TaxTMI 
TaxTMI 
2022 (2) TMI 1350
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....me Tax (Transfer Pricing) - II, Bangalore (hereinafter referred as "TPO" for short) and the learned Commissioner of Income Tax (Appeals) -LTU (hereinafter referred as "CIT (A)"respectively; collectively referred as "lower authorities") have erred in passing the Orders in the manner passed by them. The Orders being bad in law are liable to be quashed. 3. The learned AO and TPO have erred in passing the Orders without giving sufficient opportunity of being heard and at the fag end of the limitation period. The learned CIT(A) has erred in confirming such an action of the AO and the TPO. GROUNDS RELATING TO TRANSFER PRICING - LEGAL ISSUES 4. The learned AO has erred in making reference for the determination of the A Length price of the international transaction to the TPO, without appreciating that learned AO being jurisdictional officer for all matters relating to the appellant, co not have referred the matter of determination of arm's length price to another office The CIT(A) has erred in confirming the action of the AO. 5. The learned AO has erred in making a reference to TPO for determining arm's lengtl price without demonstrating as to w....
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.... the matter back to the TPO with the direction to identify suitable comparables and determine arm's length price of royalty payment without appreciating that under section 251 of the Income Tax Act, the CIT(A) cannot restore the matter back to the AO/TPO. 12. The CIT(A) erred in remanding the matter back to the TPO after observing that "The fact that the royalty rate was within the permissible limit specified by Government of India and approved by RBI is an additional argument in support of the legitimacy of the said payment". GROUNDS RELATING TO COMPUTATION OF ALP OF MANUFACTURING SEGMENT 13. The lower authorities have erred in: a. not appreciating that a customs duty adjustment was required to be made in order to put all comparables on a level playing field; b. Rejecting comparables selected by the appellant on unjustifiable grounds; c. not appropriately computing the operating margins of comparables and that of the appellant; d. not considering cash profit to sales as PLI as adopted by the appellant for determining arm's length price; and e. not making proper adjustment for enterprise level and trans....
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....chases certain parts and components locally for further export to other Associated Enterprises. 2.2 During the year under consideration, the assessee entered into the following international transactions with its Associated enterprises: Sl. No. Description Amount(Rs.) 1 Purchase of parts and components 827,65,33,358 2 Sale of transmission parts, other parts and components 114,59,76,937 3 Sale of prototypes 31,81,449 4 Purchase of automobiles and accessories 73,53,16,920 5 Sale of Vehicles 1,71,11,649 6 Sale of parts and Components 5,15,236 7 Purchase of Capital Goods 278,10,24,980 8 Payment towards Software License 61,38,417 9 Payment of Royalty 61,44,90,556 10 Payment of Technical assistance 26,09,17,628 2.3 The assessee selected TNMM as most appropriate method for determining the arm's length price of international transactions entered by it with its AE. TNMM was applied using combined transaction approach at the entity level. While computing ALP, the assessee aggregated manufacturing and trading segment. The assessee had high import content when compared to comparable selecte....
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....units includes payment for technology. In the case of independent parties, the import price paid includes premium for technology as well as for the brand. Thus, no extra payment is required in the guise of Royalty; d) that the RBI permission was granted in the context of Foreign Exchange Management. The RBI did not make any enquiry regarding arm's length nature of the Royalty payment; e) that the assessee has not produced any evidence that it had actually received any technical know-how during the year under consideration from AE; f) that there is no proof that the Other group concerns or third parties are also charged identical royalty; g) that the taxpayer has also not been able to show it derived any economic benefit from the alleged know how received from the AE. 2.7 Based on the above reasons, the Ld.TPO determined the ALP of international transaction relating to Royalty at NIL by selecting CUP method as the most appropriate method to determine the ALP. Accordingly, a TP adjusted of Rs.61,44,90,556/- was made in respect of the Royalty payment by the Ld.TPO. 2.8 The Ld.AO incorporated the TP additions in the assessment order. Whi....
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....ting margin of the assessee are at arm's length as concluded by the Ld.TPO. 6. The assessee submits that once the operating margin at segment or entity level is at arm's length, separate analysis of Royalty is not required. This is for the following reasons: Section 92C(1) provides that the arm's length price shall be computed applying the most appropriate method out of the methods listed in section 92C(I). Rule 10C lays down the guidelines for selection of the most appropriate method. The most appropriate method is to be selected having regard to nature of transaction or class of transaction or class of associated persons, functions performed, assets employed and risks assumed etc. 7. The assessee selected TNMM as the "most appropriate method" is not disputed by the revenue. The Ld.AR submitted that the TNMM considers the net profit margin earned by an organization. Adjustments are made to the net profits to factor in the differences at the transaction level or the enterprise level. It is submitted that the adjustments are also made for difference in the accounting methodology. TNMM makes a comparison at the entity / global / segment level and not at the trans....
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....d, interdependent and flow from a common source. He at the cost of repetition reiterated that once the net profit margin is determined to be at arm's length, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm's length is to be upheld. On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. It is the contention of the Ld.AR that assessee has paid royalty to TMC in accordance with the technical service agreement being an integral part of the manufacturing activity. Admittedly, the Ld.TPO upon segregating the manufacturing and trading activity found the margin determined under the separate segments to be at arm's length. It has been submitted by Ld.AR that for: A.Y. 2008-09 in IT(TP)A No. 1595/Bang/2012, A.Y. 2010-11 in IT(TP)A No. 16/Bang/2015 and A.Y. 2013-14 in ITA Nos. 2016 & 1972/Bang/2018 the Coordinate Bench of this Tribunal in assessee's own case has analysed that the royalty payment has been made by assessee towards the licen....
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.... benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) & Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, the Hon'ble Delhi High Court held that the "transfer pricing guidelines" laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of IT(TP)A No.1315/Bang/2011 a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage re-structuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The OECD guidelines should be taken as a valid input in judging the action of the TPO because, in ....
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....he contentions in the petition and are of the view that the same are devoid of any merit. The addition by way of adjustments to the ALP has been deleted by the Tribunal in para 47 of its order. The observations in para 48 to 51 has been very clearly mentioned MP No.7/Bang/2015 to be purely academic. Therefore, the confusion as is sought to be brought out in the petition is without any basis and is rather mischievous. All that the AO has to do while giving effect to the order of Tribunal is to delete the addition on account of adjustment to ALP. We may also add that the miscellaneous petition is thoroughly misconceived and has been filed without a proper reading of the order of the Tribunal. We hope that such miscellaneous petitions will not be filed by the revenue in future, when the orders in question clearly set out its conclusions. The miscellaneous petition is therefore dismissed." 12. It is also observed that the principle of aggregation has been upheld by various High Courts as well as decision of this Tribunal. Admittedly, the assessee has treated royalty to be closely interlinked with the transactions, which was rejected by the revenue authorities. Reliance has been p....
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....rate tax issues raised: 15. Ground No. 15 The assessee is in the business of manufacture of motor vehicles. The contractual obligations mandate the performance of certain services free of cost after the sale of the vehicles. This is during the warranty period. This is a normal phenomenon in the automobile industry. It is stated that as the products are sold by the assessee, it undertakes obligation to rectify any mal-functioning in the product sold. The payer thus has a right, without payment of any money to have the defect rectified, provided the defect is notified within the specified period. The price charged for the products includes an element the expenditure that is likely to be incurred in meeting the demands for rectification of the defects during the warranty period. Assessee submitted that since the gross amount is reflected as turnover, correct accounting treatment would require that appropriate amount, reflecting the probable charges that the assessee is likely incur, be debited to the profit and loss account. The Ld.AO disallowed the provision towards warranty while computing the book profits under section 115JB of the Act on the ground that it is provision....
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....re is a cash outflow incurred by the assessee in pursuance of the warranty, the estimate cannot be made regarding the amount to be claimed as deduction under the heading of "warranty". In this case, as there is no such evidence, the assessee is not entitled to the said benefit. 5. The law laid down by the apex court makes it clear the historical trend referred to therein is to the question whether in the past there was any defect in the manufactured goods and not the actual expenditure incurred in rectifying the defect or in substituting the defective product with a defectless product. Assuming that the amount of warranty claiming deduction is actual and not incurred by the assessee, the difference in the amount is taxed in the subsequent year. In that view of the matter and in the light of the law laid down by the apex court as aforesaid, the authorities were justified in allowing the warranty claimed as deduction. However, they have made it very clear that there should not be double deduction and for verifying the same, the matter is remitted back to the authorities which, in the facts of this case, would meet the ends of justice. We do not see any justification to inter....