TaxTMI 
TaxTMI 
2013 (1) TMI 86
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....p companies. TMC provides the assessee with technical know-how for which it is paid royalty and fees for technical assistance received. 2.2 The assessee filed its return of income for Assessment Year 2003-04 on 27.11.2003 declaring a loss of Rs.6,21,90,723. Along with the return of income the assessee filed the report as required under section 92E of the Income Tax Act, 1961 (herein after referred to as 'the Act'). The return was processed under section 143(1) and the case was taken up for scrutiny by issue of notice under section 143(2) of the Act. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act for conducting the Transfer Pricing audit to determine the Arms Length Price (ALP) in respect of the following international transactions of the assessee in the relevant period : A. Manufacturing Segment Sl. No. International Transaction Amount Rs. 1. Purchase of components 362,51,10,000 2. Sale of prototypes 33,73,008 3. Purchase of capital goods 6,72,44,889 4. Royalty Paid 37,57,21,640 5. Software License Fees Paid 20,13,533 6. Technical Assistance Fees P....
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.... made on account of the proposed adjustment to the ALP by the TPO. (ii) The Assessing Officer also disallowed expenditure amounting to Rs.9,03,028 incurred on software, holding it to be capital in nature and allowed depreciation thereon. 2.5 Aggrieved by the order of assessment for Assessment Year 2003-04 dt.28.3.2006, the assessee went in appeal before the CIT (Appeals)-IV, Bangalore. The assessee also filed a letter seeking rectification under section 154 of the Act of the order of assessment including the TPO's order under section 92CA of the Act. In the rectification application, the assessee contended that the international transactions of purchases with related parties constituted only 37% of the total purchases and therefore the adjustment under section 92CA of the Act on account of high material cost should have been restricted to the percentage of material purchased from Associated Enterprises (AE's). The TPO vide order dt.31.8.2006 rejected the assessee's rectification application. Aggrieved by the TPO's order dt.31.8.2006 rejecting the rectification application under section 154 of the Act, the assessee filed an appeal before the CIT (Appeals). 2.6 The CIT....
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....parables were same as in the earlier years or subsequent years in which no similar adjustment had been made. 7. not appreciating that the value of the imported components having been accepted by the Customs Tribunal, the same therefore deserves to be accepted by the Income Tax Authorities also. 8. considering data which was not available to the appellant at the time of complying with the TP documentation requirements. 9. adopting a flawed methodology and process in arriving at the ALP. 10. not appreciating that the trading and manufacturing segments are intertwined and inter-related warranting a "Combined Transaction Approach" in arriving at the arm's length price. 11. making a flawed adjustment on account of operational efficiencies in arriving at the ALP. 12. not excluding excise duty in sales and material cost while computing arm's length price. 13. not appreciating that a customs duty adjustment was required to be made in order to put all comparables on a level playing field. 14. not considering cash PLI which is an accepted parameter of determining arm's length price. 15. not making....
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....'s T.P. analysis pertained to Financial Year 2000-01 and 2001-02. The assessee adopted cash profit to sales as the Profit Level Indicator (PLI) and operating profit to sales as additional PLI and made adjustments for excise duty and customs duty while computing the ALP. Since the cash profit margin and operating margin as worked out by the assessee at 8% was higher than that of the comparable companies, the assessee contended that its international transactions were at arm's length. 4.2 T.P. Analysis of the TPO The TPO on examination of the assessee's T.P. Study accepted TNMM as the most appropriate method and also the comparables selected by the assessee. The TPO, however, did not accept the following aspects of the T.P. Study carried out by the assessee. (i) Combining the manufacturing and distribution functions and applying TNMM at the entity level. (ii) Use of earlier year's data against the mandatory use of current year as per the Act. (iii) Exclusion of customs and excise duty while computing the cost of goods sold. (iv) No adjustments made for the differences in the relative operational efficiency levels and depreciation costs ....
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....unsel for the assessee has contended that the Assessing Officer had erred in passing the order disregarding the principles of natural justice by passing the order at the fag end of the limitation period; in a hurried manner and without affording proper opportunity of being heard and therefore the order of assessment is bad in law and liable to be quashed. We have also heard the learned Departmental Representative and perused the record. We find no merit in the claim of the assessee that the Assessing Officer had not afforded the assessee adequate opportunity of being heard. No evidence has been brought on record before us by the assessee to establish the violation of the principles of natural justice by the Assessing Officer as claimed and we therefore reject this ground raised by the assessee as infructuous. 6.1 Reference to TPO In the ground of appeal at A-2, the learned counsel for the assessee argued that the Assessing Officer has erred in making a reference to the TPO for determination of ALP of the international transactions entered into by the assessee, as a reference could be made to the TPO only in circumstances where the Assessing Officer considers it necessary or e....
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....s, the case should be picked up for scrutiny and reference under section 92CA be made to the TPO. Thus, it is mandatory for the Assessing Officer to refer all the cases whenever the aggregate value of international transactions is more than Rs.5 Crores. These instructions are binding on all Assessing Officers. In these cases, there is no need for the Assessing Officer to make a prima facie opinion, except that he/she needs to examine the 3CEB Report to see the aggregate value of international transactions. In the instant case, as the aggregate value of international transactions based on 3CEB Report filed by the taxpayer before the Assessing Officer, exceeded Rs.5 Crores, he referred the case to the TPO. Therefore, we see no infirmity in referring the matter to the TPO without forming "a considered opinion". In the light of the above reasoning, the first legal point raised by the assessee, namely, the reference to the TPO by the Assessing Officer without forming "a considered opinion" does not stand the test of law and cannot be sustained, therefore this plea of the assessee is rejected. It is ordered accordingly." Respectfully following the decision of the co-ordinate bench ....
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....y in what manner he should accept/appropriate the material on record in regard to the compensation payable. If such a power of issuing directions to the Collector by the Commissioner under the provision of law referred to hereinabove is to be accepted then it would mean that the Commissioner is to examine the said power to substitute his opinion for that of the Collector's opinion for the purpose of fixing compensation, which in our view is opposed to the language of section 11 of the Act." 7.2 In the case of Kailash Moudgil v. Dy. CIT [2000] 72 ITD 97 (Delhi) (SB) the issues before the Hon'ble Tribunal of Delhi was whether the Commissioner is required by law to give an opportunity of hearing to the assessee before giving approval for block assessments and also whether the Commissioner is required by law to record his reasons in writing while approving the order of the Assessing Officer. The Tribunal held as under : "10. ...... Then, what is the role of the Commissioner while granting approval to the assessment order prepared by the Assessing Officer and putting it before him for approval. We have already seen what is meant by 'approval.' The word 'approval' means to be satis....
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....e assessee that the word approval amounts to an appellate power and thereby the Commissioner would have to give detailed reasons for approval. Further, in view of the decision of the Hon'ble Apex Court (supra), the Commissioner cannot go beyond the material placed before him by the Assessing Officer like records of assessment, Form 3CEB etc. Therefore, in our view, the approval of the Commissioner to the Assessing Officer's proposal for making a reference to the TPO as per section 92CA(1) of the Act is an administrative approval based on appraisal of Form 3CEB which contains information on international transactions entered into and the quantum of such transactions, suffers from no legal infirmity once the aggregate value of such international transactions exceed Rs.5 Crores in the relevant period. Therefore, we dismiss this ground raised by the assessee. 8.1 In respect of the ground raised at A-3, the learned counsel for the assessee argued that the authorities below have erred in not appreciating that the charging or computation provisions relating to income under the head 'Profits & Gains from Business or Profession" do not refer to include amounts computed under Chapter X of....
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.... In support of the ground raised at A-5, the learned counsel for the assessee argued that the authorities below have erred in passing the orders making the TP adjustment and thereby enhancing the assessee's income without demonstrating that the assessee had motive for tax evasion or that the profits of the assessee were diverted elsewhere or that there has been any erosion in the base of taxable income in India. The main arguments of the learned counsel for the assessee is that the assessee did not intend to transfer/shift profits outside India and thus the TPO ought not to have made any adjustment without establishing that the assessee shifted profits outside India. The learned Departmental Representative's submissions were also heard. 10.2 We have heard both sides on this issue. We have perused the decision of the ITAT, Pune Bench in the case of Asstt. CIT v. MSS India (P.) Ltd. [2009] 32 SOT 132 (Pune) wherein the Tribunal discussed both the decisions of the co-ordinate benches of the Bangalore Bench in the cases of - (i) Aztech Software Technology Services Ltd. v. Asstt. CIT [2007] 107 ITD 141/15 SOT 49 and (ii) Phillips Software Centre (P.) Ltd. v. Asstt. CIT [IT Appeal No.....
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....justment could be made in the assessee's case without there being any material or finding by the TPO to show that there was transfer of profits outside India or evasion of tax in India and therefore dismiss this ground raised by the assessee. 11.1 In the ground raised at A-6, it has been submitted that the TPO made a T.P. adjustment for the year under consideration, although the method adopted, the AE's, the nature of transactions and the comparables were same as in earlier years or subsequent years in which no similar adjustment was made. 11.2 In this regard, after consideration of the submissions, we are of the view that the determination of ALP is a factual matter and there would certainly be variations/differences in the activities of both the assessee and comparables from year to year and therefore in the fact situation the TPO on examination of the material placed before her found differences leading to the TP adjustment. Moreover, as res judicata is not applicable for income tax proceedings, as the TPO, based on the material available with her could find that in the relevant period there are major differences between the assessee and the comparable companies mainly on ....
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.... that the TPO/CIT(Appeals) had rightly rejected the assessee use of multiple year data as the assessee failed to demonstrate before them how such data pertaining to the prior years had an influence or bearing on prices in the current financial year. Multiple year data may be used in case there is any effect in the case of the assessee or of the comparables on their profitability. The assessee has failed to establish how the use of multiple year/prior years data influenced the determination of transfer prices in relation to the transactions being compared. In our considered opinion the use of earlier years data was not warranted in the facts of the instant case and we find that the TPO aptly used only data of the relevant financial year and therefore uphold her action. 13.1 In the ground raised at S.No.9, it is submitted that the TPO adopted a flawed methodology and process in arriving at the ALP. On perusal of the material on record, we find that the TPO had rejected the assessee's T. P. documentation mainly on three points - (i) the assessee did not use data of the relevant financial year 2002-03 (ii) the assessee did not make any adjustments to account ....
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....acturing and trading operations. It was submitted that the learned CIT (Appeals) concurred with the view of the TPO that the activities of manufacturing and trading segments were different and distinct each having its own functions, assets and risks. It is submitted that the learned CIT (Appeals) had further held that the import of components for manufacture of passenger cars and import of Camry passenger car for distribution is a distinct class of transaction and requires separate analysis. In support of his conclusion, the learned CIT (Appeals) relied on the decision of the Tribunal in the case of Star India Pvt. Ltd. v. Asstt. CIT IT Appeal Nos. 3585 & 3846 (Mum.) of 2006, dated 28-5-2008 Mumbai and UCB India (P.) Ltd. [2009] 30 SOT 95 (Mum.). 14.2 Before us, the learned counsel for the assessee submitted that to determine whether the prices charged/paid in international transactions entered into by the assessee are at arm's length, a T.P. method may be applied to each transaction separately on to a group of transactions. Reliance was placed on para 3.9 of the OECD T.P. Guidelines 2010, which provide that a 'Combined Transaction Method' can be adopted in case the transactions....
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....goods. It is submitted that due to lack of details in the public domain, it is not possible to have segmental analysis of comparables. The learned counsel for the assessee also submitted that for Assessment Year 2004-05, the TPO accepted the T.P. analysis of the assessee without segmenting the results between trading and manufacturing segments. Based on the above, the learned counsel for the assessee submitted that segmentation of its results between trading and manufacturing was not called for and is bad in law. 14.4 The learned Departmental Representative supported the orders of the learned CIT (Appeals) in upholding the action of the TPO in taking the segmental break up of trading and manufacturing operations. The learned Departmental Representative submitted that" (i) the two activities of manufacture and trading are distinct; each with their own functions, assets and risks involved and therefore cannot be clubbed together and requires to be analysed separately as per Rule 10C(2)(a). (ii) the tax payers argument that both trading and manufacturing segments are closely linked is without basis as the completely built units CBU's are sold independently of the ....
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....l Reports of the comparable companies contended that their trading activities are not confined to spares alone but to other items also and in such circumstances to single out the assessee alone for evaluation of trading activity results separately is inappropriate. (v) The learned counsel for the assessee strongly argued that when the learned Departmental Representative had accepted that both the assessee as well as the comparable companies are engaged in trading in spares, comparison of segment profits of the assessee with enterprise/entity level results of the comparable companies would be incorrect. (vi) With respect to the learned Departmental Representative reliance on paras 2.78 of the OECD guidelines to support the proposition that it would be inappropriate to apply TNMM at entity level margins, the learned counsel for the assessee submits that the observations in para 2.78 are made in the context wherein a company is engaged is a variety of controlled transactions which are not closely linked. However, in the assessee's case the transactions are closely linked and inter-related and therefore the reliance placed by the learned Departmental Representative is witho....
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....spare parts. 14.5.2 Taking into consideration the submissions made and the facts and circumstances of the case, we agree with the submissions of the learned counsel for the assessee. While it is true that function, assets and risks of the trading and manufacturing segments generally differ, however circumstances may warrant combining both of them. It is only in the specific facts of the case that the combining of both segments is advisable. In the instant case of the assessee, the sale of spare parts is triggered as a result of the manufacturing activities, including warranty commitments. Therefore, we are of the view that it would not be in the fitness of things for the sale of spare parts and components to be considered in isolation from the sale of manufactured vehicles. This view is supported by the OECD T.P. Guidelines, 2010, relied on by the assessee. This view is also buttressed by the fact that the comparable companies are also trading in spare parts and components. On a overall consideration, it can be concluded that trading in spare parts is closely inter-linked with the manufacturing segment of the assessee. We are of the view that no meaningful purpose would be serve....
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....cy of the assessee vis-à-vis the comparables. 15.2 The submissions of the assessee opposing the operational efficiency adjustment made by the TPO is as under : "(i) Operating Efficiency Adjustment is not contemplated by law : The law contemplates an adjustment to be made for transaction level difference or an enterprise level difference. These differences can either be in the functions performed or assets employed or risks assumed. An operating efficiency does not fall within any of the parameters warranting an adjustment. The difference in operating expenses is neither a difference in transactions nor enterprises. An adjustment for operating efficiency is thus not contemplated under the law. The ratio of the Mumbai Tribunal judgment in the case of CAPITAL ASSETS Computer Associates Pvt. Ltd. v. Dy. CIT 2010-TIOL-68-ITAT-MUM, supports this argument. (ii) Companies with different operating efficiency cannot be compared. If there are substantial differences in the performance of other companies, they cannot be chosen as a comparable at all. The differences may arise because of products manufactured, the scale of operations, assets employed etc. Assuming th....
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....o suffer. A good quality of clay on other hand would significantly reduce the above mentioned downsides. Operating efficiency and the quality of material used are thus interdependent. There is an interplay between them. One is inextricably linked to other. They cannot therefore be segregated. The approach of the TPO to segregate these components and thereafter draw adverse consequences against the appellant is faulty. The same needs to be disregarded. The correct approach would therefore be to reckon the operating costs and the material costs simultaneously and together. To give another example, cutting wood with blunt axe would take longer when compared to sharp axe. The cost of blunt axe may be less but the labour would be high. Operating expenditure is thus dependent on the quality of the material and technology used. This is more so incase of the appellant who follows Toyota Production System (hereinafter referred as "TPS" for short). TPS differs from the other modes of organizing production and performing the manufacturing management function. TPS seeks to continuously eliminate waste and non-value added work from an organization and provide value to the customer in t....
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....to high operating expenditure. The concept of variance anlaysis under standard costing assumes relevance in this context. The relevant portion of the download from the website was filed with the CIT (Appeals) (www.bpp.com/acca/downloads/sc/ATF57-Sc.pdf) (page 211 & 212 of case law compilation). The down load consists of an explanation of the interdependency between material and efficiency and the impact of variance thereunder. It is suggested therefore that the individual variances should not be looked at in isolation. The variances are inter-related, and much of it occurs only because the other variance occurred too. When two variances are interdependent (inter-related) one will usually be adverse and the other one favourable. For example, if cheaper materials are purchased for a job in order to obtain a favourable price variance, materials wastage might be higher and an adverse usage variance may occur. Similarly if the cheaper materials are more difficult to handle, there might be an adverse labour efficiency variance too. The appellant further submits that the TPO's conclusion regarding operating efficiency just looking profit and loss account (operating expenses incurred....
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....ncy and quality of material, the learned Departmental Representative has stated that the tax payer has not brought on record any material to prove its contention that in the case of comparables, this model is not being followed. (v) With respect to the assessee's contention that the Toyota Production System believes in greater degree of outsourcing, the learned Departmental Representative submits that nothing has been brought on record by the assessee to demonstrate that the comparables do not follow the same model. (vi) With respect to the assessee's reliance on experts opinion, the learned Departmental Representative submitted that the same is additional evidence and therefore cannot be considered at this stage of proceedings. If at all the experts opinion is to be considered, then this matter should be remanded to the file of the TPO for examination/rebuttal of the same. 15.4 In rejoinder to the learned Departmental Representative's submission, the learned counsel for the assessee submitted as under : (i) The law contemplates an adjustment to be made for transaction level difference or enterprise level difference in support of functions performed, o....
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.... (vi) With regard to the learned Departmental Representative's contention that the assessee is making consistent losses, the learned counsel for the assessee submitted that its sales and profits have increased substantially in the subsequent years of operation. (vii) The learned counsel for the assessee also submitted that based on the above submission, it is clear that the adjustment for operating efficiency as proposed by the TPO is bad in law. Further, no operating efficiency adjustment has been made in the earlier years or immediately succeeding years and this inconsistency in such adjustment is proof enough that the said adjustment is to be removed. (viii) With respect to the expert opinion introduced as additional evidence, the learned counsel for the assessee submitted that the admission of the same is within the power of the ITAT. 15.5.1 We have heard both parties and carefully considered the rival submissions. We are concerned here with a unique and unusual adjustment made by the TPO and upheld by the learned CIT (Appeals). The TPO has made the operating efficiency adjustment by bringing the operating expenditure of the comparables at par with that of....
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....orities have decided the case without affording the assessee sufficient opportunity to adduce evidence either on points specified or not specified by them. It is held in the case of CIT v. Salig Ram Prem Nath [1989] 179 ITR 239 that in order to do substantial justice, the ITAT is vested with the requisite authority to admit additional evidence. In the factual matrix of the case, we find that the assessee had made submissions on the said matter on which the experts opinion is now filed. The expert opinion is filed and available with the Department for subsequent years in the assessee's case as submitted by the learned counsel for the assessee. We also notice that the learned Departmental Representative while opposing the admission, argued on the fallacies and short comings of the experts opinion. In view of all of the above, and of the paramount consideration for the effective disposal of this appeal, for which reason the ITAT can admit additional evidence, we in the interest of equity and justice admit the experts opinion for being considered in the disposal of this ground of appeal. 17. Excise Duty Adjustment 17.1 The ground raised at A-12, challenges the non-exclusion of....
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.... After excluding excise duty) and also excise duty be excluded from operating costs also. 17.3 The learned Departmental Representative supported the orders of the authorities below on this issue. The learned Departmental Representative argued that the accounting treatment of an item for the purpose of financial accounting would not be a determinant factor how that particular item should be treated for computing the operating cost for the purpose of transfer pricing. The learned Departmental Representative contended that excise duty is an integral part of operating cost and is also embedded in sales and therefore should be considered as part of cost as well as revenue. The learned Departmental Representative further contended that if the assessee wants to exclude excise duty from cost, then the same should also be excluded from sales so that comparability analysis could be at the same level between the assessee and the comparable companies. Thus the margin may be computed either on gross sales (excluding excise duty in cost as well as sales) or on net sales (including excise duty in cost as well as sales.) 17.4 The learned counsel for the assessee in rejoinder contends that th....
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....unsel for the assessee argues that the assessee's having to pay the higher customs duty component it would put the assessee at a disadvantage when compared with the other comparable companies as customs duty impact profit margins. It is submitted that as the import component increases, the material cost as a percentage of sales also increases and thereby leads to a reduction in profit margins. In view of the above, the assessee submitted that the adverse effect of customs duty warrants its exclusion so as to bring the assessee and the comparables on par. The learned counsel for the assessee relied on the decision of the ITAT, Pune in the case of Skoda Auto India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 319 and submitted that the proposition of customs duty adjustment is also supported by this decision. 18.2 Per contra, the learned Departmental Representative supported the findings of the authorities below and submitted that customs duty is paid on the parts and components imported from its AE's and so forms a part of the cost of purchase of the raw material. The learned Departmental Representative submitted that the decision of whether to import or purchase locally is a commercial ....
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....rcial decision. Further, in the Skoda Case, the Tribunal has given a clear finding that it is an assembler of cars whereas the comparable companies were manufacturers. In the case of the assessee, the learned Departmental Representative submits, it is a full fledged manufacturer with sufficient localization as evidenced by the local sourcing of 60% of its material consumption. The learned Departmental Representative also pointed out that in the case of Skoda (supra), it was the first year of operation and it was claimed that for want of local vendors it was found to import to the extent of 98.55% whereas the assessee is in its third year of operation and is in the business of manufacturing of passenger cars in India since 1999. It is thus submitted by the learned Departmental Representative that no adjustment is required on customs duty paid by the assessee. 18.3 The learned counsel for the assessee in rejoinder has reiterated his submissions that import of parts and components was necessary because it was the start up phase and it needed to adhere to the global quality standards, for which the Toyota Group is renowned. Localisation of such high quality raw material and product ....
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....ter quality which is bound to reflect or translate into a higher selling price of the product which hardly leaves any scope for adjustment to the profit margin of the comparables on this issue. (ii) No doubt, a higher import content of raw-material does not warrant an adjustment in operating margins as was held in Sony India Pvt. Ltd. case (supra), but what is to be really seen is whether the high import content was necessitated by circumstances beyond the assessee's control. (iii) Whether the higher customs duty component on account of imports impacts the profit margins of the assessee, putting it at a disadvantageous position, vis-à-vis the comparable companies who would be paying more of central excise duty, sales tax etc. (iv) Whether if the sale price is market driven, a higher import duty cost through a differential discharge of duty is bound to depress profits and the import of customs duty would have to be eliminated through adjustment to maintain the impact on margins ? In these factual circumstances, we remand the matter, of examining the necessity of whether customs duty adjustment is to be allowed, as claimed by the assessee, to the ....
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.... in the case of new companies depreciation would be higher as compared to an old enterprise, but the expenses on repairs and maintenance would be lower in a new enterprise as compared to an older one and therefore the depreciation along with expenses on repairs and maintenance takes care of the age factor of the assessee vis-à-vis the comparable companies. It is argued that in asset - intensive manufacturing concerns like the assessee, exclusion of depreciation distorts the comparability analysis and therefore cash PLI or PBDIT is not the appropriate PLI. In support of this proposition the learned Departmental Representative placed reliance on the decision of the ITAT, Mumbai in the case of Fiat India (P.) Ltd. v. Dy. CIT [IT Appeal No. 1848 (Mum.) of 2009, dated 30-4-2010]. 19.3 In rejoinder the learned counsel for the assessee submitted that the learned Departmental Representative's contention that depreciation is one of the consideration for fixing the price and therefore cannot be eliminated from the comparability analysis is without basis as the TPO had analysed that the sales price is market driven. The learned counsel for the assessee relied on para 136 of OECD Dra....
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....that - "... The basic issue involved was whether the cost paid or charged for international transactions was at arm's length or not. The factors which go to influence price, cost or profits are/were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by the IT regulations. There is no way to dislodge the claim of the tax payer. The context and purpose of legislation and facts of the case overwhelmingly approve adoption of cash profit only." This case was relied upon by the assessee in support of its proposition that cash PLI or PBDIT is the appropriate PLI. 19.4.3 We find that the above finding of the Tribunal was given as the case of revenue was not clear and the TPO had rejected cash PLI without assigning any reasons. Subsequently, the Mumbai, ITAT, in the case of Fiat India Pvt. Ltd. (supra) held that in an asset intensive industry where assets are the key drivers, excluding depreciati....
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....at the assessee is part of a world renowned multi-national organization and as part of its global image has made substantial investments in establishing dealership networks, implemented global standards of office layout and thereby secured the highest satisfaction for both customers and dealers. We have carefully considered the submissions and find no merit in the claim for making any adjustment on this count. The assessee has failed to demonstrate that comparables do not invest in setting up dealership network. "Even otherwise TNMM is tolerant to minor functional differences and hence no adjustment is required for this difference in operation. 20.4 It is submitted by the learned counsel for the assessee that in the case of the assessee the technology belonged to the AE and therefore research and development activity was not assumed by the assessee and hence the assessee was insulated from certain risks. In these circumstances, it is submitted that it is natural that the profit margins of the assessee are lower than that of the comparables who assume the full range of functions and risks and have full fledged assets. The submissions of the assessee have been carefully cons....
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....ssessee sells its vehicles to various customers, they have an attached warranty condition. In the event of a faulty design or manufacture, defects arise which were not originally visualized. It is submitted that in the relevant period, the assessee noticed a defect in the exhaust system of the automobiles manufactured by it. Apprehending that there would be increased expenditure to rectify these defects, the assessee made a special one time provision of 15.90 Crores towards warranty costs. The learned counsel for the assessee contended that the same being an unusual expenditure and also non-recurring, it ought not to have been included in the operating costs which was what the TPO did. It was further submitted that in the succeeding years, in the assessee's own case, the TPO had accepted that warranty provision is not operating expenditure and excluded it from operational costs. The learned Departmental Representative submitted that warranty adjustment is not called for on the ground that it is part of the operating expenditure and integral to the tax payers business. This was rebutted by the learned counsel for the assessee stating that the warranty provision is a special, extra-o....
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....the comparable companies which is 4.72%. It is common knowledge that the comparable companies also in the automobile industry would be launching new models/vehicles at regular intervals, for which they too, just like the assessee, would be incurring marketing expenses to promote their products. In these circumstances, we are of the opinion that these marketing expenses for launch of new vehicles are part and parcel of the normal business operations of the assessee and the comparable companies and therefore would comprise a part of the operational expenses. From an accounting perspective, it is generally perceived that marketing expenses have an impact on revenues over a period of time. However, in the assessee's case we find that all the marketing expenses have been incurred and claimed in the relevant period only. In view of the facts and circumstances as discussed above, we are of the opinion that the marketing expenses incurred by the assessee for launch of a new passenger vehicle in the relevant period, is incurred in the normal course of its business operations and forms part of its operating expenditure. In this view of the matter, the assessee's claim is rejected. 22. Adj....
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....TP adjustment, if any, should be restricted to transactions with AE's only. 22.2 On a perusal of the order of the learned CIT(Appeals), at para 7.31 thereof, we find that the CIT(Appeals) has held that the ALP adjustment has to be restricted to the extent of import/purchases from AE's only and cannot be extended to purchases made from Non-AE's and has remitted the matter back to the file of the TPO for computation of the same. Since this issue is not disputed before us, we decline to adjudicate thereon or interfere therein. 23. Benefit +/- 5% Safe Harbour 23.1 In the ground No.5 on Safe Harbour - the assessee has sought the benefit of +/- 5% as set out under the proviso to section 92C(2) of the Act citing several judicial decisions in support of this proposition. Prior to the amendment made by Finance (No.2) Act, 2009 and the Finance Act, 2012, the proviso to section 92C(2) of the Act provided that the ALP would be taken to be the Arithmetical Mean (AM) or at the option of the assessee, a price which may vary from the A.M. by an amount not exceeding 5% of such A.M. Thus, the ALP was +/- 5% of such A.M. Thus, the ALP was +/- 5% from the A.M. This issue is more of an academi....