TaxTMI 
TaxTMI 
2012 (11) TMI 57
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....e case and in law, the Hon'ble DRP and consequentially the ld AO have: Ground No. 1 - erred in making transfer pricing adjustment amounting to Rs 5,68,14,344/- to the value of international transaction by rejecting the analysis undertaken by the appellant to determine arm's length price for its international transaction pertaining to export of spare parts and components to the associated enterprise. Ground No. 2 - erred in rejecting the external TNMM approach adopted by the assessee and inappropriately applying internal TNMM for determining the arm's length price for the international transaction of export of SP&C. Ground No. 3 - erred in (without prejudice to the above grounds) not allowing the benefit of the proviso to section 92C(2) of the Act (which was effective during AY 2006-07) and consequently not providing the benefit of +/-5 per cent from the arithmetic mean (arm's length price) determined by the ld TPO." 3. In brief, the facts relevant to the impugned dispute can be summarized as follows. The assessee filed its return of income for the assessment year 2006-07 declaring an income of Rs 141,64,07,566/-. Notably, the assessee company was incorporated in India a....
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....ct, the assessee's assertion was rejected. The TPO rejected the application of external TNMM adopted by the assessee and instead applied internal TNMM mechanism in order to benchmark the international transaction relating to export of spares and components to AE. The TPO analyzed the profitability of the exports undertaken by the assessee to its AE on one hand and compared it to the profitability of the exports undertaken by the assessee to third parties (i,e. non- AEs). On the basis of such an analysis, the TPO noticed that the net profit margin (on cost) pertaining to export sales to AEs was 11.63% and the net profit margin (on cost) pertaining to third party exports, (i.e. to non-AEs) was 56.58%. Based on this analysis, the TPO proposed an adjustment of Rs 5,68,14,344/- to the international transaction pertaining to the export of spares and components to AE and as a consequence, the Assessing Officer has made an addition of Rs 5,68,14,344/- to the returned income. 5. The assessee in proceedings before the Dispute Resolution Panel (DRP) was unsuccessful in assailing the adjustment to the international transaction as proposed by the TPO. The objections taken by the assessee bef....
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....ibutors required for servicing of vehicles sold by the assessee. In this manner, it is sought to be pointed out that the aforesaid sub-segments involve incomparable activities and therefore the margin of 56.58% on exports to non- AEs cannot be a benchmark to evaluate the arm's length feature of assessee's margin of 11.63% on exports to AE. 7. The assessee has explained the varied nature of transactions which are comprised in the sales of 'spares and components' amounting to Rs 14,62,45,611/-. It has been explained that three categories of transactions are carried out in the activity of sale of 'spares and components'. We may summarize the activities as follows - Category 'A' represents sale of spares by the assessee to third party distributors as well as to the AEs, which are required for the purposes of servicing the vehicles sold by the assessee company; Category 'B' represents sourcing of components required by the overseas AEs for manufacture of two and three-wheelers; and Category 'C' represents sourcing of components required by the overseas AEs for manufacture of four-wheelers, namely, New Quadracycle Poker. The point sought to be made out by the assessee is that the expo....
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....icing study of an international transaction, it is imperative that a comparison is made with the similarly placed transactions, as far as possible. In the present case, as noted earlier, 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. So, however, the income-tax authorities have applied an internal TNMM mechanism in order to benchmark the impugned International transaction. The TPO analyzed the profitability of exports of spares and components to AEs on one hand, and compared it to the profitability of export of spares and components made by the assessee to third parties (i.e. non-AEs). At the threshold, the assessee has assailed the use of internal TNMM mechanism as inappropriate and has pointed out that the use of TNMM mechanism based on external comparable is more appropriate. Initially, we do not take up this controversy, which we shall deal with a little later. However, another pertinent plea of the assessee is to the effect that even the internal TNMM mechanism applied by the income-tax authorities is quite inappropriate and, therefore, the same has resu....
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....f 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. The factors which can be industry-specific, for example can be in the field of competitiveness, new entrants, product differentiation and other Government regulations, etc. It is therefore quite imperative that while undertaking transfer pricing analysis one must examine the transactions undertaken with regard to the relevant factors effecting such transactions visà- vis transactions sought to be compared. In this context, we may now appreciate the distinction being set-up by the assessee in relation to transactions of category 'B and 'C' on one hand and the transactions of category 'A' on the other. 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. On the other hand, the nature of transactions in category 'A' effectuated by the asses....
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....see with its AE. In so far as such transactions are concerned, there is no internal comparable transaction, inasmuch as such like transactions have not been carried out with non-AEs. The transactions of such nature involving sourcing of spares and components used in the manufacture of vehicles undertaken by the AE abroad have not been undertaken by the assessee with non-AEs. Therefore, in the absence of any internal transactions with third parties with similar functions and economic scenario, benchmarking of transactions of category 'B' and 'C' undertaken with AEs, cannot be done appropriately by invoking the internal TNMM mechanism. In this context, the assessee pointed out that for benchmarking the transactions between the assessee and the AEs in respect of such activities, the assessee has undertaken comparison with operating margins earned by third party support service providers in India and tabulation in this regard has been placed in page 223 of the Paper Book No. II. It is sought to be made out that the margins declared by the assessee on such activity at 11.05% compare favourably with the average operating margins earned by third party support service provider companies....
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....issions. In this case, a pertinent issue which has been vehemently agitated by the appellant is with regard to its claim of seeking benefit of the option available under the erstwhile proviso to section 92C(2) of the Act. The erstwhile proviso which was inserted by Finance Act, 2002 with effect from 1.4.2002 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 percent of such arithmetical mean." As per the said Proviso, an option is available to the assessee for adjustment of +/-5% variation for the purposes of computing ALP. As per the Proviso, 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 5% of such arithmetical mean. The point made out by the assessee is based on the latter part of the Proviso whereby an option is g....
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....DT Circular No 5/2010 (supra) read with Corrigendum dated 30.9.2010 issued by the CBDT in this regard. Per contra, the stand of the assessee is that the amended Proviso would be applicable prospectively and would not apply in respect of the stated assessment year, which is prior to the insertion of the amended Proviso with effect from 1.10.2009. 22. We have carefully examined the rival stands on this aspect. The amended Proviso has been brought on the statute by the Finance (No. 2) Act, 2009 with effect from 1.10.2009. The Explanatory Notes to the provisions of Finance (No 2) Act, 2009 contained in circular No 5 of 2010 (supra) provides the objective behind the amendment of the Proviso. The Legislature noticed the conflicting interpretation of the erstwhile proviso by the assessee and the income-tax Department. The assessee's view was that the arithmetical mean should be adjusted by 5% to arrive at ALP, whereas the departmental view was that no such adjustment is required to be made if the variation between the transfer price and the arithmetical mean is more than 5% of the arithmetical mean. With a view to resolving this controversy, the Legislature sought to amend the proviso ....
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....ect from 1st October, 2009 and shall accordingly apply in relation to all cases in which proceedings re pending before the Transfer Pricing Officer (TPO) on or after such date." (ii) In para 38.3, for the date "1st October, 2009, the following date shall be read: "1st April, 2009". In terms thereof, it is canvassed that the amended proviso has been made applicable with effect from 1.10.2009 and shall apply even to cases where proceedings were pending before the TPO on or after such date, irrespective of the assessment year involved and, therefore, in the instant case the benefit of the erstwhile proviso cannot be extended to the assessee. We have carefully pondered over the assertion made by the appellant that the Corrigendum is untenable in the eyes of law. Firstly, the said corrigendum does not bring out any preamble so as to throw light on the circumstances and the background in which the same has been issued. Secondly, it is well understood that the Explanatory Notes to the provisions of a Finance Act passed by the Parliament seeks to explain the substance of the provisions of the Act as intended by the Legislature. In fact, the Hon'ble Supreme Court in the case of K.P Va....
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....f +/-5% variation while computing ALP is not justified. As per the Tribunal, though the amended proviso to section 92C(2) was applicable with effect from 1.10.2009, so however, for the reasons contained therein, it would not cover such like cases as is the case before us. In para 22 of the order, which has been reproduced above, it has been observed that the applicability of amendment is to be effective in respect of assessment years 2009-10 and subsequent years and such inference was found to be fortified by the decision of the Delhi Bench in the case of ACIT v UE Trade Corporation India (P) Ltd. vide ITA No 4405(Del)/2009 dt 24.12.2010. Apart from the aforesaid precedent, the assessee has also referred to certain Tribunal decisions, which are on similar lines. In view of the aforesaid discussion, we find no justification in the action of the lower authorities from disentitling the assessee from its claim of +/-5% while computing ALP in terms of erstwhile proviso to section 92C(2)of the Act. On this aspect, we uphold the plea of the assessee. However, as we have remanded the matter to the file of the Assessing Officer with regard to the benchmarking of transactions of Category ....
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....basis of a subsequent decision of the Hyderabad Bench of the Tribunal in the case of A.P. Paper Mills Ltd. v. ACIT 33 DTR 148 (Hyd). 22. On the other hand, the learned Departmental Representative, appearing for the Revenue, has not contested the aforesaid factual matrix brought out by the learned Counsel on behalf of the appellant. 23. Having regard to the precedents, where the matter has been restored for re-adjudication by the Assessing Officer in the past years, in the instant year also we deem it fit and proper to restore the matter to the file of the Assessing Officer to examine the issue in the light of the observations of the Tribunal in the assessee's own case for the past years and also on the basis of any further submissions that the assessee may deem proper to raise before him in the ensuring remand proceedings. Accordingly, Ground No. 4 in the appeal of the assessee stands allowed for statistical purposes. 24. In so far as Ground No. 5 is concerned, it relates to the disallowance of assessee's claim for additional depreciation amounting to Rs 15,01,754/- in respect of computers installed in its factory at Baramati. 25. In this context, it was a common ground....
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....of Techno Shares & Stocks Ltd. v. CIT reported at 327 ITR 323 (SC). Apart therefrom, it has been pointed out that on similar issue for assessment years 2003-04 and 2004-05 the Tribunal in its order dated 6.4.2011 (supra) has restored the matter to the file of the Assessing Officer to examine whether lease hold rights acquired for the purpose of business are in the nature of commercial or business rights as contemplated in section 32(1)(ii) of the Act. In view of the aforesaid, on the aspect of assessee's claim for depreciation on lease hold rights, we deem it fit and proper to restore the matter back to the file of Assessing Officer to be decided in the light of the observations of the Tribunal contained in the order dated 6.4.2011 (supra) as also on the basis of any further submissions that may be sought to be raised by the assessee in the ensuring remand proceedings. 28. In so far as the alternative claim of the assessee for allowing proportionate deduction for the premium paid to MIDC over the period of lease is concerned, the learned Counsel pointed out that the same is supported by the decision of the Hon'ble Gujarat High Court in the case of DCIT v. Sun Pharmaceutical Indi....