 -(244) -ITR -0734 - DEL]
8. Commissioner of Income Tax Vs. Neo Poly Pack (P) Ltd.
- [2000 -(245) -ITR -0492 -DEL]
9. Commissioner of Income Tax Vs. A.R.J. Security Printers
- [2003 -(264) -ITR-0276-DEL]
10. Commissioner of Income Tax Vs. Dalmia Promoters Developers (P) Ltd. [2006 -(281) -ITR -0346 -DEL]
11. Commissioner of Income-tax Vs. Hang Crank Shafts Ltd.
- [2008-(173)-TAXMAN -0152 -DEL]
12. Director of Income-tax (Exemptions) Vs. Escorts Cardiac Diseases Hospital Society - [2008-(300)-ITR -0075 -DEL]
13. Commissioner of Income-tax Vs. Haryana State Industrial Development Corporation Ltd. - [2010 -(326) -ITR -640 - P&H]
14. Commissioner of Income Tax -25 Vs. Gopal Purohit -
[2010 -(188) -TAXMAN -0140 -BOM]
15. Management Structure & Systems Pvt. Ltd. Vs. Income Tax Officer, Mumbai - [2010-(ID1)-GJX -0046 - TBOM] ITA No. 6966/ MUM/ 2007
16. Assistant Commissioner of Income Tax vs. M/s. L'oreal India Pvt. Ltd. - [ITA No.6745/M/2008)"
8. On this issue, the learned DR submitted that it is a general rule that principle of res judicata is not applicable to the decisions of income-tax 16 ITA No.4767/Del./2009 ITA No.344/Del./2010 proceedings. In assessment for a particular year is final and conclusive between the parties only in relation to that particular year. The decision gave in any particular assessment year is not binding on either side in the subsequent years. He also submitted that these principles of res judicata and estoppel by record applies to decisions of civil courts and has no application to the decisions of income-tax authorities. The tax authorities are not precluded for determination of a question in a subsequent year. Such proposition has been held by the Hon'ble Supreme Court in the case of New Jehangir Vakil Mills Co. Ltd. vs. CIT - (1963) 49 ITR (SC) 137 and also in other case, namely, ITO vs. Murlidhar Bhagwan Das - (1964) 52 ITR 335 (SC). He relied on the order of the CIT (A).
9. We have heard both the sides in detail. We have also considered the case laws relied upon by both the sides. In our considered view, the principle of res judicata cannot be applied in the cases where the assessments of different years are involved. The concept of transfer pricing is directly linked to the computation of income on year to year basis and it cannot be an issue which is settled once forever. Every year the transactions vary and the facts of the case also vary for calculating the taxable income. The chart submitted by the assessee which itself shows that the assessee has himself changed the method to work our appropriate PLI. In 2002-03 and in the year under consideration, the assessee took the PLI on return on capital employed while 17 ITA No.4767/Del./2009 ITA No.344/Del./2010 in the subsequent years 2004-05 to 2006-07, the assessee has considered the OP / TC minus raw material as the most appropriate method for work out the PLI. Therefore, in our considered view, it was open to the taxing authorities to consider the position on year to year basis for working out the appropriate PLI in the transfer pricing. The selection of PLI depends on number of economic factors. The selection of the PLI also depends on the factual position of the case, on comparable companies and FAR analysis which may vary year to year basis. The Hon'ble ITAT, Delhi in the case of Carraro India Ltd. - 2008-TOIL-519-ITAT-DEL has held that there can be no presumption that if in one year, international transactions are carried at arm's length price, then it is carried at arm's length in all the other assessment years.
Considering all these facts and case laws, we hold that the principle of consistency or say the principle of res judicata is not applicable to the facts of assessee's case.
10. We have also heard both the sides on the issue of Profit Level Indicator (PLI). After hearing both the sides, we are of the view that PLI are the ratios that measure relationship between profits with costs or resources. The use of a particular PLI depends on a number factors including, nature of activities of tested party, the reliability of available data with respect to uncontrolled comparables and the extent of which the PLI is likely to produce available measure of income. The PLI is selected with its appropriateness for the 18 ITA No.4767/Del./2009 ITA No.344/Del./2010 transaction under view. The PLI represent a logical financial relationship between the two components / variables. In the assessee's case, the assessee has applied return on capital employed as PLI in the transfer pricing documentation. Since the assessee is engaged in the manufacturing of automobile exhaust catalysts and making import of raw material from its AE, the return on capital employed is not an appropriate PLI. Further the operating profit as a percentage of total cost has to be the basis instead of operating profit as a percentage of the total cost minus raw material cost which the assessee claims. The assessee's explanation to justify the same by explaining the business model and pricing arrangement with the customer cannot be accepted. The assessee's claim that the assessee has no role to play in selecting either the supplier of raw material or determining the terms of pricing of the raw material and determining the customer. It is also claimed that the cost of raw material does not affect the profitability, hence it cannot be taken into account while working out the PLI as operating profit. This view of the assessee cannot be accepted. It is a fact that its raw material supplied by the AE is not exactly in the same condition which has been purchased on the instructions of customer (Maruti Udyog Limited). Further, after the manufacturing of automobile catalyst the same are not directly sold and supplied to Maruti Udyog Limited, but the same are sold/supplied to vendors of Maruti Udyog Limited. It is an undisputed fact that purchase of 19 ITA No.4767/Del./2009 ITA No.344/Del./2010 raw material is as per advice of Maruti Udyog Limited but the same is not supplied to assessee by AE in same form or condition. Assessee had also failed to justify its claim by way of filing agreements with vendors of Maruti Udyog Limited to whom the supply is made. In view of these facts, the purchase cost of the raw material cannot be said to be a pass through cost. It cannot be reduced to working out the PLI. Some technical processes are conducted by the AE on the raw material purchased and then only it is supplied to the assessee company which after manufacturing automobile catalyst supplies to the vendors of Maruti Udyog Limited. The assessee's agreement with the Maruti Udyog Limited under which assessee is obliged to purchase the precious metal raw material on the basis of price quotes advised by Maruti Udyog Limited but it cannot be a basis on which the cost can be considered as pass through cost. Such arrangements only insulate the assessee as well as the Maruti Udyog Limited in respect of the heavy fluctuations in the price of precious metal raw material. This is what assessee is exactly doing. Assessee purchases the raw material when the Maruti Udyog Limited advises and placed a confirmed order for the purchase of the end product in which these precious metals raw material are used. Maruti Udyog Limited does not guarantee the recoverability of the cost of raw material. AE do some technical process on this raw material. The end product manufactured by the assessee is not sold directly to the Maruti Udyog 20 ITA No.4767/Del./2009 ITA No.344/Del./2010 Limited but these are supplied to the third party vendors of Maruti Udyog Limited who in turn further sell to Maruti Udyog Limited. We would also like to note that the accounting entries made by the assessee in respect of the transactions entered into with AE show that the purchases of the raw material is a part of the turnover of the assessee. The material is processed and then sent to vendors of Maruti Udyog Limited and total sale value is taken as turnover of the assessee. These accounting entries do indicate the intention of the transacting parties. The accounting of the assessee shows that the cost of raw material is a value added cost and not as a pass through cost. Even the AE which are using the precious precision metal for manufacturing catalyst raw material and they are also accounting the precious precision metal in the same manner as the assessee is doing. AE also do not treat it as a pass through cost. All these facts show that the assessee's claim to treat the cost of purchase of precious metal as a pass through cost has no basis. In view of this, we are unable to agree with the assessee's contention that cost of purchase of precious metal should not be added to the cost. In our considered view, it must be a part of the cost base for computing the profit element.
11. On the issue of allowing adjustment of ±5% for determining the ALP as provided in the provisions of section 92C(2) of Income-tax Act, the CIT (A) has decided the issue as under :-
"12.3.1 I have gone through the above submission of the appellant, where the appellant claims the benefit of ±5% as a 21 ITA No.4767/Del./2009 ITA No.344/Del./2010 standard deduction. The appellant claims the benefit of adjustment under proviso to Section 92C (2) which read as under:-
"Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean."
12.3.2 It is pertinent to highlight here that the TPO did not allow any benefit, as in his view above provision was not applicable in this case. The provision would be applicable only if Arm's Length Price shown by the taxpayer falls within ±5% of arithmetic mean of more than one price determined by the Most Appropriate Method. As the taxpayer was not falling in above range, it was not entitled to any benefit.
Secondly, the option is surely available to the appellant but it is available only when he is computing the ALP and not when: AO /TPO is computing the ALP.
12.3.3 Section 92(1) of the Income Tax Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Section 92C(2) of the Act provides for determination of the arm's length price by applying the most appropriate method in the prescribed manner. The proviso to the said Section 92C(2), as it stood originally before its amendment by the Finance Act, 2002, provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be arithmetical mean of such prices. This would have resulted into addition to the total income on account of transfer pricing adjustments in all cases wherever there was any variation between the arithmetical mean arm's length price (i.e. mean ALP) determined by the AO / TPO and the transfer price as shown by the taxpayers.
12.3.4 The transfer pricing provisions were brought on the Statute by the Finance Act, 2001 w.e.f. 01.04.2001. With a view to avoid hardship to the taxpayers in the initial years of 22 ITA No.4767/Del./2009 ITA No.344/Del./2010 implementation of these provisions, the Govt. of India, through a Press note issued by the Ministry of Finance (Department of Revenue) on 22.8.2001, expressed its intention of not making any adjustment if the price adopted by the taxpayer was upto 5% less or up to 5% more than the arm's length price determined by the AO. Immediately thereafter, the Board issued the Circular No. 12 dated 23.8.2001 specifying that the AO shall not make any adjustment to the price shown by the taxpayer if such price was up to 5% less or up to 5% more than the arm's length price determined by the AO and in such cases, the price declared by the taxpayer may be accepted.
12.3.5 In effect, the transfer price shown by the taxpayer was not to be disturbed if it was within ±5% mean ALP range i.e. upto 5% less (i.e. in case of receipts) or up to 5% more (i.e. in case of outgoings) than the arm's length price determined by the AO based on the arithmetical mean of the prices. If the transfer price shown by the taxpayer was less than 5% (in case of receipts) or more than 5% (in case of outgoings) of the arithmetical mean arm's length price (i:e. mean ALP) determined by the AO, then the transfer price declared by the taxpayer was not to be accepted and the adjustment.) was required to be made for the difference between the arm's length price determined by the AO based on the arithmetical mean of the prices (i.e. mean ALP) and the transfer price shown by the taxpayer.
12.3.6 The relaxation in transfer pricing adjustments provided by the Board's Circular No.12 dated 23.8.2001, referred to in the proceedings paragraph, was clearly intended to remove hardship to the taxpayers in whose cases the variation between the declared transfer price and the determined mean ALP was only marginal i.e. within ±5% of the mean ALP. This relaxation was not intended to be provided to the taxpayers in whose cases the variation between the declared transfer price and the determined mean ALP was substantial and exceeded the permissible +5% range.
Subsequently, the relaxation extended by the above Circular was, in substance, brought on the Statute by the Finance Act, 2002 by amending the proviso to section 92C(2) of the Act with retrospective effect from 01.04.2002 so as to provide that besides the arithmetical mean of the prices, the arm's length 23 ITA No.4767/Del./2009 ITA No.344/Del./2010 price shall be a price which varies from the arithmetical mean up to ±5%.
12.3.7 It is, thus, evident that the legislative intent of the amended proviso to section 92C(2) of the Act is to remove hardship in cases of marginal variation up to ±5% between the transfer price declared by the taxpayer and the mean ALP determined by the TPO. This is sought to be achieved by taking the arithmetical mean price after adjustment of variation up to ±5% (i.e. adjusted mean ALP), as the arm's length price so that in cases of marginal variation up to ±5%, there would be no difference between the transfer price declared by the taxpayer and the ALP determined by the TPO. Consequently, there would be no addition on account of transfer pricing adjustment in cases of marginal variation upto ±5% between the transfer price declared by the taxpayer and the mean ALP determined by the TPO.
12.3.8 The benefit of adopting the adjusted mean ALP as the arm's length price is not intended to the available to a case where the variation between the transfer price shown by the taxpayer and the mean ALP determined by the TPO exceeds ±5% of mean ALP. In case, the variation between the transfer price declared by the taxpayer and the mean ALP determined by the TPO exceeds ±5% of mean ALP, then the arm's length price shall be taken to be mean ALP and not the adjusted mean ALP. Consequently, the transfer pricing adjustment would be made for the difference between the transfer price shown by the taxpayer and the mean ALP determined by the TPO.
12.3.9 Thus, it is clear from the above discussions, that the ± 5 percent range was provided in Section 92C(2) in lieu of Circular 12 to avoid unnecessary hardship to companies where the adjustment from the arm's length price was with the range prescribed.
However, such benefit cannot be considered to be a standard / universal deduction allowed in each and every case where the assessee exceeds the permissible limit and falls outside the arm's length range. If it is considered as a standard deduction, then it would be an incorrect interpretation of the law whose intention was in substance to provide relief to asses sees 24 ITA No.4767/Del./2009 ITA No.344/Del./2010 who fall within the prescribed range. The principle of substance over form cannot be overlooked as claimed by the Appellant by stating the ruling of Sony India Private Limited.
12.3.10 Further, the proviso only provides a relief to the tax payer at the time of ·determining the ALP. The Hon'ble ITAT has observed that the TP provisions are not an exact science and this is the reason as to why the assessee has been provided the shelter of variation of 5% by the proviso. The shelter is available to ensure that the assessee need not make any changes in its transactional price if the variation w.r.t. the ALP is within a range of 5%. The proviso ensures that neither the assessee is burdened at the time of conducting the TP analysis, nor is the assessee burdened with small amounts of additions made by the revenue.
However the proviso is totally silent as to what should be done if the ALP is not with the range of 5% of the transaction price. This is explained by the original circular issued by the government. In cases where the variation is in excess of 5%, no relief is to be provided to the assessee. It is for this reason that the original circular has still not been withdrawn by the department. There is no doubt that the law has been amended subsequently and a large part of the circular has been converted into legislation but still the circular remains the only directive issued by the government to the AO / TPO explaining them how they should deal with cases where the variation between the ALP and transaction price is in excess of 5%. Hence it is very difficult to disregard the circular which explains the intention of the concept of ±5%.
12.3.11 Therefore, in my humble view keeping the legislative intent of the proviso to section 92C(2) of the Act, the adjustment for ±5% in ALP determination cannot be taken as a standard deduction.
12.3.12 The appellant in his submissions has referred to the decision of various Tribunals and has asserted that they should be followed for allowing the benefit of ±5%.
In this regard it is very humbly submitted that even though an ITAT ruling needs to be given highest respect and 25 ITA No.4767/Del./2009 ITA No.344/Del./2010 applied in letter and spirit, but in context of area of transfer pricing, which is at nascent stage, and given the background, where there is no much jurisprudence either from ITAT benches and much less (absolutely negligible and that too on certain issues, having divergent views/opinion), from High Courts/Supreme Courts, the CIT-A being an appellate authority in order to enable the development of wholesome law on a complex subject, in my understanding may respectfully deviate from understanding given by the Hon'ble ITAT.
12.3.13 For aforesaid proposition, I respectfully place reliance on the principle articulated in Special Bench ITAT ruling in the case of Gold Mine reported at 113 ITD 209:
" ... 53. Referring to the case before the Rajasthan High Court in CIT v. Mewar Oil & General Mills Ltd. (supra), it is emphatically submitted by Mr. Vora that the aforesaid decision of the Rajasthan High Court, being the only High Court decision, directly on the point, it is well settled, is binding on the Bench, as has been held in CIT v. Akshay Kumar Jain 281 ITR 431(MP); SAE Head Office Monthly Paid Employees Welfare Trust: 271 ITR 159 (Del); CIT v. Sarabhai Sons Ltd. 143 ITR 473, 486 (Guj); and that the decision does not lose its binding force merely because Sub-section (6) of Section 801 has not been specifically reproduced/ incorporated in the judgment since: (a) Section 801 has been specifically referred and considered by the Court; and (b) arguments based on the language of Sub-section (6), similar to the one addressed before this Bench, were also very much raised and considered by the Court. Reference, in this regard, was made to Ballabhdas Mathuradas Lakhani AIR 1970 SC 1002, 1003 wherein their Lordships observed in the context of binding effect of decision of Supreme Court on the High Court that:
4 .... The decision was binding on the High Court and the High Court could not ignore it because they thought that relevant provisions were not brought to the notice of the Court. Following the aforesaid decision, the Supreme Court in Director of Settlements, AP v. M.R. Apparao observed:26 ITA No.4767/Del./2009
ITA No.344/Del./2010
7. . .. The decision in a judgment of the Supreme Court cannot be assailed on the ground that certain Aspects were; not considered the relevant provisions were not brought to the notice of the Court (See and AIR 1973 SC
794) ....
54. We do not find any merits in these submissions of Mr. Vora. Firstly, the Supreme court was dealing with the binding nature of the Supreme Court decision on the High Court, whereas we are dealing with the decision of a High court and that too of a High Court having no jurisdiction over the case arising from a different State, which though has a high persuasive value is not binding in other jurisdiction. Secondly, the decision of Rajasthan High court has not dealt with and was also not addressed to deal with. the controversy by noticing the non obstante provisions of Section B01(6)/ BOIA(5) aforesaid. Thirdly, in any case the issue before Rajasthan High Court was whether Assessing Officer could be said to be justified to invoke Section 154 to rectify the mistake which on a contentious matter is not permitted. Fourthly, a decision without noticing an existing provision of law governing the very issue in dispute cannot shut the doors of the tribunal in considering and applying the provisions of law de hors the contrary decision of a High court. This is because a statutory provision supersedes the contrary decision of any court including that of a High court or even Supreme Court and has an ultimate force of law having greater force. Fifthly, in the first case it was not an actual non consideration of a provision but as the Supreme Court itself says in the underlined portion by the intervener itself 'because they thought that "relevant provisions were not brought to the notice of the Court"'.
55. It is true that in the case of Director of Settlement, AP vs. M.R. Apparao (supra) the Supreme Court observed in para -7 of its judgment that decision in the judgment of the Supreme Court cannot be assailed on the ground that certain aspects are not considered or the relevant provisions of the Act is not brought to the notice of the Court, but these observations were based on the decision of the Supreme Court in AIR 1970 in the case of 27 ITA No.4767/Del./2009 ITA No.344/Del./2010 Ballabhdas Mathuradas Lakhani (supra) wherein the Supreme Court, as stated above, has made observation that High Court could not ignore the decision of the Supreme Court because, "they thought" that the relevant provisions were not brought to the notice of the Court. There was actually no ignorance. We, however, find in paragraph-12 of the judgment of the Supreme Court's observation in Apparao' case as under:
Mr. Rao then placed. reliance on yet another decision of this Court in the case of A-One Granites v. State of U.P. and Ors. (2001) 2 SCC 537 to which one of us (Pattanaik, J.) was a party. In that particular case the applicability of Rule 72 of the U.P. Minor Minerals (Concession) Rules, 1963 was one of the bone of the contention before this Court, and when the earlier decision of the Court in Prem Nath Sharma v. State of U.P. , was pressed into service. It was found that in Prem Nath Sharma's case the applicability of Rule 72 had never been canvassed and the only question that had been canvassed was the violation of the said Rules. It is in this context, it was held by this Court in Granite's case "as the question regarding applicability of Rule 72 of the Rues having not been even referred to, much less considered by Supreme Court in the earlier appeals, it cannot be said that the point is concluded by the same and no longer res Integra". This dictum will have no application to the case in hand on the question whether the judgment of this Court in Civil Appeal.No. 398 of 1972 can be held to be a law declared under Article 141.
56. In view of the above, it gets crystalised that when a provision of a statute is not considered, it cannot be said that point is concluded by the Supreme Court decision and the same was no longer res integra. These decisions, therefore, are of no help in resolving the issue. The decision of Rajasthan High Court wherein provisions of section 80I (6) were not specifically discussed nor brought to the notice of the High Court, cannot therefore be said to have concluded the issue, and consequently the same cannot be said to be a binding decision. "
28 ITA No.4767/Del./2009ITA No.344/Del./2010 12.4 In view of the above discussion, and in view of the amended provision of Finance no. 2 (Act) of 2009, which in my humble opinion has a retrospective operation, therefore it is held that the benefit of ±5% is not available to the appellant as a standard deduction."
12. The learned AR submitted that without prejudice to the contention of the other issues raised in appeal in respect of the international taxation done by the assessee with the AE, the assessee deserves to a benefit of variation of ±5%. The learned AR further submitted that provisions of section 92C(2) of the Income-tax Act stipulates that more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. The Ld. AR also submitted that the provisions of section 92C(2) recognizes the method of computing ALP mandate the variation of ±5%. Ld. AR submitted that the variation of ±5% is required to be allowed and the ALP is to be determined at 5% less than computed by the Assessing Officer. Ld. AR also pleaded that this position has been clearly explained by Explanatory Memorandum to the Finance Act, 2002, which states that a price which differs from the arithmetical mean up to ±5% an amount not exceeding of ±5% of such amount may be taken to the ALP at the option of the assessee. He pleaded that the benefit of ±5% must 29 ITA No.4767/Del./2009 ITA No.344/Del./2010 be granted while computing the ALP. It is claimed that it should be allowed as standard deduction.
13. On the other hand, the learned DR relied on the orders of the authorities below.
14. We have heard both the sides on the issue. Various Benches of ITAT had decided the issue. In the case of DCIT vs. Deloitte Consulting India Pvt.
Ltd., the ITAT, Hyderabad Bench 'A' in ITA No.1082/Hyd./2010 has decided this issue as under :-
31. Next we deal with the issue with regard to the allowance of 5% deduction before computing the ALP. It is contention of the learned counsel for the assessee that the arithmetical mean of the comparable price should be reduced by 5% for determining the ALP. We have gone through the submissions and also the case law relied upon by him. He pointed out that the amendment made under section 92C of the Act would be applicable prospectively and not retrospectively. Whereas the learned Departmental Representative objected to the above proposition and submitted that under the proviso, no standard deduction has been provided to the assessee company. In our considered view, the tolerance band provided in the aforesaid provision is not to be taken as a standard deduction. If the arithmetic mean falls within the tolerance band, then there should not be any ALP adjustment. If it exceeds the said tolerance band, then ALP adjustment is not required to be computed after allowing the deduction at 5%. That means, actual working is to be taken for determining the ALP without giving deduction of 5%. Our view is supported by the recent decision of the Delhi Bench of the Tribunal in the case of M/s.
ST Microelectronics Private Limited vs. CIT (A) XX, New Delhi and others (supra). We also find that the issue is covered in favour of the revenue by the decision of co-ordinate Bench in the case of ADP Private Limited, Hyderabad vs. DCIT, Hyderabad (ITA No.106/Hyd/2009 and ITA No.155/Hyd/2009 dated 25-2-2011, to which one of us was a party of that order and the same is binding on us. Since the decision of co-
30 ITA No.4767/Del./2009ITA No.344/Del./2010 ordinate Bench is binding on us, we are not inclined to follow the decisions rendered by other Benches of this Tribunal which are relied on by the learned counsel for the assessee. We are also in agreement with the elaborate findings of the first appellate authority in dealing with this issue and accordingly we do not see any infirmity in his order. Hence, the grounds raised by the assessee on this issue are rejected."
In the case of M/s. ST Microelectronics Pvt. Ltd. vs. Addl. CIT in ITA Nos.1806 & 1807/Del.2008 & Ors., the ITAT, Delhi Bench 'G', New Delhi in its order dated 03.06.2011 has also considered the similar issued and decided as under :-
"44. With the assistance of learned representatives, we have gone through the record carefully. Learned CIT(Appeals) in assessment year 2003-04 has examined this issue in detail. He observed that in order to avoid hardships to the assessees in the initial years of implementation of the TP provisions, the Government of India, through a press note issued by the Ministry of Finance on 22nd August 2001 expressed its intention that no adjustment could be made if the transfer price adopted by the assessee was within the band of ± 5% of the ALP determined by the Assessing Officer. CBDT had issued Circular No.12 on 23.8.2001 specifying that Assessing Officer shall not make any adjustment to the price shown by the assessee if it is within the ±5% band, the effect of the Circular was that transfer price shown by the assessee was not to be disturbed if it was up to 5% less in case of receipt and up to 5% more in case of outgoing. The relaxation extended by this Circular was in substance brought on to the statute by the Finance Act 2002 by amending the proviso to sec. 92C(2) with retrospective effect from 1.4.2002. It provides a tolerance band. It also suggests that there will be no TP adjustment in cases of marginal variation up to ± 5% but substantial variation would result in appropriate TP adjustment. Learned CIT(Appeals) has explained the meaning of tolerance band which read as under :
• "Whether there is an international transaction involving sale of a product or export of services, there would be a 31 ITA No.4767/Del./2009 ITA No.344/Del./2010 credit entry in the profit & loss account. By allowing a margin of (-) 5% for such a transaction, a taxpayer is permitted to have a credit entry which is not below 95% of the ALP so that profit from the transaction is not understated beyond the tolerance level of (-) 5%.
• Whenever there is an international transaction involving purchase of a product or import of services, there would be a debit entry in the profit and loss account. By allowing a margin of (+) 5% under such a transaction, a taxpayer is permitted to have a debit entry which is not above 105% of the ALP so that profit from the transaction is not understated beyond the tolerance level of (+) 5%.
11.18.3 The decision rule contained in the proviso to the sec. 92C(2) of the Act containing a tolerance band is akin to a similar decision rule of confidence interval used in the theory of statistical inference. Under that theory, a 5% level of significance would provide for a tolerance band consisting of 95% & 105% of the arithmetical mean and these points are known as "Critical Values". The rule is one of "All" or "Nothing" kind of a situation. If a computed value falls within the tolerance band, a favorable inference is drawn. The decision rule contained in the proviso to section 92C(2) of the Act thus is a "All"
or "Nothing" kind of rule. After all in the transfer pricing analysis, a sample set of comparables along with the distribution of profitability of this set is examined and an inference is sought to be drawn about the appropriateness of profitability shown by a taxpayer. Therefore, statistical inference theory based on sampling is directly applicable to the benchmarking analysis carried out in the transfer pricing analysis with the help of a sample set of comparables. There is no scope for any "standard deduction" under this rule. In other words, if the ALP falls outside the tolerance band, TP adjustment would have to be made for the difference between the ALP determined by the A.O. based on the arithmetical mean of the prices and the price shown by the assessee".
32 ITA No.4767/Del./2009ITA No.344/Del./2010
45. The contention of the learned counsel for the assessee was that arithmetic mean of the comparable price should be reduced by 5% for determining the ALP. He pointed out that in 2009, the proviso appended to section 92C has been amended but this amendment would be applicable prospectively, because the basis of determination of ALP in respect of international transaction get changed. This amendment effects imposing a new liability by taking the option away from the taxpayers. Thus, according to the learned counsel for the assessee, the amended proviso is not applicable. On the other hand, Learned DR has submitted that under the proviso no standard deduction has been provided to the assessee.
46. On due consideration of the facts and circumstances and perusal of the proviso introduced in 2002 as well as in 2009, we are of the view that this tolerance band provided in the proviso is not to be construed as a standard deduction. In the present appeals, learned TPO has adopted the arithmetic mean of several comparables for taking out a PLI which would be tested with the PLI of the assessee. If that arithmetic mean falls within the range of alleged tolerance band then there may not be any adjustment but if it exceeds then ultimate adjustment is not required to be computed after reducing the arithmetic mean by 5%. The actual working is to be taken. Learned First Appellate Authority has considered this aspect elaborately in assessment year 2003-04 and after going through his order, we do not see any merit in the ground of appeal raised by the assessee in all these three assessment years.
Considering all these decisions of ITAT Benches and pleadings on both the sides, we are of the view that this tolerance band provided in the proviso is not to be construed as a standard deduction. In this case, the TPO has adopted the arithmetic mean of several comparables for taking out a PLI which would be tested with the PLI of the assessee. If that arithmetic mean falls within the range of tolerance band then there may not be any adjustment but if it exceeds then ultimate adjustment is not required to be computed after reducing the 33 ITA No.4767/Del./2009 ITA No.344/Del./2010 arithmetic mean by 5%. The actual working is to be taken into consideration.
Considering all these facts, the appeal of the assessee is also dismissed on this ground.
15. In the ground no.2 & 2.1, the revenue has raised the issue regarding restricting the addition to Rs.7,03,05,000/- instead of Rs.8,33,86,859/- made by the Assessing Officer.
16. We have heard both the sides on the issue and we find that the CIT (A) has rightly accepted the working of the determination of ALP. When the operating profit on cost is to be taken as 16.85% which is to be earned by the assessee then the total revenue earned must be 116.85%. Therefore, the CIT (A) was justified for computation of operating margin which has been done as under :-
(Rs.in ,000) (A) Total Revenue 88,49,97,000 (B) The average operating margin on cost the 16.79% appellant should have earned as discussed in para 11.4.5 above (C) The total cost the appellant should have 75,77,67,000 incurred (A/100 + B x 100) (D) Total cost the appellant actually incurred on 82,80,72,000 discussed in para 11.4.5 above (E) Quantum of adjustment (D-C) 7,03,05,000 In view of these facts, we dismiss these grounds of revenue's appeal.
15. In the ground nos.3 & 3.1 of the revenue's appeal, the issue involved is inclusion of the interest income as the business income for qualified for 34 ITA No.4767/Del./2009 ITA No.344/Del./2010 deduction u/s 80HHC of the Income-tax Act. The revenue has prayed that the interest income is to be assessed as income from other sources and not as business income, therefore, it cannot form the part of the business income which qualified for deduction u/s 80HHC of the Act.
16. The assessee has claimed deduction u/s 80HHC for the financial year 2002-03 relevant to assessment year 2003-04 amounting to Rs.17,89,177/-.
The Assessing Officer recomputed the deduction u/s 80HHC after including the interest of Rs.30,76,000/- and other income of Rs.69,09,000/- from the amount of profits eligible for deduction u/s 80HHC. The CIT (A) has granted the relief on the basis of decision of ITAT in assessee's own case in the assessment year 2002-03 and 2004-05 on the same ground. Since the revenue has not brought anything on record regarding the reversal of the order of ITAT for assessment years 2002-03 and 2004-05 of any higher courts, therefore, we have no alternative but to follow the orders of ITAT in the earlier years on the same issue. These grounds of revenue's appeal are dismissed.
17. In the result, appeal of the assessee as well as the revenue stand dismissed.
Order pronounced in open court on this 29th day of March, 2012.
Sd/- sd/-
(U.B.S. BEDI) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 29th day of March, 2012/TS
35 ITA No.4767/Del./2009
ITA No.344/Del./2010
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)-XXI, New Delhi.
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.