2014 (12) TMI 1 - AT - Income Tax

Tribunal directs re-determination of arm's length price, allows additional depreciation claim, dismisses penalty, considers interest.

The Tribunal partly allowed the appeal, directing the Assessing Officer to re-determine the arm's length price for the export of spare parts and ... Transfer pricing adjustment – Rejection of analysis undertaken to determine ALP - International transaction of export of spare, parts and components with the AE – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that while carrying out the transfer pricing study of an international transaction, it is imperative that a comparison is made with the similarly placed transactions, as far as possible - the assessee benchmarked its International transaction of export of spares and components to its AE on the basis of TNM Method by relying on external comparable companies - the net profit margin in any particular kind of activity is indeed effected by various factors which are industry-specific and can also be unit-specific having regard to the degree of business experience enjoyed by an entity - while undertaking transfer pricing analysis one must examine the transactions undertaken with regard to the relevant factors effecting such transactions vis-à-vis transactions sought to be compared - with regard to the transactions of category ‘B’ and ‘C’, which is in the realm of sourcing of components, quite clearly the same is in the nature of industrial supplies, which are in-turn, used by the buyer in manufacturing of vehicles and the services being rendered by assessee is merely logistic service equivalent. The assessee which manufactures vehicles and sells the same, also undertakes supply of spares and components required for servicing of such vehicles sold by it - the supplies so undertaken are from already firmed-up sources, inasmuch as the assessee is the manufacturer of vehicles in which such components are used, and at the time of procurement for manufacturing the assessee has mandated the dies, design, quality, warranties, etc. - supply of spare-parts and components as purely after-sales distribution results in higher margins - the sourcing of products for overseas AE entailing category ‘B’ and ‘C’ transactions, the assessee has very limited role to play, which is akin to logistics support service provider - even according to the internal TNMM mechanism sought to be applied, the comparison of margin of transactions of category ‘B’ and ‘C’ undertaken with the AEs is incomparable with the transactions undertaken with the third parties (i.e. non-AEs) which are purely in the nature of category ‘A’. In relation to the international transactions of export to the associated enterprises relating to the spares and components required in servicing of vehicle manufactured and sold by the assessee, even on an application of internal TNM mechanism the international transactions undertaken with associated enterprises was at an arm's length price - the adjustment computed by the TPO with regard to the export to associated enterprises of spares and components required for the purpose of servicing of vehicles sold by assessee is untenable, as the transactions undertaken with third-party distributors are comparable to the transaction with the associated enterprises – thus, the matter is to be remitted back to the AO for re-determination of ALP of international transactions of export of spares and components – Decided in favour of assessee. Claim of additional depreciation on computers installed in factory u/s 32(1)(ii)(a) – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that the field and has not been altered by any higher authority – the assessee’s claim of additional depreciation on computers installed in its factory is allowed – thus, the order of the CIT(A) is set aside – Decided in favour of assessee. Issues Involved:1. Transfer Pricing Adjustment for Export of Spare Parts and Components2. Additional Depreciation on Computers Installed in Factory3. Penalty Proceedings under Section 271(1)(c)4. Levy of Interest under Sections 234B, 234C, and 234DIssue-wise Detailed Analysis:1. Transfer Pricing Adjustment for Export of Spare Parts and Components:The primary dispute pertains to an addition of Rs. 2,15,95,600/- made by the Assessing Officer (AO) on account of a transfer pricing adjustment to the stated values of international transactions undertaken by the assessee with its associated enterprises (AEs) concerning the export of spare parts and components. The AO rejected the external Transactional Net Margin Method (TNMM) approach adopted by the assessee and instead applied the internal TNMM. The Tribunal noted that the dispute was identical to the one considered in the assessee's own case for the assessment year 2006-07, which had been followed for the assessment year 2007-08. The Tribunal found that the internal TNMM mechanism applied by the AO was inappropriate due to the varied nature of transactions, which included categories 'A' (sale of spares for servicing vehicles), 'B' (sourcing components for two/three-wheelers), and 'C' (sourcing components for four-wheelers). The Tribunal concluded that the transactions under categories 'B' and 'C' could not be compared with category 'A' transactions due to functional and economic differences. The Tribunal directed the AO to re-determine the arm's length price following its decision for the assessment year 2006-07, remanding the issue back to the AO for verification and appropriate order.2. Additional Depreciation on Computers Installed in Factory:The dispute involved the disallowance of additional depreciation of Rs. 18,70,555/- claimed by the assessee under Section 32(1)(ii)(a) of the Income Tax Act for computers installed in its factory at Baramati. The Tribunal noted that a similar issue had been considered in the assessee's own case for the assessment year 2007-08, where the claim was allowed. The Tribunal followed this precedent and directed the AO to allow the claim for additional depreciation.3. Penalty Proceedings under Section 271(1)(c):The assessee challenged the penalty proceedings initiated under Section 271(1)(c) of the Act. The Tribunal deemed this ground as premature and accordingly dismissed it.4. Levy of Interest under Sections 234B, 234C, and 234D:The last ground related to the levy of interest under Sections 234B, 234C, and 234D of the Act. The Tribunal noted that this issue was consequential in nature and did not require any adjudication.Conclusion:The appeal was partly allowed. The Tribunal directed the AO to re-determine the arm's length price for the export of spare parts and components based on its previous decisions. The claim for additional depreciation was allowed, the penalty proceedings were dismissed as premature, and the issue of interest levy was noted as consequential.