2016 (1) TMI 1381 - AT - Income Tax

TPA - comparable selection - Held that - Assessee is the sole distributor of spare parts, components and accessories for Honda products and the responsibility of the assessee is to ensure that such spare parts, components and accessories are available for the end-customer through replacement market, thus companies functionally dissimilar with that of assessee need to be deselected from final list. The facts and functions of the assessee have not been properly reported by the assessee and resultantly have not been appreciated and adjudicated upon by the TPO. The function of distributor has to be treated differently from the function of job order manufacturer of spare or cases where there is value addition. Hence, the facts of the case, the functional profile etc. have to be examined afresh to arrive at the correct A.L.P. As directed a) RPM is the MAM for the Distributor/trading segment. In our view, this method has to be preferred to other methods. Thus, we uphold the finding of the DRP for the segment where value addition is made to imported spares, and in case where procurement is done by placing job work orders, fresh adjudication is to be done de novo to determine the MAM. c) The burden is on the assessee to substantiate its claim of value addition etc. with facts and figures. d) Internal comparables are to be preferred to external comparables for the distribution segment, wherever appropriate data is available. Adjustment with regard to customs duty and marine freight & insurance charges incurred with regards to imported goods - Held that - The claim for adjustment for marine freight and insurance cannot be allowed as such costs would also be present in bad purchase. This is rejected as far as statutory levies, imposed by the Indian Customs authorities, are concerned which is not the case with locally procured goods. In case of locally procured goods, excise duty is payable. The difference between the rate of custom duty and the rate of excise duty may be considered for adjustments as these are statutory levies. Such adjustments may have to be considered while comparing the net margins of imported goods vis-a vis locally procured goods. Allow this ground of the assessee to the extent indicated above and direct the TPO to adjust for the difference in statutory levies.

Summary

Issues Involved:
1. Whether the claim of the assessee company that it is also a manufacturer is correct on facts.
2. Which is the Most Appropriate Method (MAM) to be adopted?
3. Whether external or internal comparables are to be adopted for determining the Arm's Length Price (ALP).
4. Whether the adjustments to the ALP, claimed by the assessee, are to be granted or not.

Issue-wise Detailed Analysis:

1. Claim of the Assessee as a Manufacturer:
The assessee claimed to be a manufacturer, arguing that it places job work orders specifying design, quality, and quantity, and that value addition is carried out. However, the Tribunal found that the assessee is predominantly a distributor, as it purchases and sells spare parts from both related and unrelated entities. The Tribunal noted that placing orders for manufacturing does not make the assessee a manufacturer but a distributor procuring spares through job work orders. The Tribunal concluded that the assessee's functional profile does not support the claim of being a manufacturer, as the design and specifications are determined by the automobile company, not the assessee.

2. Most Appropriate Method (MAM):
The Tribunal upheld the Resale Price Method (RPM) as the MAM for the distributor/trading segment of the assessee. The Tribunal reasoned that RPM is preferred over other methods for determining the ALP for the distribution segment. For segments involving value addition to imported spares or procurement through job work orders, the Tribunal directed fresh adjudication to determine the MAM.

3. External vs. Internal Comparables:
The Tribunal emphasized the preference for internal comparables over external ones for the distribution segment, provided appropriate data is available. The Tribunal directed the Assessing Officer/TPO to re-examine the facts and functional profile of the assessee to determine the correct ALP, considering internal comparables wherever applicable.

4. Adjustments to ALP:
The Tribunal addressed the assessee's claim for adjustments related to customs duty, marine freight, and insurance charges for imported goods. The Tribunal allowed adjustments for the difference in statutory levies (customs duty vs. excise duty) between imported and locally procured goods, recognizing that such costs are additional for the assessee. However, the Tribunal rejected the claim for adjustments related to marine freight and insurance charges, as these costs are also present in local purchases.

Conclusion:
The Tribunal set aside the determination of ALP to the Assessing Officer/TPO for fresh adjudication, directing the use of RPM for the distribution segment and consideration of internal comparables. Adjustments for the difference in statutory levies were allowed, while other adjustments were rejected. The appeals were allowed for statistical purposes. The order was pronounced on 07.01.2016.