2015 (5) TMI 858 - AT - Income Tax

Determination of arm s length price of international transactions - Export of components and parts made by the assessee to its associated enterprises - CIT(A) deleted the addition on the ground that the TPO wrongly compared the tested transactions with an incomparable transaction - Held that - In the domestic market assessee was supplying carburettors and ASVs to OEMs such as Bajaj Auto and Hero Honda who used these products in the production of vehicles that they manufactured. In contrast, the associated enterprises to whom the components and parts were exported were essentially manufacturers of carburettors, who used the products exported by the assessee for manufacture of carburettors which in turn they sold to the OEMs. This difference was brought out by the assessee to establish that there were differences in functions performed and risks assumed with regard to export of components/parts and the sale of carburettors/ASVs in the domestic market. The CIT(A) has appreciated the aforesaid differences and in our considered opinion, there is no cogent material or evidence before us to dissuade us from affirming the stand of the CIT(A). The CIT(A) has categorically noted that assessee had exported components and parts whose profit margins should be compared with the margins derived from sale of parts/components and not sale of manufactured products. Going further, the CIT(A) held that volume of domestic sale of components/parts was quite insignificant to constitute a valid comparable with the export transactions. For all the aforesaid reasons, CIT(A) has differed with the approach of the TPO in benchmarking the impugned transaction of export of components and parts with the profit margin of domestic sales which primarily consist of manufactured products i.e. carburettors. Thus no reason to interfere with the ultimate conclusion of the CIT(A) to delete the addition on the ground that the TPO wrongly compared the tested transactions with an incomparable transaction. Disallowance of engineering services fee - Held that - No fault can be found in the manner in which the CIT(A) has come to conclude that the expenditure in question is to be allowed as a revenue expenditure. It is also not disputed before us that similar expenditure in assessment year 2006-07 stands allowed as a revenue expenditure by the Assessing Officer after due verification. The CIT(A) also noted that the engineering services provided by the parent company in this year related to day to day running of business in contrast to the earlier assessment year of 2004-05 wherein it related to the pre-installation stage of the imported machinery. Having regard to the facts and circumstances of the case and the findings of the CIT(A), we find no reasons to interfere with his decision of allowing deduction for ₹ 1,21,87,328/- representing engineering services fee as a revenue expenditure. The Revenue fails on this aspect. - Decided in favour of assesse.

Summary

Issues Involved:
1. Determination of arm's length price of international transactions.
2. Treatment of engineering service fees as capital or revenue expenditure.

Detailed Analysis:

1. Determination of Arm's Length Price of International Transactions

Summary of the Case:
The appeals concern the determination of the arm's length price of international transactions entered by the assessee with its associated enterprises for the assessment years 2005-06, 2006-07, and 2007-08. The core issue revolves around the Transfer Pricing Officer (TPO) and Assessing Officer's (AO) approach to benchmarking these transactions.

Facts and Findings:
- The assessee, a company engaged in manufacturing carburettors and ASVs, entered into various international transactions with associated enterprises.
- The TPO determined the arm's length price of these transactions, leading to an addition of Rs. 62,72,857/- for the assessment year 2005-06.
- The CIT(A) deleted the adjustment, noting that the TPO made fundamental errors in benchmarking net margins derived from trading activities with those from manufacturing activities, which are not comparable.
- The CIT(A) emphasized that the TPO should have used external comparables instead of internal ones and highlighted the significant turnover difference between export and domestic sales, making them incomparable.

Judgment:
- The Tribunal upheld the CIT(A)'s decision, agreeing that the TPO wrongly compared transactions that were fundamentally different in nature.
- The Tribunal noted that the export transactions were primarily trading activities, whereas domestic sales involved manufacturing, making them incomparable.
- The Tribunal also dismissed the Revenue's reliance on the case of Capgemini India Private Limited, stating that the nature of transactions in the present case was fundamentally different.

Conclusion:
The Tribunal affirmed the CIT(A)'s decision to delete the addition made by the TPO, concluding that the TPO's comparability analysis was flawed.

2. Treatment of Engineering Service Fees as Capital or Revenue Expenditure

Summary of the Case:
The appeal also involved the treatment of engineering service fees amounting to Rs. 1,62,49,770/- incurred by the assessee, which the AO treated as capital expenditure.

Facts and Findings:
- The assessee claimed the expenditure as revenue expenditure, arguing that it pertained to services provided by engineers for day-to-day business operations.
- The AO treated the entire expenditure as capital in nature, relying on the technical collaboration agreement, which suggested enduring benefits from the services rendered.
- The CIT(A) accepted the assessee's claim, noting that the expenditure was for day-to-day business operations and not for any enduring benefit.

Judgment:
- The Tribunal upheld the CIT(A)'s decision, agreeing that the expenditure was revenue in nature, as it related to the day-to-day running of the business.
- The Tribunal noted that similar expenditure was allowed as revenue expenditure in the subsequent assessment year 2006-07.

Conclusion:
The Tribunal affirmed the CIT(A)'s decision to treat the engineering service fees as revenue expenditure, dismissing the Revenue's appeal on this issue.

Final Order:
- The appeals of the Revenue for the assessment years 2005-06 and 2007-08 are dismissed.
- The appeal of the assessee for the assessment year 2006-07 is allowed.
- The Tribunal pronounced the order on January 30, 2015.