Case Law Details
Brief of the Case
Delhi High Court held In the case of Denso India Limited vs. CIT that there can be no dispute that the AO would normally accept the figures given in TP report, if they do not call for his interference. However, his job also extends to critically evaluating materials and in cases which do require scrutiny, go ahead and do so. The factual discussion in this case clearly reveals that the assessee chose to import components not from the manufacturer (which was an AE) but an intermediary. Normally, this would have been a commercial decision, which revenue authorities would not question. However, interestingly, the vendor of the components was also connected with both the assessee and the manufacturer. If these realities emerged during the TP exercise, compelling the TPO to closely scrutinize the value of such imports and seek further details from the assessee, to justify its decision, the onus was clearly on the assessee to afford a convincing and reasonable explanation. Such of the explanations that were forthcoming, were apparently unconvincing. Hence, the unusual features which remained unexplained by the assessee influenced the TPO and the AO to resort to transfer pricing adjustment and determine ALP by adopting the CUP method for the procurements from Sumitomo Japan.
Facts of the Case
The facts which are common for the specific questions of law framed by the Court are that for both the assessment years 2002-03 and 2003-04, the assessee had procured component level inputs for the manufacture of its products. The total raw material imported was to the extent of Rs. 57,77,00,221 of which the value of imports from Sumitomo Corporation was Rs. 49,86,69,729/- or 86.3% of the total import. It also constituted 37.5% of the total raw material consumed. This figure related to AY 2002-03. Likewise, for AY 2003-04, the facts were much the same and the transfer pricing adjustment leading to addition of Rs. 5.86 crores was recommended by the TPO. The AO, in his order dated 28.03.2006 noticed that there was no difference of facts between the previous year AY 2002-03 and the current year in question, AY 2003-04 in respect of supplies by Sumitomo Corporation and consequently directed addition of Rs. 97,44,630/-. The TPO had determined the ALP at an average margin of 6.92% after eliminating 7 out of the 11 comparable companies since their turnover was less than Rs.100 crores. The assessee’s turnover was over Rs.250 crores. The Profit Level Indicator (PLI) of the assessee, in terms of the documents furnished by it worked out to 4.36%. The adjustment was, therefore, arrived at Rs. 5.86 crores.
Like for AY 2002-03,the CIT (A) held by his order dated 30.12.2009 that the adjustments were not justified. The CIT(A) followed his previous order and held that the CUP method was not the most appropriate one and that the import prices were not comparable to the prices paid to domestic vendors after indigenisation. The adjustment of Rs. 97,44,630/- was, therefore, deleted. The common order of the ITAT set aside the order of the Appellate Commissioner and restored the adjustments directed by the AO.
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