TaxTMI 
TaxTMI 
2018 (4) TMI 501
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.... on the basis of Turnover when as per Rule 10B(2), turnover is not one of the comparability factor defined therein and when the FAR have been carefully calibrated for comparison with assessee and it was accepted in the assessment proceedings (As per the SCN dated 16.01.2013 company has not objected to the use of TATA motors as comparable) 2. Whether the DR Panel was correct in law to allow working capital adjustment to the profit level indicator of the comparables when: 2. a) it has not been demonstrated or proved that the pricing of the product and services in case of comparables or even in case of the assessee company was actually determined in the basis of the working capital; 2. b) the Comparables have been identified following the provisions of Rule 10A(a), Rule 10B(2), Rule 10B(3) and Rule 10B(1) comparing functions, assets and risks, wherein there is no case for any adjustment; which needs to be made to the financial results of either assessee company or the comparables. 2. c) it has not considered the fact that the profit level indicator used for comparison was operating profit before interest and thus any impact of credit policy on inter....
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....e Rules'). Sale of Vehicles and Spare Parts 3. On the facts and circumstances of the case, and in law, the learned AO / TPO erred and the Hon'ble DRP further erred in rejecting the use of the internal Transactional Net Margin Method ('TNMM') to determine the ALP of the Appellant's sale of vehicles / spare parts to its AE ('the sale of vehicles') Aggregation of Transactions 4. On the facts and circumstances of the case, and in law, the learned AO / TPO erred and the Hon'ble DRP further erred in aggregating the import of parts, sale of vehicles and professional fees paid and thereby performing an entity-level TNMM analysis to determine the ALP of the Appellant's international transactions. Incorrect Rejection of Comparable Companies 5. On the facts and circumstances of the case, and in law, the learned AO / TPO erred and the Hon'ble DRP further erred in incorrectly rejecting company which is comparable to the Appellant while determining the ALP of the international transactions of the Appellant. Restricting the Adjustment Proportionate to the International Transaction 6. On....
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....under section 92CA(1) to the Transfer Pricing Officer (TPO). The TPO vide order under section 92CA(3) of the Act made an adjustment of Rs. 42,99,42,818/- to the arm's length price in respect of international transactions of the assessee with its associated enterprises as under:- "a) Rs. 41,66,47,000/- in respect of international transactions relating to Manufacturing, imports, exports and knowhow and Professional Fees b) Rs. 1,32,95,818/- relating to transactions of import of fixed assets." 6. The Assessing Officer further disallowed sum of Rs. 56,595/- out of telephone expenses which included phone lines given to the employees at various levels including field staff. Another disallowance proposed in the hands of assessee was on account of repairs to buildings. The assessee had incurred an expenditure of Rs. 13,43,920/- and as per the Assessing Officer, this included major repairs of capital in nature and hence, 15% of the expenses were treated as capital in nature at Rs. 2,04,493/- and depreciation on the said amount was allowed @ 10%. The assessee filed objections before the Dispute Resolution Panel (DRP) against the order of TPO, who in turn, gave direct....
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.... the learned Authorized Representative for the assessee that certain raw material was imported, wherein the assessee hired the services of its associated enterprises to buy raw material. It was further pointed out that the assessee was importing specific material which was used for all trucks. The first issue pointed out by the learned Authorized Representative for the assessee was that the capacity of manufacturing facility of the assessee was to manufacture 24000 trucks, against which the assessee could sell in India only 700 trucks. So, capacity utilization was less. Because of low sale of trucks in India, the assessee ventured into exporting of trucks to the developing countries. In this regard, the assessee took help of its associated enterprises for booking the orders, wherein the assessee gets orders from Germany for developing countries. The said trucks could not enter Germany because of emission norms and were directly sent to South African countries. Some parts were being imported and used for both the domestic and export markets. He further pointed out that the TPO had aggregated all the transactions and applied entity-wise TP provisions i.e. the first transaction was im....
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....led before the DRP was not considered and even the evidence filed before the Assessing Officer was not considered by him and matter was decided on the basis of orders of Assessing Officer / TPO. 11. In respect of grounds of appeal, the learned Authorized Representative for the assessee pointed out that the first ground of appeal raised by it was general in nature. The issue in ground of appeal No.2 was against the adjustment made on account of purchase of raw material / imports. In respect of ground of appeal No.3, it was pointed out by the learned Authorized Representative for the assessee that because of excess capacity available in the manufacturing unit, vehicles were sold to the developing countries, for which the services of associated enterprises were utilized. The assessee had applied internal TNNM method, where margins of sale in the Indian market and exports to developing countries were considered. He referred to the additional evidence filed before the DRP, where the segmental on actuals were filed; the sales were actual and material cost comes from the system. He referred to the observations of DRP that the goods sold in India and goods sold to Germany could not be c....
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....d Authorized Representative for the assessee pointed out that CUP method or external CPM method could be applied. However, in respect of exports, internal TNMM method merits to be applied. The issue in ground of appeal No.5 raised by the assessee was for application of TNNM method and it was pointed out that the results of assessee were comparable to Force Motors, wherein the RPT was less than 25%, hence, could not be rejected. However, he fairly pointed out that the issue would become academic if the earlier ground of appeal No.4 is allowed. 12. In respect of issue raised vide ground of appeal No.7, the learned Authorized Representative for the assessee pointed out that the DRP had allowed the said aspect in favour of the assessee but the Assessing Officer has not calculated it correctly. In this regard, he made a request that the Assessing Officer be directed to compute the international transactions correctly. The issue in ground of appeal No.8 is charging of interest was held to be consequential. In conclusion, he stressed that where the trucks are being sold to the developing countries though the orders were through Germany company, but the trucks were straight away sent to....
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....any case was protected where he gets cost plus 25%. He stressed that the external TNNM method was to be applied and all the transactions had to be aggregated. 14. The learned Authorized Representative for the assessee in rejoinder pointed out that looking at the trading situation, where the associated enterprises buys raw material from third party and selling the same to the assessee, then Cost plus Mark up was the right method. He stressed that surcharge was a kind of mark up, so if CPM method is applied, then Cost plus Mark up. Our attention was drawn to the WTS certificate placed at Annexure A, which talks about factual aspects of the case. Referring to the OECD guidelines and other principles on inter-dependence, the learned Authorized Representative for the assessee pointed out that if the transactions were so inter-dependant, then no aggregation of the transactions. He referred to the order of TPO and pointed out that he has failed to give a finding that there is no other way but aggregation and in the absence of the same, he pointed out that the order of TPO was incorrect. In respect of export to associated enterprises, the learned Authorized Representative for the assess....
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....p of Companies in Germany. The assessee was engaged in the manufacture of heavy commercial vehicles i.e. cargoline shell trucks. The assessee had made sales of its trucks both in the domestic market and had exported the same to developing countries markets. The claim of assessee before the authorities below and even before us is that the cargoline shell trucks manufactured by it were special line of trucks which were specifically meant for Indian market and other developing countries markets. The reason for the same, the emission norms followed by the assessee while manufacturing the said trucks. The trucks were manufactured as per the emission norms of Euro - III. The associated enterprise of the assessee was in Germany, which was sourcing the raw material to be used for the manufacture of trucks both in the domestic market and in the exports to the developing countries. The assessee was raising the bills on the said Germany company i.e. on its associated enterprises for export of finished goods, but the trucks were being sent to the developing countries by the assessee directly. The reason for the same was that the trucks in Europe had to be manufactured as per the Euro-V norms w....
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....wed the same emission norms and had no difference in the product. The assessee in this regard has filed the evidence of emission norms applied in European Union and in Asia with special reference to Indonesia and also in South Africa, wherein emission norms are similar and consequently, cannot be said to have geographical differences. Even otherwise, geographical differences would not be relevant where the products were exported to markets similar to Indian markets, where emission norms were less stringent than as compared to Germany. Accordingly, we find no merit in the approach of DRP / TPO for rejecting the internal comparables available on geographical grounds. 19. Now, coming to the second argument of the DRP and the TPO that FAR is dissimilar, so in respect of marketing and selling functions, wherein the sale in domestic market, the assessee has to engage in marketing activities, whereas for sales made through its associated enterprises, no marketing functions are performed by the assessee. The assessee explained that in case any adjustment has to be made for this function, then this would result in reduction in the margins of domestic segment but this would not change the....
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.... The contention of assessee was where comparison was available at hand, then an endeavour should be made to use the internal comparables available. The margin of assessee in the field of export of finished goods and spares was higher as against the margins earned by the assessee in the domestic segment, was further argument. 21. Another aspect which was pointed out by the assessee by way of additional evidence before the DRP was the certificate from WTS (certified accountant). They had worked out that the associated enterprises had earned negative contribution of (-) 1.34% by selling the assessee's trucks as against the income earned by the assessee in India on account of sale through associated enterprises, vis-à-vis trucks sold directly in domestic market. In respect of FAR analysis, which was the reason on which internal comparability was rejected by the DRP, the case of assessee before us is that where the assessee was selling the same product in both the segments, difference in FAR could not obviate the internal comparability. The learned Authorized Representative for the assessee has furnished tabulated details in this regard and has stressed that even if the differ....
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....artmental Representative for the Revenue has strongly objected to the same and pointed out that the CPM method is applicable where there is cost plus mark-up. However, in the case of assessee, the mark-up charged by the associated enterprises consist of both direct as well as indirect cost, which is clearly evident from the TP study report and hence, the method adopted by the assessee was incorrect and needs to be rejected. The second aspect for rejection was that the assessee had failed to give any evidence to establish the reasonableness of surcharges. The assessee claimed that the associated enterprises were charging cost plus the actual expenses incurred on the said items less 500 and hence the import of raw material from associated enterprises was at arm's length price. The plea of assessee before us was that where the associated enterprises were charging at material cost i.e. charged by third party vendors plus nominal surcharge to cover cost of inbound freight, material handling, quality inspection, etc., then the same cannot be said to be not at arm's length price. In this regard, the assessee filed some screen shots from associated enterprises account i.e. electron....
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....e correct application of CPM by comparing the mark ups charged by the associated enterprises and determine the arm's length price. Where the assessee had failed to establish the reasonableness of surcharge charged by the associated enterprises, the learned Departmental Representative for the Revenue pointed out that there was no justification in the percentage of surcharges nor had the assessee done any external benchmarking to justify the charges. In respect of reliance on the WTS filed by way of additional evidence before the DRP, the case of Revenue is that the same was not authentic and could not be relied upon and where the agreed upon procedure was not in public domain, the same could not be accepted in transfer pricing analysis. Another difference which was pointed out by the learned Departmental Representative for the Revenue was the method of applying surcharge by the associated enterprises which dependent on various factors and thus, varied. Because of such mark up variations arising due to inbound freight, mode of transport, packing material, then in such scenario, authenticity, reliability and basis of comparison would fail. 27. In view of the submissions made by....
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.... with regard to margins earned by the assessee in the domestic market and vide international transactions. It may be pointed out that no segmental details were prepared by the auditor. The segmental details of margins earned by the assessee in domestic and international market on the finished products has been prepared by the assessee, which lacks certification. We have already decided the issue of there being no geographical difference on the goods sold in domestic market and the goods which were exported through associated enterprises to the developing countries. The assessee has worked out the margins in domestic segment at 0.06% and in the export segment at 24.19%. The assessee is cost plus entity, wherein it is exporting finished products to its associated enterprises on cost plus margin of 25%. Under the transfer pricing provisions, an endeavour is to be made to compare like with like. In the case of assessee, it is undisputed that input cost both for domestic sector and export sector is same. However, the assessee was remunerated on cost plus basis in respect of its exports to associated enterprises, whereas in respect of domestic sales normal margins were earned. We have al....