TaxTMI 
TaxTMI 
2010 (11) TMI 730
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....the assessee in this regard. (2) On the facts and the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in holding that the amount paid to the assessee for royalty and technical know-how should be nil. (3) On the facts and the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in applying the TNMM, whereas the cost plus method was the most appropriate method for determining the ALP and also ignoring the internal comparable between international and non-international transactions for the cost plus method submitted by the assessee. (4) On the facts and the circumstances of the case and in law, the learned CIT(A) has erred in ignoring and in not giving the assessee the benefit of the fact that no adjustment has been made in the assessee's transfer pricing assessment for the next asst. yr. 2005-06, where the facts and circumstances were absolutely the same. (5) The order of the learned CIT(A) is bad in law and on the facts of the case arid is based on the surmises and conjectures only and without considering the facts and submissions ma....
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....Auto Ltd. 75.30 7.13 9.46 2. NRB Headings Ltd. 210.95 31.95 15.14 3. Rane (Madras) Ltd. 201.66 23.39 11.58 4. Sona Koya Steering Systems Ltd. 281.47 20.20 7.17 5. Talbros Engineering Ltd. 22.95 1.51 6.57 6. Bharat Gears Ltd. (automotive segment) 92.69 4.95 5.34 Average 9.21% 2.4 As the appellant's net operating margin on overall basis was 4.56 per cent as against 9.21 per cent for the comparables adopted by the TPO, accordingly AO made a downward adjustment by Rs. 3,18,89,975 to the international transaction. 3. Aggrieved, the assessee preferred first appeal where the detailed submissions were made. The CIT(A) however, enhanced the addition in respect of international transactions to 10.74 per cent average operating margin by following observations:- "15. In view of the above discussion, I hold that the following 6 comparables chosen by the TPO are correct for making comparability analysis for determining the ALP for the international transactions comparing payment for raw material, royalty and technical know-how. 15.1. The average....
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.... safety seat belts for automobiles and is supplying to OEM's like Maruti Udyog Ltd., Honda Siel Cars India Ltd., Tata Motors Ltd., Swaraj Mazda and Hindustan Motors Ltd. AAIL has a technical and financial collaboration with Takata Asia Pte Ltd., Singapore. This collaboration provides technology for new seat belts coming. AAIL is also doing business of window regulators (power and manual) for cars and supplys to Tata Motors and Hindustan Motors. AAIL buys seat belt components from Takata, assembles them and sells to Honda and Maruti Udyog. AAIL's total equity capital is 13,00,000 shares, of which 70 per cent is being held by Indian shareholders and balance 30 per cent is held by Takata's Group. 1.2 The major international transactions reported in Form No. 3CEB are as under:- Sl. No. Description of transaction Method Value (in Rs.) 1. Purchase of raw material None 8,27,84,638 2. Purchase of machines None 33,27,876 3. Payment of royalty None 16,09,505 4. Fee for technical know-how None 1,10,00,000 5. Interest on loan None 10,26,843 Purchase of raw material:- "During the previous year,....
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.... only, hence the question of determining ALP does not arise. During the course of proceedings, the assessee has filed photocopy of collaboration agreement, copy of profile of Takata, its AE. (b) A note on determination of ALP was also filed mentioning:- "We are engaged in manufacturing and supplying safety seat belts for automobiles to all OEMs in India like Maruti Udyog Ltd., Honda Siel Cars Ltd., Tata Motors Ltd., Hindustan Motors Ltd. and Swaraj Mazda Ltd. In 2000, AAIL entered into a technical collaboration with Takata Asia Pte Ltd., Singapore (previously known as Automotive Safety System Pte Ltd), a subsidiary of Takata Corporation, Japan. Takata Asia also holds 30 per cent equity shares in Abhishek Auto Industries Ltd. (AAIL). Takata has developed seat belts for Honda Siel Car India Ltd. and Maruti export model. These are specifically designed seat belts for particular model of car and cannot be used in other cars. Abhishek Auto buys this material from Takata and does some assembly work and supplies to Honda and Maruti. Initially, the prices are fixed according to purchase price from Takata and later on foreign exchange fluctuations are....
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....sp; 5.6 The appellant's margins have been calculated by TPO in para 5.8 of his order as under:- "Computation of net operating margin of the assessee:- 5.8 From the balance sheet and P and L a/c filed by the assessee the following emerges:- Net sales Rs. 68,76,63,661 Profit before tax Rs. 1,91,17,090 Other income Rs. 16,10,614 Financial expenses Rs. 1,39,37,372 Net operating profit (Profit before tax - other income + financial expenses) Rs. 3,14,43,848 Net operating margin 4.56% Net operating profit at arm's length margin = 9.21% of Rs. 68,76,63,661 Rs. 6,33,33,823." 5.7 Learned counsel contends that TPO thus concluded in his order as under:- "5.9 Accordingly, at arm's length the assessee company was required to obtain a net operating margin of 9.21 per cent over sales which translates into Rs. 6,33,33,823. The net operating profit of the assessee is Rs. 3,14,43,848 accordingly the value of 'international transaction' related to purchase of raw material and machines needs to be adjusted downward by an amount of Rs. 3,18,89,975 which is the difference of net operating margins at arm's length i.e. Rs.....
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.... C Operating profit 5,78,47,259 1,86,20,306 3,92,26,953 D Operating profit as a percentage of operating income 8.41% 14.61% 7% E Operating profit/total cost 9.18% 17.11% 7.53% 5.10 CIT(A) made adjustments which are mentioned in his order as under:- "8.6 When the information given in the above table is compared with the audited financial statements provided by the appellant it is found that the total expenses allocated between the two segments were Rs. 62,98,16,402 vis-a-vis the total expenses of Rs. 67,01,57,185. On the perusal of the schedule of the P and L a/c it is noticed that the difference is on account of non-allocation of the following expenses:- (a) Technical know-how payment made to Takata amounting to Rs. 1,10,00,000. (b) Depreciation amounting to Rs. 2,64,03,411. (c) Finance expenses amounting to Rs. 1,39,37,372. The above expenses also need to be allocated to both the segments either on the basis of some allocation key or if they are directly attributable to a particular segment. 8.7 On the perusal of the nature of the inter....
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....apitalized by the assessee. Therefore in any case difference may be attributed to only of items (b) and (c) above. By allocating entire payment of technical know-how fee of Rs. 1.10 crores to AE segment, CIT(A) computed the PLI from AE segment at 1.86 per cent and from non-AE segment at 2.88 per cent. This according to learned counsel is incorrect as the appellant never claimed payment of technical know-how fee of Rs. 1.10 crores in its P and L a/c since the same was capitalized. 5.13 Even though CIT(A) rejected internal comparable and held that in the absence of internal comparable, TNMM is the most appropriate method by following observations in para 8.9 of his order:- "Hence in the absence of any internal comparable TNMM is the most appropriate method to compare the company-wise margins earned by the appellant with external comparables undertaking similar manufacturing activities." 5.14 In view of the above calculations, the CIT(A) enhanced the addition as calculated by him on p. 25 para 15.1 of his order to Rs. 4,24,11,209. 5.15 Learned counsel canvassed following points before us:- (A) Written agreements which are duly executed....
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....ansfer pricing is a complete code in itself and therefore there is no need for any external aids in interpretation of the Indian statute. The Judges of the apex Court and various other High Courts and the Tribunals specifically dealt with almost every situation in Indian perspective and the law in India is well-settled on most of the propositions involved in this case. Royalty agreement duly executed and approved by the Government of India should not have been disregarded completely by the authorities below. D. Learned counsel supports his case on the basis of assessment orders in assessee's own case for subsequent years, i.e. asst. yrs. 2005-06 and 2006-07 along with TPO's orders which show that the TPO as well as the AO have accepted the existence of this joint venture agreement and have not proposed any additions either on account of royalty payment or on account of purchase of raw materials in the subsequent years. E. Only international transactions are covered by Chapter X on transfer pricing regulations and the transactions which have no international transaction element are not amenable to adjustments and for this proposition he has cited the following au....
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....ith regard to internal CUP as the comparable method for testing the appellant's transactions with its AE. It is pointed out that paras 8.5 and 8.8 of the CIT(A)'s order show that the margin in the AE transactions by the appellant is much higher than the margins in its local business. As per revised chart furnished by assessee by excluding the capital payment of Rs. 1.10 crores which has been capitalized by the appellant in its books of accounts under the Companies Act as well as under the IT Act, the operating profit of sales in the AE transaction segment would be 10.495 per cent as against 2.88 per cent in the totally domestic segment in which there is no international transaction. In both these segments, the product manufacturing processes are the same. In the other segment the turnover is Rs. 56.02 crores as against turnover of Rs. 12.74 crores in the AE segment. All the sales of the appellant company are to domestic, non-related parties only, there is no export sales. The only difference in the Takata segment is the use of technology of Takata and the raw material is also imported from them. Normally in a transfer pricing regulation, this should be tested on the fact that where....
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.... unrelated parties cannot be disregarded without assigning any cogent reasons thereto. In this case it has not been imputed that agreements were non-genuine or sham, rather they are duly approved by RBI and other regulatory agencies. It is also a settled proposition that commercial transactions are in the domain of the businessman and IT Department cannot intervene in realm of intricacies of commercial expediencies involved in these arrangements. In this case if the assessee had not entered into joint venture agreement with Takata, it would not have been able to make any sales whatsoever using their technology and raw material and the machines supplied by them. The very existence of this business in AE segment depended upon the joint venture agreement which has been duly approved by the Government of India in accordance with law. In such circumstances, we are of the view that TPO and the CIT(A) were not correct in disregarding this agreement without assigning any cogent reasons except challenging the commercial need for such arrangement which is in the domain of the businessman and not of the Revenue authorities. 8.1 We have observed that the TPO in his order has accepted....
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....resentative and while making adjustments based on statistical analysis some sort of safe harbour percentage must be there before making any additions. Respectfully following the judgments of the Tribunals, we accept this plea of the assessee. 8.4 The next proposition of using internal comparables also in our view helps the case of the assessee, to take it outside the scope of making any adjustment. Apart from relying on the judgments cited by the appellant, in our opinion, the best comparability can be of the transactions of the tested party itself. If the tested party without the use of the imported technology and imported raw material can make additional margins, then it would be a case which may require an adjustment, but in this case the international transactions have demonstratively boosted the profits of the appellant. As per calculations of the CIT(A), as corrected by an error on account of technical know-how fee which was not claimed as revenue expense, the segment which did not have the benefit of foreign technology and foreign raw material had an operating profit to sales margin at 2.88 per cent, whereas the segment which had this benefit had a margin of 10.49 ....