2013 (1) TMI 86 - AT - Income Tax

Transfer Pricing Adjustment - assessee-company is an Indian company engaged in the manufacture and trading of automobiles - operating expense adjustment - assessee contested against violation of natural justice - Held that - No evidence has been brought on record by the assessee to establish the violation of the principles of natural justice by the AO as claimed and therefore rejecting this ground raised by the assessee as infructuous. Reference to TPO - Held that - As decided in Tally Solutions Pvt. Ltd. (2011 (9) TMI 196 - ITAT BANGALORE) there is nothing in section 92CA to suggest that the AO should hear the assessee or record reasons before making a reference to the TPO and therefore in the instant case there is no infirmity in the action of the Assessing Officer in referring this case to the TPO. The Explanation to section 92(1) clarifies that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the ALP. As these are anti-avoidance provisions of the Act, and also special provisions to protect the tax base of the country from being eroded, they will over-ride all other provisions of the Act. Therefore, see no merit in this ground raised by the assessee that the definition of income under the Act is not amended to include the T.P. adjustments as income and accordingly dismiss this ground TP adjustment without demonstration - Held that - As in Coca Cola India Inc. v. Asstt. CIT 2008 (12) TMI 67 - PUNJAB AND HARYANA HIGH COURT it is not necessary for the AO/TPO to demonstrate that profits are shifted out of India in order to determine the arm s length nature of any international transaction - thus no merit in the ground raised that no T.P. adjustment could be made in the assessee s case without there being any material against assessee. Use Of Multiple Year Data - Held that - TPO is both empowered and also duty bound to determine the ALP using such contemporaneous data for this purpose even if it is not available to the assessee in the public data bases at the time of preparation of its report on the T.P. study - as mandated by rule 10B(4) of IT Rules, 1962, the TPO used data pertaining to the current year i.e. FY 2002-03 rightly rejecting the assessee use of multiple year data as the assessee failed to demonstrate as how such data pertaining to the prior years had an influence or bearing on prices in the current financial year. Methodology and process in arriving at ALP - segregation of trading and manufacturing segments - Held that - The sale of spare parts is triggered as a result of the manufacturing activities, including warranty commitments. Therefore, it would not be in the fitness of things for the sale of spare parts and components to be considered in isolation from the sale of manufactured vehicles. This view is supported by the OECD T.P. Guidelines, 2010. As the comparable companies are also trading in spare parts and components it can be concluded that trading in spare parts is closely inter-linked with the manufacturing segment of the assessee. No meaningful purpose would be served in segregating the trading and manufacturing segments when the assessee and the comparable companies are at par with regard to the nature and scale of combined activities - direct the AO/TPO to compute the ALP at the entity/enterprise level by combining the trading and manufacturing segments. Operating Efficiency Adjustment - bringing the operating expenditure of the comparables at par with that of the assessee - Held that - TPO has concluded that the assessee is very efficient as its operating expenses are lesser when compared to that of the comparable companies. Briefly, the TPO has equated operating efficiency to operating expenditure. Before the CIT (Appeals) detailed submissions were made on this issue and a remand report was called for thereon, CIT (Appeals) however was of the view that since these submissions were not filed before the TPO during the assessment proceedings they could not be entertained at the appellate stage. Before us apart from the submissions made, expert opinion has been filed on this issue by the assessee which was not available before the TPO. In these circumstances, this matter of operating efficiency adjustment be remanded back to the file of the TPO for re-examination. Admission of Additional Evidence - Held that - As decided in CIT v. Salig Ram Prem Nath 1989 (2) TMI 51 - PUNJAB AND HARYANA HIGH COURT that in order to do substantial justice, the ITAT is vested with the requisite authority to admit additional evidence. As found that the assessee had made submissions on the said matter on which the experts opinion is now filed the experts opinion for being considered in the disposal of this ground of appeal admitted. Excise Duty Adjustment - Held that - Assessee s ground on excise duty adjustment needs to be allowed as assessee collects excise duty as levied by the Central Government and there is no profit element involved in collecting the same and remitting it to the Government. TP regulations are based on the actual margins and pass through items like excise duty are not to be considered while computing margins as is also the case with the comparable companies. DR too did not appear to have serious objections to the exclusion of excise duty in arriving at the margins. Customs duty adjustment - Held that - Remand the matter, of examining the necessity of whether customs duty adjustment is to be allowed, as claimed by the assessee, to the file of the TPO. The TPO directed to examine the contentions keeping in mind the observations made in the light of the decision in the case of Skoda Auto (P.) Ltd. s case (2009 (3) TMI 249 - ITAT PUNE-A) relied on by the assessee and the case of Sony India Pvt. Ltd. s case (2008 (9) TMI 420 - ITAT DELHI-H) relied on by revenue. Cash PLI (Profit Level Indicator) or PBDIT (Profit Before Depreciation, Interest and Tax) to sales - profit margin for determining ALP - Held that - The assessee is in the asset intensive automobile industry thus cash PLI or PBDIT to sales is not the appropriate PLI and also note that the TPO has given depreciation adjustment for differences in relative level of depreciation cost with reference to sales. Commission Income - Held that - In agreement with the TPO s action in excluding commission income for the reason that the commission income earned by the assessee is not derived from out of the assessee s business operations of manufacture and sale of passenger vehicles or the sale of spare parts and components. Provision for Warranty Costs - Held that - The one time special warranty provision, arising out of an extra-ordinary viz. manufacturing defect in exhaust of passenger vehicle in the relevant period should be considered as non-operating expenditure. Marketing Expenses - Held that - Marketing expenses incurred for launch of a new passenger vehicle in the relevant period, is incurred in the normal course of its business operations and forms part of its operating expenditure, hence disallowed. Benefit /- 5% Safe Harbour - Held that - /- 5% variation is allowed only to justify the price charged in the international transactions and not for adjustment purposes. The amendment to 92C(2A) has settled the issue, thus the 5% benefit is not allowable in the assessee s case. CIT(A)exceeded his jurisdiction u/s 251 - Held that - ALP adjustment is to be restricted to the extent of purchase of components from its AE s & CIT(A) has only directed the TPO to compute the ALP adjustment, in accordance with his finding and for this purpose to make necessary verification. No reason to hold that the CIT(A)in directing the TPO to recompute the ALP adjustment has exceeded his jurisdiction u/s 251.

Summary

Issues Involved:
1. Violation of principles of natural justice.
2. Reference to Transfer Pricing Officer (TPO).
3. Approval of Commissioner of Income Tax.
4. Charging or computation provisions under Chapter X.
5. Disallowance under section 40A(2).
6. Demonstration of tax evasion motive.
7. Consistency with earlier and subsequent years.
8. Use of multiple year data.
9. Methodology and process in arriving at the Arm's Length Price (ALP).
10. Segmentation between manufacturing and trading operations.
11. Operating efficiency adjustment.
12. Excise duty adjustment.
13. Customs duty adjustment.
14. Profit Level Indicator (PLI) computation.
15. Adjustments for differences.
16. Adjustment for Associated Enterprises (AE) transactions.
17. Benefit of +/- 5% Safe Harbour.
18. Jurisdiction of CIT (Appeals) under section 251.

Detailed Analysis:

1. Violation of principles of natural justice:
The assessee claimed the assessment order was passed hastily without proper opportunity of being heard. The Tribunal found no merit in this claim, noting no evidence was provided to establish the violation of principles of natural justice.

2. Reference to TPO:
The assessee argued the reference to the TPO was made without proper application of mind. The Tribunal upheld the reference, citing CBDT's Circular No.3 of 2003 which mandates reference to TPO in cases where international transactions exceed Rs.5 Crores.

3. Approval of Commissioner of Income Tax:
The Tribunal held that the Commissioner's approval for making a reference to the TPO is an administrative approval based on appraisal of Form 3CEB and does not require detailed reasons or a hearing.

4. Charging or computation provisions under Chapter X:
The Tribunal dismissed the assessee's argument that Chapter X adjustments are bad in law, stating that the provisions are special anti-avoidance measures that override other provisions of the Act.

5. Disallowance under section 40A(2):
The Tribunal found no merit in the argument that disallowance under Chapter X should be made under section 40A(2), emphasizing that Chapter X provisions override other provisions of the Act.

6. Demonstration of tax evasion motive:
The Tribunal held that it is not necessary for the TPO to demonstrate tax avoidance or diversion of income for invoking provisions of section 92C and 92CA of the Act, citing the case of Coca Cola India Inc.

7. Consistency with earlier and subsequent years:
The Tribunal dismissed the argument that the TPO should not have made adjustments for the year under consideration based on consistency with other years, stating that the determination of ALP is a factual matter and variations can occur year to year.

8. Use of multiple year data:
The Tribunal upheld the use of current year data by the TPO, stating that Rule 10B(4) mandates the use of contemporaneous data, even if it was not available to the assessee at the time of preparing its T.P. documentation.

9. Methodology and process in arriving at the ALP:
The Tribunal found no infirmity in the TPO's methodology and process, noting that the TPO is empowered to gather reliable information and reject incorrect documentation.

10. Segmentation between manufacturing and trading operations:
The Tribunal agreed with the assessee that trading and manufacturing activities are closely inter-linked and should be evaluated together at the entity level using the 'Combined Transaction Approach'.

11. Operating efficiency adjustment:
The Tribunal remanded the issue back to the TPO for re-examination, noting the need for a fresh examination of the interplay between material cost, operating costs, and operational efficiency.

12. Excise duty adjustment:
The Tribunal allowed the assessee's ground on excise duty adjustment, directing the TPO to exclude excise duty from sales and costs for both the assessee and comparable companies.

13. Customs duty adjustment:
The Tribunal remanded the issue back to the TPO for re-examination, directing a holistic perspective keeping in mind the decisions in Skoda Auto (P.) Ltd. and Sony India Pvt. Ltd.

14. PLI computation:
The Tribunal dismissed the ground for using cash PLI or PBDIT to sales, noting that in asset-intensive industries like automobile manufacturing, depreciation is a significant cost that cannot be excluded from the comparability analysis.

15. Adjustments for differences:
The Tribunal found no merit in the claim for adjustments due to global increase in steel prices, dealership network investments, or start-up phase, stating that these factors do not warrant adjustments under TNMM.

16. Adjustment for AE transactions:
The Tribunal upheld the CIT(Appeals)'s decision that ALP adjustments should be restricted to transactions with AE's only and remitted the matter back to the TPO for computation.

17. Benefit of +/- 5% Safe Harbour:
The Tribunal dismissed this ground, citing the retrospective amendment to section 92C(2A) by the Finance Act, 2012, which clarified that the +/- 5% variation is allowed only to justify the price charged in international transactions and not for adjustment purposes.

18. Jurisdiction of CIT (Appeals) under section 251:
The Tribunal found no reason to hold that the CIT(Appeals) exceeded his jurisdiction under section 251 in directing the TPO to recompute the ALP adjustment and declined to interfere.

Conclusion:
The appeal was partly allowed, with several issues remanded back to the TPO for re-examination and others dismissed based on legal precedents and statutory provisions.