TaxTMI 
TaxTMI 
2015 (4) TMI 502
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....s necessary technology and support to the assessee for manufacturing two-wheelers in India. The manufacturing activity is undertaken by the assessee and the goods so manufactured, namely, two wheelers, are largely sold in India to unrelated parties and some part of the total sale is exports made both to Associated enterprises (AEs) and non- associated enterprises (non-AEs). The assessee reported the following fourteen international transactions with Honda and its other offshore affiliates:- S. No. Nature of transaction Method used by assessee Value of Transaction Received Value of transaction Paid Method PLI 1. Purchase of Motorcycle, Scooter Parts, Consumables and other supplies TNMM OP/Sales 18,48,17,733 2. Export of scooters and scooter parts CUP/ TNMM OP/Sales 140,37,12,904 3. Purchase of fixed assets TNMM OP/Sales 21,37,15,816 4. Payment of export commission CUP/ TNMM --- 7,44,24,255 5. Payment of royalty CUP/ TNMM --- 57,26,60,430 6. Payment of technical know-how fee CUP/ TNMM --- 18,88,50,000 7. Payment of technical assistance fee CUP/ TNMM --- 2,42,24,247/- 8. Authorise....
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.... the TPO expanded the list of comparables by also including Bajaj Auto Ltd. This company was included in the list of comparables for the reason that the assessee itself treated this company as comparable in the immediately preceding year, but chose to ignore the same for the year in question. Average of the Profit Level Indicator (PLI) of these three companies, being, the rate of Operating profit/Operating Revenue, was computed at 7.44%. In computing the assessee's percentage of Operating profit/Operating revenue, the TPO rejected the assessee's point of view of reducing total operating costs by the proportionate operating costs incurred for three-months strike period. That is how, he computed the assessee's operating profit margin at 0.32% by, inter alia, including the amount of depreciation as part of operating cost, which was not considered by the assessee in its original calculation. A transfer pricing adjustment of Rs. 19,53,79,302 was computed by applying the differential profit rate of 7.12% (7.44% minus 0.32%) on the total value of all international transactions reported by the assessee at Rs. 274,40,91,319. In other words, the TPO applied Transactional Net Marg....
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....tion 92(1) of the Act provides that: 'Any income arising from an international transaction shall be computed having regard to the arm's length price.' The procedure for computation of arm's length price has been set out in section 92C. Sub-section (1) of section 92C provides that: 'The arm's length price in relation to an international 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'. Five specific methods have been enshrined in this provision apart from one general method, being : 'Such other method as may be prescribed by the Board.' Out of the five specific methods, the first one is Comparable uncontrolled price (CUP) method and the fourth one is Transactional net margin method (TNMM). A bare reading of section 92C(1) brings out that: (i) the ALP is required to be determined of 'an' international transaction; and (ii) the ALP of such an international transaction is to be determined by applying....
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....nt of export commission; Payment of royalty, technical knowhow fee, technical assistance fees; Payment of Authorized test support fee; and Reimbursement expenses, etc. By no standard, the above fourteen international transactions can be considered as closely related to each other, so as to fall for consideration as a single international transaction. It can be noticed from the assessee's Transfer Pricing study report and also Audit report in Form No. 3CEB that it claimed twelve out of the total international transactions at ALP by using the CUP as the most appropriate method. The TPO, without assigning any reason as to why the CUP method could not be applied, went ahead by determining the ALP of all the international transactions under TNMM on a consolidated manner. 7.4 It goes without saying that it is the assessee who knows best about the most appropriate method for a particular international transaction undertaken by him. It is his prerogative to initially choose the most appropriate method for each international transaction having regard to the nature of transaction and all other relevant factors and then determine its ALP. Having chosen a particular method as the most app....
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....plicability of the CUP as the most appropriate method in respect of twelve international transactions, the TPO could not have proceeded to determine the ALP of these twelve international transactions also under the TNMM. Under such circumstances, we have no option but to set aside the impugned order and remit the matter to the file of AO/TPO for determining the ALP of the twelve international transactions, firstly, under the CUP method as was substantively chosen by the assessee as the most appropriate method. It is only if the TPO comes to the conclusion that either the CUP method is not appropriate to such international transactions or that the data provided by the assessee is not proper or is inadequate, that he can resort to some other method, of course, after confronting the assessee with his reasons for the proposed rejection of the CUP method. We want to make it clear that we have eschewed from undertaking the exercise of checking the applicability or otherwise of the CUP method to such twelve international transactions or examining the availability or suitability of the data of comparable uncontrolled transactions given by the assessee. In other words, the entire exercise h....
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....costs for the three months period is wholly inappropriate because the so-called strike continued only for a period of one month and five days. It is further discernible that the assessee computed the amount of abnormal fixed costs at Rs. 23.91 crore by applying 56% to the total operating costs incurred during this period of three months. This 56% was determined by considering the ratio of actual sales during these three months to the normal sales during such period. Prima facie, going by the assessee's own version, it should have been in the ratio loss of sale to the normal sales and not actual sales to normal sales. The ld. AR candidly conceded this position during the course of hearing before us. Be that as it may, we find that there is no warrant for reducing any amount/percentage of the operating costs for these three months period from the total operating costs. If we accept the contention of strike, then there should be some corresponding reduction in costs as well. The assessee has not demonstrated that the operating expenses during the month preceding and succeeding these three months were at any higher level. Apart from that, we find from the Chart of month-wise produc....
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.... in the open market ; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction." 10.4 Sub-clause (i) in the determination of ALP under TNMM is the computation of net operating profit margin realized by the assessee from an international transaction. Sub-clause (ii) is the computation of net operating profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction. Sub-clause (iii) provides that the net profit margin realised by a comparable company, determined as per sub-clause (ii) above, 'is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions,... which could materially affect the amount of net p....
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....erence between international transaction of the assessee and comparable uncontrolled transactions. The assessee in the instant case has failed to bring on record any material to show that the profit of the comparable companies was not hit by any untoward incident. Such southwards adjustment in the assessee's own operating costs and the resultant northwards movement in its own profit rate, is impermissible under the law. In view of the foregoing reasons, we uphold the view taken by the TPO in rejecting the claim of the assessee for reduction of the so-called abnormal operating costs from the total operating costs. 11.1 Now, we take up the second issue of adjustment to the operating profits of the assessee by the amount of depreciation. The ld. DR submitted that depreciation ought not to have been allowed to the assessee. We fail to appreciate this contention for the reason that depreciation is an integral part of the operating costs. Even though the assessee initially did not consider the amount of depreciation allowance as a part of the operating cost, but the TPO, in our considered opinion, was right in including the amount of depreciation as an element of operating cost. 11....
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....s. For the purposes of making comparison, one cannot contend that the payment of rent by one enterprise in comparison with a non-payment of rent by another, should be neutralized by giving proper adjustment from the operating profit of the comparable. The manifest reason is that the other enterprise may have its own office premises and in that case, the amount of depreciation on such premises will also form part of its operating cost. When we consider the operating profit of the first enterprise which is paying rent and then compare it with the second enterprise which is not paying any rent but is claiming depreciation on its own premises, the overall effect of rent in one case gets counterbalanced with depreciation on premises of the other. Similar is the position of a company having purchased new assets charging higher amount of depreciation allowance in its books of accounts vis-a-vis another comparable company using old assets with lower amount of depreciation. No adjustment on account of difference in the amounts of depreciation of two companies is called for when the operating profits are determined because in the case of a company having purchased new asset, there will be lo....
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....pardized due to higher rate of depreciation charged by company B at 30% in comparison with lower rate of depreciation charged by company A at 20%. In such a situation, although both the companies use similar type of assets and everything else is also equal, but their respective operating profit percentages undergo change due to higher or lower rate of depreciation, thereby distorting their comparability. It is this difference in the amounts of depreciation due to different rates of depreciation and not due to different quantum of depreciation simiplicitor, which calls for bringing both the companies at par. 11.6 Reverting to the facts of the extant case, we find that the TPO did not have any occasion to consider this issue, because such an argument has been advanced before us for the first time. In our considered opinion, the ends of justice would meet adequately, if we set aside the impugned order to this extent also and send the matter back to the file of the TPO for allowing adjustment to the operating profit margin of the comparable companies, if there is some difference in rates of depreciation charged by the assessee vis-à-vis these companies. In other words, the amou....
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.....2005, the assessee provided data of LML Ltd. for preceding year ending 31.3.2005. It is obvious that in the absence of the relevant data for the year ending 31.3.2006, these companies were liable to be excluded. Primarily, we are in agreement with the TPO in so far as the rejection of the data other than the relevant financial year is concerned. The Special Bench of the Tribunal in the case of Aztec Software and Technology Service Ltd. (2007) 107 ITD 141 (Bang) (SB) has held that the current year's data should be preferred over the multiple years' data. Rule 10B(4) read with Rule 10D(4) also supports this proposition. As such, we approve the view taken by the TPO in using only the current year's data. 12.3 The ld. Counsel for the assessee contended that though at the material time the relevant data for the current year of these three companies was not available, but, now the assessee can produce the relevant data. We find from the TPO's order that he has excluded these three companies only for the non-availability of the data for the current year. The otherwise comparability of these companies is not in dispute. Under such circumstances, we set aside the impugned ....
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....ct the TPO to determine ALP of the first transaction of the Purchase of motorcycles and scooter parts, etc. in the light of the operating profit margin of the assessee and that of comparables as determined in the light of our above directions. If the difference between two margins breaches the safe harbor rule, then, the addition on account of TP adjustment should be made. 15.1 Coming to the international transaction of Purchase of fixed asset, it is seen that the assessee recorded it at Rs. 21.37 crore and showed it as ALP under the TNMM. We have laid down the mechanism for computation of ALP of such transaction under the TNMM by directing the way in which the profit margin of the comparables and the assessee should be computed. The TPO should apply the recalculated profit margin of the assessee and comparables to the value of this international transaction. If the result crosses the permissible percentage, then the additional amount would go to affect the value of fixed assets. 15.2 It is noted that the TPO proposed the transfer pricing adjustment on this score by considering the value of the transaction and then applying the differential profit rate of 7.12% on such value. In ....
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....n its ALP shall constitute a basis for making of addition on account of difference between the assigned value and ALP of such international transaction as per the relevant provisions. But if there is an international transaction in the capital field, which does not otherwise give rise to any income in itself, then even though its ALP may be computed in consonance with the provisions, but no adjustment can be made for the difference between the declared value and the ALP of such international transaction. At the same time, it does not mean that the computation of the ALP of such an international transaction in the capital field is just a ritual and should not be embarked upon. In fact, such a computation is necessary because of the impact of such a transaction of capital nature on the transactions of its revenue offshoots. In our present context, the international transaction of purchase of fixed assets is required to be benchmarked as per the most appropriate method. The application of the ALP, if required, will give rise to the recomputation of the revised value of the purchase of fixed assets. Such an increase in the value of the fixed assets, being a capital transaction in itsel....