Lenovo (India) Pvt. Ltd. Vs DCIT (ITAT Banagalore)
Ld. TPO thus applied the TNMM as the MAM and determined ALP which resulted in adjustment of Rs. 10,19,77,372/- to the Manufacturing Segment.
The assessee filed objection before the DRP agains the proposed adjustment. However the DRP upheld the order of Ld. TPO by observing that in CUP method, strict comparability is required and such comparability is not possible in the case of the assessee. The DRP also upheld application of TNMM as MAM and methodology adopted to determine ALP under the TNMM by the TPO.
On receipt of the DRP order the Ld.AO passed the final assessment order making the adition in the hands of the assessee. Against the final assessment order, the assessee raised the issue before this Tribunal.
We refer to the order passed by this Tribunal for A.Y. 2015-16 which is the recent most order wherein this Tribunal decided this issue on identical facts in assessee’s own case by observing as under.
“9. Aggrieved by the order of the DRP, the Assessee has raised Grd.No.II before the Tribunal. We shall first take up Gr.No. II sub grounds 2 to 6 which grounds relate to the contention of the Assessee that CUP should have been accepted as the MAM. We have heard the rival submissions. As far as the issue of MAM in the case of the Assessee in the transaction of import of components is concerned, we have already extracted the reasons assigned by the TPO for rejecting CUP as MAM and the reasons given by the Assessee as to why the reasons assigned by the TPO are unsustainable.
10. In AY 2006-07, the Tribunal has in its order dated 5.2016 in IT (TP) A.No.582/Bang/2015 upheld the DRP’s direction that CUP is the MAM to be applied in the case of the Assessee. In AY 200 7-08, the DRP upheld CUP as the MAM and the department did not file any appeal against that order of DRP before the Tribunal. In AY 2008- 09 the TPO vide his order dated 31.10.2011 accept Assessee’s adoption of CUP as MAM and also accepted that price paid in the international transaction to the AE is at Arm’s Length. In AY 2009-10 in ITA(TP) A. No. 74/Bang/2014 order dated 6.7.2018 the Tribunal upheld order of the DRP accepting CUP as MAM. In AY 2010-11 the Tribunal in IT(TP)A No. 580/Bang/2015 order dated 31.3.2017 upheld the order of the DRP upholding CUP as MAM. There are no changes in the facts and circumstances in the present AY and hence the decision of the Tribunal rendered in the past will apply to the present AY 2015-16 also.
11. We are therefore the view that CUP should be adopted as the MAM. We direct the TPO to apply CUP as the MAM and determine ALP after due opportunity of being afforded to the Assessee. Ground II sub-grounds 2 to 6 are allowed. In view of the above conclusions the other sub-grounds 7 to 11 raised in Ground No. II does not require any adjudication.”
Before us, for year under consideration, both Ld.AR as well as Ld. DR raised identical arguments in support of their respective claims as reproduced hereinabove. As the submissions advanced are on identical facts that has already been considered by this Tribunal, for preceding assessment years as well as assessment year 2015-16, respectfully following the above view, we direct the Ld.TPO to replace the TNMM with CUP as most appropriate method.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present appeal arises out of the final assessment order dated
30.10.2017 passed by Ld. DCIT, Circle – 4(1)(1), Bangalore for Assessment Year 2013-14 on following grounds of appeal:
1. The Assessment Order dated October 30, 2017 (served on November 4, 2017), issued by the learned Deputy Commissioner of Income-tax, Circle 4(1)(1), Bangalore (“learned AO”) under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 (“the Act”), the Directions issued by the Hon’ble Dispute Resolution Panel (“Hon’ble DRP”) and the Order of the learned Transfer Pricing Officer (“learned TPO”) issued under Section 92CA of the Act are not in accordance with the law and made in violation of the principles of equity and natural justice and are contrary to the facts and circumstances of the present case.
2. Transfer pricing adjustment in the Manufacturing segment of INR 10,19177,372
2.1. The Hon ’ble DRP and learned AO / TPO have erred in law and on facts in making transfer pricing (“TP”) adjustment of INR 10,19,77,372 to the returned loss of the Appellant and in holding that the international transactions undertaken by the Appellant with its associated enterprises (“AEs”) in the manufacturing segment were not at arm’s length.
2.2. Rejection of internal comparable uncontrolled price selected as the most appropriate method by the Appellant
2.2.1. The Hon’ble DRP and learned AO / TPO have erred in law by rejecting the application of Internal Comparable Uncontrolled Price (“CUP”) method selected as the most appropriate method (“MAM”) by the Appellant for benchmarking the international transaction of import of raw materials in relation to manufacturing segment.
2.2.2. The Hon’ble DRP and learned AO / TPO have erred in upholding the learned TPO’s stand that average of the comparable uncontrolled transaction prices which are similar comparables to each other cannot be taken as the arm’s length price under the internal CUP method.
2.2.3. The Hon’ble DRP and learned AO / TPO have erred in law and on facts in concluding that the Appellant has adopted industry average rates and, on this basis, rejecting the CUP method, when only the average of the comparable uncontrolled transaction prices under internal CUP method were used by the Appellant.
2.2.4. The learned TPO erred in concluding that comparable data is not available for a substantial portion of the transactions, when he himself has acknowledged in the TP order that comparable uncontrolled transactions are available to the extent of 84 percent of the value of total purchases from the AEs. Further, no rational basis is provided with respect to the aforesaid percentage calculated by the learned TPO.
2.2.5. The Hon’ble DRP and learned AO / TPO have erred in rejecting the CUP method as the MAM when similar transactions of the Appellant for the preceding years AY 2007-08 and 2008- 09 has been benchmarked by the Appellant under the CUP method and reported as such in the Form 3CEBs filed for the relevant years and have been accepted to be at arm’s length in the TP Orders for those years.
2.2.6. The Hon’ble DRP and learned AO / TPO have failed to consider the principle upheld by the jurisdictional bench of the Income Tax Appellate Tribunal (“ITAT”) in the Appellant’s own case for AY 2006-07, which had held in the context of benchmarking the Appellant’s import of raw materials transaction pertaining to the manufacturing segment that the CUP method, where consistently applied and accepted in the assessments of the subsequent years AY 200 7-08 and 2008-09, should not be substituted with the transactional net margin method (“TNMM”).
2.2.7. The Hon’ble DRP and learned AO / TPO have erred in rejecting the CUP method as MAM when the jurisdictional bench of Hon’ble ITAT as well as the Hon’ble DRP in the Appellant’s own case for AY 2010-11, have upheld the adoption of Internal CUP as the MAM for determining the ALP of import of raw materials transaction pertaining to manufacturing segment.
2.2.8. The Hon’ble DRP and learned AO / TPO have erred in not following the settled principle based on the rulings of the Supreme Court that where a fundamental fact permeates through more than one year and is accepted by the Revenue authorities, it should not be arbitrarily rejected.
2.3. The Hon’ble DRP and learned AO / TPO have erred in law and on facts by adopting the TNMM as the MAM for benchmarking the international transaction of import of raw materials in the manufacturing segment.
2.4 Fresh comparability analysis undertaken by the learned TPO
2.4.1. The Hon’ble DRP and learned AO / TPO have erred in law by conducting a fresh search for comparable companies and by rejecting the benchmarking process carried out by the Appellant as per the provisions of the Act, without giving adequate reasons for the rejection.
2.4.2. The Hon’ble DRP and learned AO / TPO have erred in law in adopting the following filters for conducting TP analysis, without appreciating the TP documentation prepared by the Appellant:
