TaxTMI 
TaxTMI 
2022 (2) TMI 1350
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....d 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 why it was necessary and expedient to do so. The CIT(A) has erred in confirming the action....
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....ion 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 transactional level differences between the appellant and the comparable companies. 14. Without prejudice to above, the lower authorities have erred in not allowing the benefit of the +/-5% range as per the proviso to section 92C ....
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....ponents 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 selected and therefore made custom duty adjustment. It is submitted that the adjustment was made only for basic custom duty, for which input credit is not available. 2.4 The assessee used 7 comparables with CP/NS as the PLI and computed its margin at 15% as against 7% of the comparables selected. SI. No. Name of the Company OP on Sales % CP on Sales % 1 Ashok Leyland Lt....
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....ved 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. While computing the total income in the order, the Ld.AO added back (i) Rs.33,65,497/-(Net) being value of testing vehicles not forming part of closing stock, (ii) Rs.90,64,082 (Net) being write off of slow moving stock, (ii) Rs.7,49,494 (Net of depreciation) being value of software licenses purchased being debited to software expense. The Ld.AO also added Rs.6,06,00,000/- being provision for warranty to book profits u/s 115JB of the Act. Aggrieved by the order of Ld.AO, the assessee filed appeal before ....
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....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 transactional level. He assailed that the merit of this method is that, it is resilient to minor functional differences. As a result of this characteristic, examination is not made at the individual component level of income or expenditure that has been reckoned in arriving at the net profit but at the entity level. The Ld.AR emphasized that when comparison is made at the macro (global) level, where multiple intertwined transactions exist, it is not possible to identify or pinpoint the contribution of each facet or transaction to t....
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....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 license to manufacture items on exclusive basis. It is also been submitted that in the sister concern's case being Toyota Kirloskar Auto Parts for A.Y. 2007-08 in IT(TP)A No. 1356/Bang/2011, this Tribunal has taken similar view. We note that for A.Y. 2007-08, this Tribunal in assessee's own case for A.Y. 2007-08 reported in [2014] 48 taxmann.com 380 has considered the issue of separately bench marking the royalty as under. "48. On the issue whether the TPO can come to a conclusion that the ALP of an international transaction is nil because no services were rendered ....
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.... 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 a different form, they have been recognized in India's tax jurisprudence. The Hon'ble Court held that it is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand & Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same. In light of the aforesaid ....
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....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 placed on following decisions in respect of above proposition. a) DCIT vs. Air Liquide Engineering India P Ltd. reported in [2014] 43 taxmann.com 299 (Hyderabad Tribunal) b) Dell International Services India Pvt. Ltd. vs. JCIT in IT(TP)A No. 130/Bang/2014 & IT(TP)A No. 121/Bang/2014 dated 22.12.2021 c) McCann Erikson India Pvt Ltd vs. ACIT - ITA No.5871/Del/2011 d) M/s. Thyssen Krupp Industries India Pvt Ltd V ACIT - ITA No. 7032/Mum/2011 e) Lumax Industries Ltd v ACIT TS-152-ITAT-2013(DEL)-TP. f) Hindustan Unilever Limited v Ad CIT ITA No. 7868/Mum/2010 g) DCIT v CMA CGM Global India (P) Ltd ITA ....
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.... 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 to meet contingent liability and is not an ascertained liability. However, the Ld.AO allowed the same in normal computation. Aggrieved by the order of Ld.AO, the assessee preferred appeal before the Ld.CIT(A) who upheld the view of Assessing Officer. Aggrieved by the order of Ld.CIT(A), the assessee is in appeal before us now. 16. It is stated that the liability is of a known nature. Its incurrence is not uncertain. It is a liability in present, though may be discharged at a later date. The past reality and experience is normally a sure guide of the amount that the appellant is likely to incur. It is only that the amount cannot be determined with substantial accuracy. Being a kno....