2019 (8) TMI 443 - AT - Income Tax

TP Adjustment - MAM - TNMM OR RPM - Royalty payment made by assessee - HELD THAT - in the present year also the transactions undertaken by assessee are to be benchmarked under the umbrella of manufacturing activity on aggregate basis and TNMM method has to be applied and margins shown by assessee have to be compared with mean margins of finally selected concerns. The royalty payment made by assessee is also to be aggregated as part of transaction. In earlier years, the matter of selection of comparables and adoption of their mean margins was remitted back to the file of Assessing Officer. Following the same parity of reasoning, though in the present case, the TPO had selected some concerns as comparables but since it had applied RPM method to compare the margins of CBUs with margins of spare parts, we deem it fit to restore this issue back to the file of Assessing Officer/TPO who shall compare the margins shown by assessee on aggregate basis with finally selected mean margins of comparables and in case it is to be found to be within /- 5% range, then no addition is warranted in this regard. Treatment of balance royalty - whether the same is to be allowed as revenue expenditure? - HELD THAT - Similar issue arose before the Tribunal in assessee s own case in the hands of assessee, wherein the balance royalty was disallowed as capital expenditure. The said issue has been dealt with by Tribunal starting from assessment year 2002-03 onwards and following the same parity of reasoning, we hold that balance royalty payment is to be allowed as revenue expenditure in the hands of assessee. Disallowance of homologation expenditure - allowable revenue expnses - HELD THAT - In case of any technical variation in any existing vehicle or any of the components that the assessee wants to introduce in the existing vehicles, it was incumbent upon the assessee to get homologation certificate before any change was so introduced. Another expenditure which was incurred was that ARAI may in random, choose any car (as produced) for conducting conformity of production. Hence, it were not only the initial stage for which specifications need to be approved from ARAI but even for the existing vehicles, random checks were made that the assessee was manufacturing the same in conformity with the procedure laid down. The expenditure thus, laid out was for the purpose of smooth running of business and the revenue expenditure merits to be allowed in the hands of assessee. The assessee had also filed breakup of homologation expenses incurred during the year under consideration and we have perused the same. Hence, there is no merit in the stand of authorities below in disallowing the same on the ground that the said expenditure may have enduring benefit to the business of assessee. The Hon'ble Supreme Court in Empire Jute Co. Ltd. Vs. CIT 1980 (5) TMI 1 - SUPREME COURT had laid down that test of enduring benefit cannot be applied blindly and mechanically, without regard to particular facts and circumstances. Merely because the aforesaid expenditure results in an enduring benefit would not make such expenditure as capital in nature, as while allowing any expenditure in the hands of assessee, the intent and purpose of expenditure is to be kept in mind and whether the same is incurred for smooth running of business, then, such expenditure is revenue in nature. Accordingly, we direct the Assessing Officer to allow homologation expenses as revenue expenditure. Abnormal foreign exchange movement - TPO while computing PLI of assessee had treated the foreign exchange loss as operating in nature - HELD THAT - We find merit in the claim of assessee in treating foreign exchange loss as non-operating in nature. There was fluctuation in the rate of Euro / INR rates when compared to the previous year and the market witnessed around 14.10% increase in Euro / INR rates. In such facts and circumstances, where the phenomenon was unique, then the same is to be excluded while computing PLI of assessee. We find that same ratio has been laid down by the Tribunal in Demag Cranes Components (India) Pvt. Ltd. Vs. DCIT 2017 (10) TMI 1471 - ITAT PUNE . The year under appeal in the case of Demag Cranes Components (India) Pvt. Ltd. Vs. DCIT (supra) and the assessee is same. Following the same parity of reasoning, we direct the exclusion of foreign exchange loss while computing PLI of assessee company. Upholding the order of DRP, we dismiss the ground of appeal No.2 raised by Revenue.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Rejection of Combined Transaction Approach
3. Application of Resale Price Method (RPM)
4. Adjustment to Purchase Price of CBUs
5. +/- 5% Variation Benefit
6. Disallowance of Royalty Expenditure
7. Disallowance of Homologation Expenditure
8. Legal Authority of Transfer Pricing Officer (TPO)
9. Foreign Exchange Fluctuations
10. Inclusion of Disallowed Expenditure in PLI Calculation

Detailed Analysis:

1. Transfer Pricing Adjustments:
The Tribunal addressed the issue of transfer pricing adjustments made by the Assessing Officer (AO) amounting to ?22,18,12,968. The AO had not considered the transfer pricing analysis documented in the transfer pricing report for AY 2009-10. The Tribunal held that the transactions should be benchmarked under the umbrella of manufacturing activity on an aggregate basis using the TNMM method, comparing the margins shown by the assessee with the mean margins of finally selected concerns.

2. Rejection of Combined Transaction Approach:
The AO had rejected the combined transaction approach followed by the assessee for benchmarking various international transactions. The Tribunal upheld the assessee's approach, stating that all transactions, including the import of CBUs and spares, should be aggregated under the manufacturing activity.

3. Application of Resale Price Method (RPM):
The AO applied the RPM and compared the gross margin of the controlled transaction of import of CBUs with the gross margin of the controlled transaction of import of spares, making an adjustment of ?22,18,12,968. The Tribunal rejected this approach, directing the AO to use the TNMM method on an aggregate basis.

4. Adjustment to Purchase Price of CBUs:
The AO made adjustments to the purchase price of CBUs without evaluating the applicability of any other method for benchmarking. The Tribunal directed the AO to evaluate the applicability of other methods and the availability of uncontrolled transactions/comparable companies before making any comparability with a controlled transaction.

5. +/- 5% Variation Benefit:
The AO did not take into account the benefit of +/- 5% variation from the mean, as permitted under section 92C(2) of the Act. The Tribunal allowed this benefit to the assessee.

6. Disallowance of Royalty Expenditure:
The AO disallowed the royalty expenditure of ?8,10,18,409 as capital expenditure. The Tribunal held that the royalty payment should be allowed as revenue expenditure, following the earlier years' decisions.

7. Disallowance of Homologation Expenditure:
The AO disallowed the expenditure of ?1,24,78,000 on homologation as capital expenditure. The Tribunal directed the AO to allow homologation expenses as revenue expenditure, emphasizing that the expenditure was for the smooth running of the business and not for enduring benefit.

8. Legal Authority of Transfer Pricing Officer (TPO):
The assessee raised additional grounds challenging the legal authority of the TPO. The Tribunal did not find it necessary to adjudicate these additional grounds as the main issues were resolved in favor of the assessee.

9. Foreign Exchange Fluctuations:
The DRP treated foreign exchange fluctuations as non-operating expenses, contrary to the AO's treatment. The Tribunal upheld the DRP's decision, noting that the year under consideration witnessed a significant increase in Euro/INR rates, making it an exceptional year.

10. Inclusion of Disallowed Expenditure in PLI Calculation:
The DRP directed that disallowed expenditure should be included in the calculation of PLI. The Tribunal found this issue to be academic as the grounds of appeal related to royalty and homologation expenditure were allowed in favor of the assessee.

Conclusion:
The Tribunal allowed the appeals of the assessee, directing the AO to benchmark transactions on an aggregate basis using the TNMM method, allow the benefit of +/- 5% variation, and treat royalty and homologation expenses as revenue expenditure. The Tribunal dismissed the appeals of the Revenue and the Cross Objection of the assessee.