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2009 (3) TMI 249 - AT - Income TaxAppeal u/s 254 - TP Adjustment - determination of ALP - CPU or TNMM Method - Whether or not the assessee can indeed be faulted for not being able to supply the information which he has not supplied or which the assessee claims to be incapable of supplying - taxpayer is an Indian company engaged in the business of manufacturing and selling passenger cars - assessee entered into international transactions with two associated enterprises (AEs) - main transactions are of purchase of materials from assessee's parent company and of payment of royalty and technical know-how fees to assessee's parent company i.e., Skoda a/s - reference made to the TPO u/s. 92CA - CIT(A) noted that the assessee has not submitted entire data and information which was supplied to the AO and the TPO and dismissed - preliminary objection taken by the Revenue that we should not deal with the matter on merits as the assessee has not co-operated in the first appellate proceedings - HELD THAT - The CIT(A) has brushed aside fundamental questions, and proceeded to reject the appeal for want of details in general terms. The relevant details or at least a part of relevant details, as we have noted, were furnished by the assessee and in any case all those details were in the assessment records. It is not, therefore, wholly correct to say that the assessee did not at all co-operate before the CIT(A) or that the assessee failed to furnish the necessary details to the CIT(A) and that, for this reason alone, we are denuded of powers to deal with the matter on merits and simply remit the matter to the file of the CIT(A). We therefore decline to sustain the preliminary objection raised by the assessee (sic-Revenue). We will consider the matter in entirety, and, we see no need to restrict the options available to us for doing justice in the matter. We have noted that there are references to the determination of arm's length price on the basis of CUP (comparable uncontrolled price) method, but, in the course of hearing before us, ld counsel for the assessee admitted that the transactions which were relied upon were transactions that the parent company had with other AEs and the price of Euro 680 thus given is not the price at which transactions have been entered into between independent persons. This is the price that the assessee had adopted as internal CUP. The assessee also submitted that external CUP is not available because the product is unique. To our understanding, this argument is totally devoid of any merits. To be considered as internal CUP also, the transaction has to be an independent transaction i.e., between two entities, which are independent of each other. The sale of car kit has admittedly taken place only between the associated concerns. Therefore, the price at which such transaction has taken place is irrelevant for CUP analysis; what is referred to as CUP (comparable uncontrolled price) is price of a comparable but controlled transaction, since to be termed as an uncontrolled transaction, the transaction has to be between two entities which cannot influence or control each other's decision. The transactions between AEs obviously do not satisfy such a criterion. There is thus no internal CUP, as claimed by the assessee before the authorities below and as stated in the information filed along with the IT return. The assessee also accepts that there are no external comparables available. Under these circumstances, in our considered view, the authorities below rightly rejected the assessee's case that even as per CUP method, the transactions that the assessee entered into with its parent company were at an arm's length price. Ld counsel submits that rejection of CUP method does not make a material difference to the outcome of the appeal. It is stated that, without prejudice to the assessee's reliance on CUP method, the assessee agrees with the TPO that the most suitable method of determining ALP in the present case in TNMM method and that when TNMM method is correctly applied to the facts of this case, no ALP adjustment is warranted on the facts of the case. It was thus contended before us that the computation of TNMM was vitiated inasmuch as the comparison was without taking into account (a) multiple year data; (b) the results of Ford India Ltd. and General Motors Ltd.; (c) adjustments on account of high level of import content of raw material; and (d) adjustments on account of lower capacity utilization. In any event, according to the learned counsel, ALP adjustments can be done in the profits relatable to the international transactions alone and not to the profits as a whole. Finally, learned counsel submitted that even when TNMM method is to be adopted, adjustment of 5 per cent variation from the arm's length price is permitted to the appellant under the provisions of s. 92C(2) of the Act. Our attention was also invited to some judicial precedents by the Co-ordinate Benches which cover this issue in favour of the assessee. The crisil report which has been repeatedly referred before us was apparently not available to the TPO. In these circumstances and bearing in mind the fact the year before us was only second year of implementation of transfer pricing regime and it was a new area of taxation laws in which law had not developed, we think that it will meet the ends of justice that the assessee has liberty to raise all these arguments before the TPO so that the TPO can examine all the relevant contentions and decide the same by way of a speaking order in accordance with the law. As we are remitting these issues to the file of the TPO, and as these issues are somewhat academic at this stage which will be relevant only when the assessee's plea regarding adjustment on account of higher import duties being warranted by peculiarities of operations in this year, we refrain from making any observations on the merits of the case. With the above observations, we hereby remit the matter to the file of the TPO so far as question of determination of ALP under the TNMM method is concerned. This issue is now covered in favour of the assessee by a series of Tribunal decisions including decision in the case of Sony India (P) Ltd. 2008 (9) TMI 420 - ITAT DELHI-H even as ld Departmental Representative vehemently supported the stand of the authorities and justified the same. We, therefore, uphold assessee's grievance in this respect and direct the AO to bear in mind the same while deciding the matter afresh. To summarise, (i) the applicability of CUP method is rejected on the facts of this case; (ii) on the question of determination of ALP as per TNMM method, the matter is remitted to the file of the TPO with specific directions; and (iii) the grievance against denial of 5 per cent adjustment is upheld in principle in accordance with the Co-ordinate Bench decisions. In the result, the appeal is partly allowed in the terms indicated above.
Issues Involved:
1. Addition of Rs. 23.59 crores on account of transfer pricing adjustments. 2. Non-consideration of +/- 5 per cent variation in terms of s. 92(2) of the Act. 3. Inadequate opportunity to furnish additional information during appeal proceedings. 4. Charging of interest under ss. 234B and 234C of the Act. Detailed Analysis: 1. Addition of Rs. 23.59 Crores on Account of Transfer Pricing Adjustments: The taxpayer, an Indian company engaged in manufacturing and selling passenger cars, entered into international transactions with associated enterprises amounting to Rs. 269.98 crores. The primary transactions included the purchase of materials and payment of royalty and technical know-how fees. During assessment, the Transfer Pricing Officer (TPO) rejected the taxpayer's use of the Comparable Uncontrolled Price (CUP) method, noting that the transactions relied upon were between associated enterprises and not independent entities. The TPO instead applied the Transactional Net Margin Method (TNMM), using data from comparable companies to determine the arm's length price (ALP). The TPO excluded certain comparables like Ford India Ltd. and General Motors Ltd. due to lack of data and sustained losses, respectively. The TPO concluded an adjustment of Rs. 23.59 crores was required based on the arithmetic mean of the net margins of the remaining comparables. The taxpayer argued that the TPO and CIT(A) failed to consider the high import content in raw materials, leading to higher costs and impacting profitability. The taxpayer also contended that adjustments should be made for differences in business models and capacity utilization. The Tribunal noted that the taxpayer's business model, with a high import content of 98.55%, was fundamentally different from the comparables, necessitating adjustments. The Tribunal remitted the matter to the TPO for fresh adjudication, considering the peculiarities of the taxpayer's business model and first full year of operations. 2. Non-Consideration of +/- 5 Per Cent Variation in Terms of s. 92(2) of the Act: The taxpayer contended that the CIT(A) erred in not considering the +/- 5 per cent variation permitted under s. 92C(2) of the Act. The Tribunal upheld the taxpayer's grievance, noting that this issue is covered in favor of the taxpayer by a series of Tribunal decisions, including the decision in Sony India (P) Ltd. The Tribunal directed the AO to consider this adjustment while deciding the matter afresh. 3. Inadequate Opportunity to Furnish Additional Information During Appeal Proceedings: The taxpayer argued that the CIT(A) did not afford adequate opportunity to furnish additional information during the appeal proceedings. The Tribunal observed that the taxpayer had made elaborate legal submissions and provided factual details to the CIT(A), but the CIT(A) dismissed these submissions for want of certain computations. The Tribunal found that the CIT(A) should have adjudicated on the merits of the taxpayer's claims based on the available information and not dismissed the appeal for lack of details. The Tribunal decided to consider the matter in its entirety, rejecting the preliminary objection raised by the Revenue. 4. Charging of Interest Under ss. 234B and 234C of the Act: The CIT(A) held that the ground of appeal relating to charging of interest under ss. 234B and 234C of the Act was not maintainable. The Tribunal did not specifically address this issue in the detailed analysis, focusing instead on the transfer pricing adjustments and procedural fairness. Conclusion: The Tribunal partly allowed the appeal, rejecting the applicability of the CUP method, remitting the matter to the TPO for fresh adjudication under the TNMM method with specific directions, and upholding the taxpayer's grievance regarding the 5 per cent adjustment. The Tribunal emphasized the need for a fair opportunity for the taxpayer to present relevant arguments and data, ensuring a comprehensive and just resolution of the transfer pricing issues.
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