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2015 (5) TMI 858
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....acts of the case, the appeal of the Revenue for assessment year 2005-06 is taken as the lead case. This appeal by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-IT/TP, Pune dated 18.02.2013 which, in turn, has arisen from an order dated 24.12.2008 passed by the Assessing Officer u/s 143(3) of the Act. 4. The assessee before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of manufacturing of Carburettors and Air Suction Valves (ASVs) for motor cycles/three wheelers and it has its production facility at Pune, Maharashtra. The assessee is a joint venture between Keihin Corporation, Japan (holding 74% shareholding) and Fuel Instruments & Engineers Private Limited, India (holding 26% shareholding). For the assessment year under consideration, it filed a return of income declaring a total income of Rs. 80,54,89,846/-, which was subject to a scrutiny assessment. The Assessing Officer noted that assessee had entered into certain international transactions with its associated enterprises, and income arising from such transactions was liable to be computed having regard to their....
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.... compared with the profit derived from the sale of parts and not manufactured products. The learned TPO stated that he relied on the internal comparable because the Appellant did not furnish profit and loss account pertaining to domestic sales of components and parts. It is admitted fact that volume of domestic sales of components and parts is quite insignificant to constitute valid comparable with the export transaction. In such circumstances, the learned TPO ought to have benchmarked export transactions with the external comparables. However, he did not do so. 2.1.17 Thirdly, turnover of export transaction is of Rs. 8.12 cr whereas, Appellant's domestic sales is around 258 cr. The substantial difference in turnover between export sales and domestic sales make both incomparable applying the ratio of Genisys integrating system Ltd of Bangalore ITAT. 2.1.18 The learned TPO has mentioned that the Appellant in the Transfer Pricing Report and in the Form 3CEB had described export transaction as of 'export of finished goods'. This was later changed and it was stated that the Appellant exported components and parts. The learned TPO apparently has accepted the change in ....
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....ort of finished goods 8,12,54,622/- 3. Import of capital goods 2,64,23,826/- 4. Payment of Royalty 7,37,36,926/- 5. Payment of Technical know-how fees 4,65,66,667/- 6. Payment of Technical assistance fees 1,62,49,770/- 7. Reimbursement of expenses 88,62,461/- TOTAL 56,08,86,974/- 8. In its Transfer Pricing Study, assessee benchmarked the aforesaid transactions except the transaction on import of capital goods by selecting the Transactional Net Margin (TNM) Method as the most appropriate method. While applying the TNM Method, assessee aggregated the transactions mentioned above at Item Nos.1, 2, 4, 5, 6 & 7. For the remaining transaction of Import of capital goods, assessee adopted the Comparable Uncontrolled Price (CUP) Method. In so far as the application of CUP Method for determining the arm's length price of the transaction of Import of capital goods is concerned, the TPO accepted the same and there is no dispute and therefore we do not deal any further on this aspect. 9. With regard to the other transactions enumerated above, which were aggregated by the assessee, it was contended that the same ....
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....icably linked with each other and collectively constituted the manufacturing business of assessee; and, therefore one limb of such transactions, namely, Export of components and parts to associated enterprises could not be segregated. It was explained by the assessee that there existed significant differences between the export transactions with associated enterprises and the activity of sale of carburettors in the domestic market. Firstly, it was pointed out that there is no value addition done to the components and parts which are exported to the associated enterprises because they are procured from third party vendors and re-sold whereas the carburettors manufactured and sold domestically involved a technologically advanced manufacturing process. The export of components and parts was more of a trading activity. Further, as far as the assumption of risks was concerned, it was asserted that assessee faces the product failure risk in case of products manufactured by it whereas it does not have any product risk, market risk, bad debt risk and capacity utilization risk with regard to the transaction of export of components and parts to the associated enterprises. It was emphasized t....
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....nded that what was exported to associated enterprises was a raw material whereas the sales in the domestic market were of finished products i.e. the carburettors. The Ld. Representative also referred to assessee's submissions before the TPO wherein assessee had furnished invoices which contained the description of the products exported and the domestic sales. At this point, the Ld. Representative also asserted that before the TPO, it was clarified that the nomenclature of the transaction stated to be "Export of finished goods" was a misnomer whereas the exports in question comprised of only components and parts, which are used in the manufacture of carburettors. The aforesaid aspect was also clarified by the assessee by pointing out the difference in the type of customers in the domestic market vis-à-vis the impugned Export of components and parts. In sum and substance, the Ld. Representative for the assessee has defended the ultimate conclusion of the CIT(A) by pointing out that there are significant differences between the impugned export activity and the domestic manufacturing business of the assessee and the project margin of the two cannot be compared. Therefore, accord....
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....he effect that the even if the impugned export activity was to be considered as an independent business activity, the TPO was wrong in benchmarking it with the domestic sale activities which consisted primarily of manufactured carburettors and ASVs. In this context, from the order of the authorities below, it is quite evident that assessee succeeded in pointing out that there was a difference in the nature of items exported to associated enterprises vis-à-vis sales in the domestic market. The fundamental point made out by the assessee was that the components and parts exported to associated enterprises were procured from local third party vendors whereas the domestic sales which comprised of almost 97% of the total sales consist primarily of manufactured carburettors/ASVs. The plea setup by the assessee was that the impugned activity of export to associated enterprises was a trading activity and therefore net margin from such export activity cannot be compared with the profit margin of domestic business which primarily consist of manufactured carburettors. In our considered opinion, this fact-situation is amply borne out of the material on the record and the finding of the C....
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....xport sales is not comparable with the domestic sales due to variation in volume but the profit margins per-se do not get effected by the volume of turnover and for that proposition reliance has been placed on the decision of the Mumbai Bench of the Tribunal in the case of Capgemini India Private Limited (supra). In our considered opinion, it would suffice to observe that the aforesaid stand of the Revenue is quite misplaced because in the present case, it is not merely the difference in volume of the two category of transactions but the very nature of the transactions has been found to be incomparable. Notably, the transaction of export of components and parts is a trading activity whereas the domestic business consists of sales primarily of the manufactured carburettors. Therefore, on this ground itself, we find that the reference to the decision of the Tribunal in the case of Capgemini India Private Limited (supra) in the present case is erroneous. 21. At this point, it was pointed that the assessee had undertaken transactions by way of export of components and parts to associated enterprises in the same manner for assessment years 2002-03, 2003-04 and 2004-05 also. At the ti....
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....s which are revenue in nature. 26. The Assessing Officer, however, relied upon para 5.2 of the technical collaboration agreement with the parent company which dealt with providing of Technical Assistance in India and concluded that assessee derived enduring benefit from the services rendered by the engineers of the parent company. The Assessing Officer treated the entire expenditure incurred on account of the engineering services fee as capital in nature. 27. The CIT(A), however, accepted the claim of the assessee that expenditure to the extent of Rs. 1,21,87,328/- was a revenue expenditure since the services rendered by the engineers of the parent company were for day to day running of the business. The CIT(A) also considered para 5.02 of the technical collaboration agreement which was relied upon by the Assessing Officer. The CIT(A) also took note of assessee's submission that in assessment year 2006-07 the Assessing Officer has himself allowed such expenditure after being directed by the DRP to do so. With regard to the disallowance accepted by the assessee in the earlier assessment year of 2004-05, it was noted that the same related to payment of fee for technical assista....