TaxTMI 
TaxTMI 
2014 (11) TMI 45
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.... the facts and circumstances of the case, the order passed by the learned AO under Section 143(3) read with Section 144C of the Act is bad, both in the eyes of law and on facts. 2. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in assessing the income of the assessee at Rs. 25,30,50,980/- as against loss of Rs. 133,85,69,659/- declared by the assessee. 3. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in rejecting the books of accounts of the assessee despite the same being maintained properly and duly audited. 4.i. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in making an addition to the profits of the assessee at an amount of Rs. 86,58,81,600/-. ii. That the above said amount has been arrived at most arbitrarily taking an ad-hoc profit of Rs. 3,200/- per bike, without there being any basis for the same, indulging in conjecture & surmises. iii. That without prejudice to the above and in the alternative, the learned AO has erred both on facts and in law in making various additions and disallowances in addition to the adhoc ....
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....en made arbitrarily ignoring all the norms and computing the ALP. iii. That the order of the TPO having failed to determine the ALP for different nature of transaction is bad and liable to be ignored. 9. Without prejudice to the above and in the alternative the comparables used by the TPO are wrong and unreasonable. 10. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in not allowing set off of the brought forward losses pertaining to the assessment years 2001-02 to 2006-07 and unabsorbed depreciation pertaining to assessment years 1997-98 to 2006-07. 11. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in charge interest under Section 234B of the Act. 12. The appellant craves leave to add, amend or alter any of the grounds of appeal." 2. Grounds No. 1, 2 and 12 are general in nature and do not require any adjudication. 3. It was submitted by the learned AR that grounds no. 3, 4, 5 and 10 are covered in favour of the assessee by the decision of ITAT in assessee's own case for assessment year 2006-07 which has been followed also by the ITAT in assessment year 2003-04 and ....
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....ed the action of the AO. The finding of the DRP is recorded in Paras 6 to 8 of its order as under:- "6. The Assessing Officer rejected the books of account of the assessee and estimated the profit per bike at Rs. 3,200/-. He multiplied it by no. of bike sold (2,70,588) and thus added a sum of Rs. 86,88,81,600/-. 7. The profit on sale of a bike was taken at Rs. 3,200/- because it was the average profit per bike of Hero Honda Motors. Books of account were rejected because the similar rejection was made in AY 2006-07. In nutshell, the AO followed the order of his predecessor in this respect. 8. CIT(A) has deleted the addition under this head for the AY 2006-07, which is contested before the ITAT. The appeal before ITAT is pending. Under these circumstances, we prefer not to interfere with the order of the AO." 3.5 Thereafter the AO passed the final assessment order dated 31.10.2011 reiterating the same observation in Para 4 which he made earlier in the draft assessment order in Para 3.4. 3.6 We find that in assessment year 2006-07, the Revenue aggrieved with the order of the CIT(A) had filed the appeal. However, the ITAT approved the order of the CIT(A). The relevant fi....
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....onciliation had, however, been arbitrarily rejected by the Assessing Officer. It was in these circumstances, that the ld.CIT(A) held and, in our considered opinion, for the aforegoing discussions, correctly so, that the Assessing Officer had erred in concluding that there had been a difference in the sales and quantitative details of the assessee. 11. Coming to the second ground for rejection of the books of account, the Assessing Officer had observed that the average sales of motorcycles by the assessee during the year was low, as compared to the preceding assessment year. The Assessing Officer, on figures discussed, had computed a suppression of sale value by Rs. 1,461 per motorcycle. This amounted to a total alleged suppression of Rs. 33,77,32,063/-. The ld.CIT(A) noticed that in response to this query by the Assessing Officer, the assessee had replied vide letter dated 23.11.2009, whereafter, no further query was raised by the Assessing Officer in the show cause notice dated 11.12.2009, but in the assessment order, the said reply of the assessee had been totally ignored and the Assessing Officer had, referring to other nonrelevant replies of the assessee company, drawn an ad....
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....sheets of Hero Honda Motors Ltd. and Bajaj Auto Ltd., and by taking Hero Honda Motors as an example, worked out the profit at Rs. 470 per motorcycle, where, on applying a rate of Rs. 4,000/- to 2,65,212 motorcycles sold by the assessee during the year, estimated a profit of Rs. 106,08,48,000/-. The reasons for the loss suffered by the assessee company, as contended, were low market share, low capacity utilization, very high debtors' turnover ratio, high inventory ratio, shift in technology, higher personnel cost due to VRS and labour unions problem, advertisement and publicity cost, high material cost due to low volumes and high overhead cost because of dealer network and after sales service, etc. The Assessing Officer, it was taken note of by the ld.CIT(A), had totally ignored all these contentions of the assessee and in the remand reports, he had not been able to rebut any of such contentions. These contentions were dubbed by the Assessing Officer as being general in nature. No other comment was made. The ld.CIT(A) held such an approach to be no correct. Before us, nothing has been brought to support this action of the Assessing Officer. Obviously, profit can only be made when th....
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....arm's length. These contentions of the assessee as well as the TPO's order were found by the ld.CIT(A) to have been ignored by the Assessing Officer. The comparative charge submitted by the assessee had also not been found by the Assessing Officer to contain any discrepancy. In the remand report dated 22.09.2010 also, the Assessing Officer was not found to have entered any rebuttal to the assessee's contentions. After rejoinder to the remand report even in the second remand report, the Assessing Officer was found to have passed only peripheral orders of estimation of profit without answering the assessee's submission. It was on this that the ld.CIT(A) correctly held that in absence of material, the Assessing Officer could not tinker with the price determined by the TPO. 15. It has gone unrebutted before us also, that if the contention of the Assessing Officer were to be accepted, the whole purpose of determination of arm's length price by the TPO would get defeated. To reiterate, the TPO has accepted, vide order dated 13.11.2009 (supra), the prices of export shown by the assessee to be at arm's length. 16. In view of the above, even on this score, the rejection of books of....
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....AT, we prefer not to interfere with the order of the Assessing Officer." 4.3 Thereafter the Assessing Officer in the final assessment order dated 31.10.2011 made the disallowance by making the same observation in paragraph 5.1 as he has made in paragraph 4.1 of the assessment order. The relevant para of Assessing Officer's order on this issue are 5.1 to 5.4. 4.4 Thus it is evident from the above that the addition has been made relying upon the finding in the assessment order for the assessment year 2006-07. The Revenue's appeal for assessment year 2006-07 on this ground was rejected by the ITAT with the following observations :- "24. We do not find any error, as seen above, in the order of the ld.CIT(A) in this regard. It cannot be gainsaid that any expenditure incurred wholly and exclusively for the purposes of business is an allowable expenditure, even though, as in the present case, the payment is made to a 100% shareholding company of the payer. That apart, u/s 40A(2) of the Act, it is only the fair value of such expenditure, which is allowable. Besides, the arm's length price provisions take care of the payment in such transactions being at arm's length, as has been d....
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....e correct. Whereas the ld. JM upheld the order of the CIT(A) by accepting that, in fact, YMC held 24% of the shares of the assessee's company on 26.5.2000, the ld. AM remitted the matter to the file of the A.O for necessary verification in this regard with suitable direction. The question which looms large before me is as to whether the contention of the assessee about YMC holding 74% shares on 26.5.2000 should be accepted without any further verification or the matter should be sent back to the Assessing Officer for a de novo examination. In this regard, it is relevant to note that when the A.O raised query as to why brought forward loss should not be disallowed, the assessee submitted its reply, the relevant part of which is on page 536 of the paper book. The following is the extract of the reply advanced by the assessee before the Assessing Officer: "In this regard, we would like to mention that initially the Assessee Company was incorporated as a 50:50 joint venture between Escorts Ltd. and Yamaha Motor Co., Ltd, Japan (YMC) in 1995. On may 26, 2000, 64,80,000 equity shares of the Assessee Company representing 24% of its total issued and paid up equity share capital were tra....
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....rejoinder to the AO for a second remand report. The Assessing Officer made the following comments in the second remand report, as are available on page 836 of the paper book : "VIII. Set-off of accumulated losses/unabsorbed depreciation (Ground No. 11) No further comments is required on this issue, as the assessee has only reiterated its earlier contentions, which has been duly answered to in the Assessment Order." 2.8. There is no dispute on the legal position that on YMC holding 74% shares of the assessee company on 31.3.2001 and continuing to hold so up to 31.3.2006, there can be no bar on the claim of set off of brought forward loss for the assessment year 2001-02 against the income for the assessment year 2006-07. From the above narration of facts, it is palpable that the Assessing Officer got three opportunities to examine the assessee's contention about YMC acquiring further 24% shares on 26.5.2000 apart from its original holding of 50%., firstly during the course of assessment proceedings and then during two remand proceedings. The assessee's pointed submission in this regard came to be rejected by the Assessing Officer during the original assessment proceedings wi....
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.... of ITAT. 5.3 Respectfully following the same we direct the Assessing Officer to allow set off of the brought forward losses pertaining to assessment year 2001-02 to 2006-07 and unabsorbed depreciation pertaining to the assessment year 1997-98 to 2006-07. Accordingly this ground no.10 is allowed. 6. Ground no.6 to 9 are regarding adjustment of Rs. 51,58,00,000/- made by the AO by adjustment to arm's length price in respect of the motor bike exported by the assessee company to its associated enterprises. During the year under consideration the assessee has entered into following international transactions with its associated enterprises:- S.No. International Transaction Method used by the assessee Amount (in Rs.) 1. Import of components/ spare parts from AEs CPM 21,80,38,285 2. Import of capital goods from AEs CPM 4,92,82,900 3. Export of spare parts CPM 5,86,41,575 4. Export Motorcycles RPM 147,11,88,466 5. Royalty to AEs CUP 20,99,39,042 6. Payment of interest on advance received for financing exports CUP 81,60,357 7. Reimbursement of warranty claims to AEs 44,56,2....
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....ccordingly worked out proportionately at 18.93% and the adjustment is computed as below: Arm's Length Cost Difference 272.49 crs 18.93% of the same 51.58 crs 7.3 In view of the above, an adjustment of Rs. 51.58 crs is to be made to the income of the assessee, being the amount relating to international transaction in the total difference between the arm's length cost and the cost charged by the assessee from its AEs for manufacturing and sale of motorcycles on proportionate basis. The Assessing Officer shall enhance the income of the assessee by an amount of Rs. 51.58 crs while computing its total income." 6.3 Aggrieved by the order of the TPO assessee filed objection before the DRP. The order of the TPO was confirmed by the DRP by making the following observations:- "4. We have carefully considered the facts of the case and the objections of the taxpayer. We are in agreement with the TPO that the TP study done by the taxpayer has to be rejected. We agree with the reasoning of the TPO that the taxpayer has not followed proper method(s)while benchmarking different international transactions. The TPO has rightly observed that for applying CPM/RPM accurat....
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....orders passed by the TPO placed in the paper book at pages 446-447 and 444-445. It was the contention of the learned AR that the facts being identical and there being no change there was no reason for the TPO to take a different view than the view taken in the earlier years. 6.5 The learned AR also submitted that the TPO was not justified in using TNMM method ignoring the facts of the case. In this regard attention was invited to letter dated 22nd February, 2010 placed at paper book page 320 whereby it was pointed out that assessee company has earned overall gross margin of negative 9%. However, the company has earned a gross profit margin of positive 15.22% from export of motorcycles. Attention was also invited to the annexures attached in support thereof placed at paper book pages 328 to 330. As per these annexures, on the total international transactions assessee company has earned a profit of Rs. 23,28,18,613 giving a margin of 15.83%. It was also submitted that as per Annexure A-2 the assessee has made export of motorcycles to unrelated parties and the profit margin earned in respect of export to unrelated parties was 10.75%. Since the profit margin earned on internation....
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....escribed. In this regard Rule 10C provides that the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction and which provide the most reliable measure of an arm's length price in relation to the international transaction. The TPO while invoking TNMM method has ignored the fact that it is not best suited to the facts and circumstances keeping in view the fact that the assessee company is consistently in losses for the last many years and it cannot be expected to make a sale to an associated enterprise at a price much higher than the price of that product in the market simply because it is in losses. Our attention was drawn to the fact that the company has incurred cost of Rs. 1001.96 Crores as against operating revenue of Rs. 808.10 Crores. Thus there have been losses in the operation of the company and such losses cannot be recovered by enhancing the selling price to the AE by applying TNMM. The TNMM presupposes margin in sales and is not an appropriate method in a loss making company like the assessee company. The TPO in the present case has worked out the margin of highly successful companies an....
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....has not been able to utilize its capacity and the same has been totally ignored. The assessee has just sold 270588 units during the year as against 3336756 units by Bajaj Auto. Further it is not only a case of under utilization of capacity but also assessee has been suffering losses year after year because of its performance being below par due to various commercial factors as is evident from its profit and loss account. Thus the TPO was not justified in adding profit to the average cost per unit worked out by him by applying TNMM method. This has resulted into adding further value to cost which is otherwise very high due to inefficient working of the assessee company. In this regard the assessee has made detailed submissions before the TPO vide letter dated 22nd February, 2010 placed at Paper Book Page 320 onwards. 6.11 As regards to the taking of the Bajaj Auto Ltd. as a comparable it was submitted that it is one of the leaders in the market having a very huge production capacity as compared to the assessee company. Further the capacity utilization by the assessee company was too low and that is why there was overall losses. Low capacity utilization cannot lead to enhanced pri....
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....d also in the case of Ranbaxy Laboratories Ltd. vs. DCIT. 8. We have heard both the parties and has perused the material on record. The main dispute between assessee and revenue authorities is regarding adjustment of Rs. 51,58,00,000/- made by the TPO/AO and sustained by DRP in respect of the export of motorcycle/spare parts to the AE. The assessee has benchmarked these transactions by using Resale Price Method. The Resale Price Method has been accepted by TPO in the immediate preceding two years. The contention of the learned DR in this regard is that principle of res judicata is not applicable in the tax laws and assessee cannot take the help of this principle for setting any benefit. We are in full agreement with Ld. DR for the proposition that principle of res judicata is not applicable in tax laws. However, on the facts of the case, we are of the view that in this case, the rejection of the resale price method by the TPO was not justified. There has to be continuity and uniformity in the approach of the Revenue towards an issue and particularly in the case of the same assessee. From the facts it is evident that for similar transaction on the same set of facts the arm's leng....
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.... Ltd., Japan for resale of the motorcycles exported by the company were enclosed as evidence in support of the resale price charged by the Yamaha Motor Co. Ltd., Japan. The basis of computation of the gross profit margin in respect of the export operation and domestic operation was explained along with calculations. The annual financial statements of Yamaha Motor Co. Ltd., Japan were also submitted to the TPO. Computation of the profit margin earned by associated enterprises was also submitted along with copy of the invoice in support thereof. The calculation of the gross profit margin by Yamaha Motor Co. Ltd., Japan was submitted along with item-wise breakup of the gross profit margin. 8.2 In our considered view, assessee company submitted all relevant details to the TPO and he had simply made an observation in para 6.6 to the effect that after considering the reply of the assessee it is found that assessee has nothing substantial to corroborate its analysis made in the TP report. In the same paragraph it has also been further stated that the economic analysis carried out by the assessee are not reliable and it is therefore liable to be rejected and thereafter TNMM method has b....
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....was made to Rule 10B(1)(b) to demonstrate that the conditions for applicability of RPM allows the use of this method where the associated enterprise sells to a non-associated enterprise. The assessee cannot choose associated enterprise as a tested party. To further support this contention reliance was placed on the judgment of the ITAT Delhi 'C' Bench in Global Vantedge P. Ltd. vs DCIT Circle 12(1) New Delhi (ITA No. 1432 & 2321/Del/2009) and the judgment of the Ranbaxy Laboratories Ltd. vs. DCIT 299 ITR (AT) 175. 8.4 We have gone through Rule 10B(1)(b) and provisions of section 92C. It may be relevant to refer to the provisions of section 92C which reads as under:- "92C.(1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit....
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.... price at which property purchased or services obtained is sold to an unrelated enterprise, the price at which this property is sold less margin of the associated enterprise is to be reduced for determination of the resale arm's length price. There is no condition that this method cannot be used when the tested party is an associated enterprise. The contention of the learned DR that the basic condition of resale price method is that "the property has to be obtained by the enterprise i.e. the assessee from an associated enterprise is incorrect." In the Act as well as Rules the words 'enterprise' and 'associated enterprise' have been used interchangeably. Thus the argument that enterprise will mean 'the assessee' and associated enterprise will mean' the other party' to whom the assessee has sold or purchased the goods is incorrect. The above interpretation gets supported by the definition of 'enterprise' given in section 92F(iii) which reads as under :- "92F(iii) "enterprise" means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, storage, supply, distribution, acquisition o....
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....8.6 We have also gone through the OECD guidelines in respect of resale price method. On going through the same we note that Rule 10B(1)(b) in respect of resale price method is para materia with OECD guidelines. Further in the OECD guidelines there is no such restriction as is being argued by the learned DR. On the contrary it has been stated in the OECD guidelines that resale price method is more accurate where the sale by the associated enterprises is realized within a short time of the purchase since with the elapse of time there may be change in the market conditions. Some of the examples of application of the resale price method stated in the OECD guidelines also shows that the Resale Price method can be applied when sales are made to the AE which in turn sells the same to an uncontrolled party and thus support the contention of the assessee. 8.7 According to the provisions of section 92C and Rule 10B, the arm's length price in relation to an international transaction has to be determined by following any of the appropriate method. The resale price method and the cost plus method operate at gross profit margin level requiring functional rather than product comparability. The....
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....he price of a controlled transaction from the price in a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relations made or imposed between the enterprises and the arm's length conditions can be established by directly substituting price in the comparable uncontrolled transaction in the price of the controlled transaction. Thus where a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method. It is not appropriate to apply a transactional profit method merely because data concerning uncontrolled transaction are difficult to obtain or incomplete in one or more respects. The OECD guidelines further provides that in no case should transaction profit method be used on enterprises that are less successful than average or conversely more successful than average, when the reason for their success or lack thereof is attributable to commercial factors. In the present case, as emerges from the facts, the assessee company is less successful than average and the reasons thereof is the commercial factors. ....
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....see company is much better as compared to the export price per motor bike in respect of the others in the same line of business. 8.14 In the present case the assessee company has submitted the details and information that it has earned a gross profit margin (+) 15.83% in respect of export of motorcycles to associated enterprise as against 10.75% in respect of export of motor cycles to unrelated parties. The necessary details in respect thereof were also before the TPO. Even for the sake of argument it is considered that resale price method is not the correct method, then this material was sufficient enough to hold that the margin earned by the assessee company from an associated enterprise was better than the margin earned from the nonassociated enterprises. No reasons have been given by the TPO for ignoring the same and applying the TNMM method. 8.15 As regards TNMM, we further note that the margin has been computed of the two entities i.e. Bajaj Auto Ltd. and TVS Motor Co. Ltd. operating in India on an enterprise level and not in respect of the export of motorcycles. If the comparison has to be made on the basis of the enterprise level as has been done by the TPO, then the ....
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.... iii) Where the time gap between the purchase of goods and its sale by the reseller is small. In the present case considering the facts of the assessee company we are of the view that the TPO was not correct in ignoring all these facts and applying TNMM method. From the facts and figures and as explained by learned AR it is apparent that by application of the TNMM method in the case of the assessee company, the price worked out is not a realistic price. The whole objective of the transfer pricing study is to find out an arm's length price of the product purchased or sold by the assessee company. TP is an economic function and it has to take into consideration all the facts and circumstances. 8.17 In view of the above analysis and the findings we hold that addition made by TPO and as confirmed by the DRP are unjustified and the same is directed to be deleted. 8.18 As we have deleted the addition on the issue of the applicability of the method, we do not adjudicate the other issues raised by the assessee company in respect of this addition. This would be an academic exercise. Therefore these grounds are allowed 9. Ground no.11 is regarding charging of interest under sec....
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....r disallowance of the royalty expenses. (iii) That the above disallowance has been made ignoring the explanation and submissions made by assessee in this regard and also ignoring the fact that Royalty expenses have been allowed consistently in scrutiny assessment in preceding years except in the immediate preceding year. 6. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in making an addition of Rs. 35,21,93,888/- as difference in arm's length price in respect of the international transactions with the associated enterprises. 7. On the facts and the circumstances of the case, the DRP has erred in rejecting the Resale Price Method (RPM) for determination of Arm's Length Price and substituting the same with Transaction Net Margin Method (TNMM) ignoring the fact that associated enterprise having further sold the product to an uncontrolled entity, the Resale Price Method is the best and most suited method. 8(i) On the facts and circumstances of the case, the DRP has erred, both on facts and in law in rejecting the comparable selected by assessee in its detailed Transfer Pricing Study and substituting with its own comparables. ....
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.... to unassociated persons/entities at a very low gross profit margin of 2.80%. 12. On the facts and circumstances of the case, the learned AO has erred in disallowing the stamp duty of Rs. 30,00,000/- paid on issue of share certificates to the shareholders treating them as the capital expenditure. 13. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in not allowing set off of the brought forward losses pertaining to assessment years 2001-02 to 2007-08 and unabsorbed depreciation pertaining to assessment years 1997-98 to 2007-08. 14. The appellant craves leave to add, amend or alter any of the grounds of appeal." 12. Grounds no.1, 2 and 14 are general in nature and need no adjudication. 13. Grounds no.3 and 4 are identical to the grounds no.3 and 4 for assessment year 2007-08 and for the detailed discussion in paragraphs no.3.2 to 3.8, these grounds are allowed. 14. Ground no.5 is identical to the ground no.5 for assessment year 2007-08 and for the detailed discussion in paragraphs no.4 to 4.5 above, this ground of appeal is allowed. 15. The issue involved in grounds no.6 to 11 is similar to the issue involved in grou....