2012 (11) TMI 57 - AT - Income Tax

Transfer Pricing Arm Length Price - International transaction of export/sale of spares and components to the Associate Enterprises - The TPO rejected the application of external TNMM adopted by the assessee - The TPO analyzed the profitability of the exports to its AE on one hand and compared it to the profitability of the exports undertaken to third parties (i,e. non- AEs)- TPO noticed that the net profit margin (on cost) pertaining to export sales to AEs was on lower side Such transaction are carried out in three categories - Category A - Sale of spares to third party distributors as well as to the AEs for the purposes of servicing the vehicles sold - Export to third parties (i.e. non-AEs) is comprised of only Category A transactions, which has yielded the margin of 56.58%, whereas the exports to its AEs comprise of transactions of all three Categories, i.e. A , B and C , which has yielded the margin of 11.63% and therefore the two are incomparable - Held that - In so far as the transactions of this category representing export of spares and components which are required for the purpose of servicing of vehicles sold by the assessee company, the transactions undertaken with third party distributors (i.e. non-AEs) are comparable to the transaction with the AEs. The profit margin (on cost) in relation to export to AEs is 67% and on transactions of exports to third party distributors (i.e. non-AEs) is 56.58% and the same clearly depicts that the transaction undertaken by the assessee. Therefore, same have been undertaken at an arm s length price and the same does not require any transfer pricing adjustment as done by the income-tax authorities. Issue decides in favour of assessee Category B & C B is in relation to Sourcing of components required by the overseas AEs for manufacture of two and three-wheelers C is in relation to Sourcing of components required by the overseas AEs for manufacture of four-wheelers Assessee contended that for benchmarking the transactions between the assessee and the AEs in respect of such activities, comparison has to be consider with operating margins earned by third party support service providers in India - Held that - As the margins declared by the assessee on such activity at 11.05% compare favorably with the average operating margins earned by third party support service provider companies in India which worked out to 5.1%. Therefore, the aforesaid plea of the assessee is liable to be examined with respect to its factual aspects. Issue remand back to the file of the AO Whether benefit of /-5% allowed u/s. 92C(2) applicable on pending appeals - The amended proviso to Sec. 92C(2) was applicable w.e.f 1.10.2009 Applicability of amendment is to be effective in respect of AY 2009-10 and subsequent years Held that - Following the decision in case of UE Trade Corporation India (2010 (12) TMI 224 - ITAT, NEWDELHI) which are on similar lines against the applicability of amendment prospectively. Therefore, we find no justification in the action of the lower authorities from disentitling the assessee from its claim of /-5% while computing ALP in terms of erstwhile proviso to Sec. 92C(2). Issue decides in favour of assessee & remand back to AO Depreciation on goodwill - Assessee had entered into an agreement with party - Out of the total purchase consideration, certain sum was debited to goodwill in the account books and claimed depreciation on the same Held that - Where the matter has been restored for re-adjudication by the AO in the past years, in the instant year also we deem it fit and proper to restore the matter to the file of the AO. Additional depreciation on computers installed in factories Whether additional depreciation allowed on computer installed in factory - Held that - Following the precedent we allow assessee s claim of additional depreciation on computers installed in its factory. Issue decides in favour of assessee. Depreciation in respect of lease hold rights in land Held that - In order of Tribunal has restored the matter to the file of the AO to examine whether lease hold rights acquired for the purpose of business are in the nature of commercial or business rights as contemplated in Sec. 32(1)(ii). Issue remand back to AO. Deduction in respect of premium paid over the period of lease Lease hold premium paid for acquiring lease hold rights - Held that - As concluding from the facts the AO for fresh adjudication on the basis of any further submissions that may be sought to be raised by the assessee in the ensuring remand proceedings. Issue remand back to AO.

Issues Involved:
1. Transfer Pricing Adjustment
2. Depreciation on Goodwill
3. Additional Depreciation on Computers
4. Depreciation on Leasehold Rights and Alternative Claim for Lease Rentals

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary dispute concerns the addition of Rs 5,68,14,644/- made by the Assessing Officer (AO) due to a Transfer Pricing Adjustment related to the export of spare parts and components to the Associated Enterprise (AE). The assessee used the Transactional Net Margin Method (TNMM) with external comparables to benchmark the transaction, showing an operating margin of 10.40% against the comparables' 1.83%. The Transfer Pricing Officer (TPO) rejected this approach, applying an internal TNMM, comparing the profitability of exports to AEs (11.63%) with exports to non-AEs (56.58%). The assessee argued that the internal TNMM was inappropriately applied, as the transactions with AEs included varied activities (Categories A, B, and C), whereas transactions with non-AEs were only Category A. The Tribunal concluded that the internal TNMM comparison was inappropriate due to functional and economic differences between the transactions. The Tribunal remanded the issue to the AO for re-determination, considering the external TNMM and the benefit of +/- 5% variation as per the erstwhile proviso to section 92C(2).

2. Depreciation on Goodwill:
The assessee claimed depreciation of Rs 20,08,933/- on goodwill arising from the acquisition of a manufacturing plant. The claim was denied based on past assessments. The Tribunal noted that the matter had been previously remanded for verification of the intangible assets' nature. The Tribunal restored the issue to the AO for re-examination in light of previous Tribunal observations and any additional submissions by the assessee.

3. Additional Depreciation on Computers:
The assessee's claim for additional depreciation of Rs 15,01,754/- on computers installed in its factory was disallowed by the AO. The Tribunal referenced its earlier decision for the assessment year 2004-05, which allowed such depreciation. Consequently, the Tribunal directed the AO to allow the additional depreciation claim.

4. Depreciation on Leasehold Rights and Alternative Claim for Lease Rentals:
The assessee claimed depreciation on leasehold rights in land, which was disallowed by the AO based on a Bombay High Court judgment. The Tribunal noted that the Supreme Court had overruled this judgment and that similar issues in previous years had been remanded for re-examination. The Tribunal restored the matter to the AO to determine if the leasehold rights were commercial or business rights under section 32(1)(ii). Regarding the alternative claim for proportionate deduction of lease rentals, the Tribunal noted the Gujarat High Court decision supporting such deductions and remanded this issue to the AO for fresh adjudication considering recent legal precedents.

Conclusion:
The appeal was partly allowed, with the Tribunal remanding key issues back to the AO for re-determination and verification, ensuring compliance with legal precedents and proper benchmarking methodologies.

← Previous Next →