2018 (4) TMI 501 - AT - Income Tax

TPA - upward adjustment made on account of international transactions undertaken by the assessee - comparable selection criteria - MAM selection - Held that - The assessee undoubtedly, had sold the products through its associated enterprises but the products sold by the assessee within domestic market and those exported to the markets of developing countries followed the same emission norms and had no difference in the product. The assessee in this regard has filed the evidence of emission norms applied in European Union and in Asia with special reference to Indonesia and also in South Africa, wherein emission norms are similar and consequently, cannot be said to have geographical differences. Even otherwise, geographical differences would not be relevant where the products were exported to markets similar to Indian markets, where emission norms were less stringent than as compared to Germany. Accordingly, we find no merit in the approach of DRP / TPO for rejecting the internal comparables available on geographical grounds. In the facts of present case, where there is no product dissimilarity and the geographical differences, if any, does not affect the quality of products sold by the assessee because of identical technical similarity, the issue arises is whether two transactions are comparable. Further, FAR dissimilarity, if any, warrants adjustments in the domestic segment since the assessee was selling the products through its associated enterprises on cost plus mark-up and had not to bear any risk, then the margins shown by the assessee in the export segment, need no adjustment. As pointed out in the paras hereinabove, adjustment, if any, is to be made in the domestic segment, wherein the assessee has already shown lower margins. Geographical differences do not stand as the market in which the goods were sold were comparable. Further, we have also held that it could not be said that FAR of sales in domestic segment and exports to associated enterprises were dissimilar; in addition to the same, is the input costs which are same and identical. Where comparable is available to the assessee by way of domestic sales made by it, then the margins of same should be applied in order to benchmark the margins earned by assessee for export segment. Accordingly, we hold that internal TNMM method should be applied as most appropriate method to benchmark the international transactions of export of trucks undertaken by the assessee. However, the Assessing Officer is directed to verify the stand of assessee as to the margins earned in domestic segment and in the export segment. The assessee is also directed to file segmental details in this regard before the Assessing Officer for necessary verification. Hence, we hold that aggregation approach applied by the Assessing Officer / TPO in the circumstances was not correct approach and also the method applied i.e. external TNMM on the aggregated transactions is not upheld.

Issues Involved:
1. Exclusion of Tata Motors as a comparable entity.
2. Allowance of working capital adjustment.
3. Proportionate adjustment to international transactions.
4. Adjustment for purchase of raw materials/components.
5. Benchmarking of international transactions for the sale of vehicles/spare parts.
6. Aggregation of transactions.
7. Rejection of comparable companies.
8. Import of capital goods.
9. Benefit of +/- 5% variation.

Detailed Analysis:

1. Exclusion of Tata Motors as a Comparable Entity:
The Revenue challenged the exclusion of Tata Motors as a comparable entity based on turnover. The Tribunal upheld the exclusion, noting that Tata Motors' turnover of over ?25,000 crores was not comparable to the assessee's turnover of ?161 crores. Reliance was placed on the Hon’ble Bombay High Court's decision in CIT Vs. M/s. Pentair Water India Pvt. Ltd.

2. Allowance of Working Capital Adjustment:
The Revenue contested the allowance of working capital adjustment to the profit level indicator (PLI) of comparables. The Tribunal reversed the DRP's order, as no external comparables were applied, directing the application of the internal TNMM method instead.

3. Proportionate Adjustment to International Transactions:
The Tribunal dismissed the Revenue's appeal against the allowance of proportionate adjustments, citing the Hon’ble Bombay High Court's decision in CIT Vs. ALSTOM Projects India Ltd., which held that adjustments should be made in respect of international transactions only.

4. Adjustment for Purchase of Raw Materials/Components:
The assessee argued against the adjustment made for the purchase of raw materials/components. The Tribunal restored the issue to the Assessing Officer/TPO for reconsideration, taking into account the additional evidence filed before the DRP and the consistent approach adopted in previous assessment years.

5. Benchmarking of International Transactions for Sale of Vehicles/Spare Parts:
The Tribunal held that the internal TNMM method should be applied to benchmark the international transactions of export of trucks. The assessee's contention that the same input costs were used for both domestic and export sales was accepted, and the Assessing Officer was directed to verify the segmental details provided by the assessee.

6. Aggregation of Transactions:
The Tribunal dismissed the approach of aggregating transactions for benchmarking, stating that transaction-by-transaction comparison is preferable. The method applied by the Assessing Officer/TPO, i.e., external TNMM on aggregated transactions, was not upheld.

7. Rejection of Comparable Companies:
The issue of rejection of comparable companies became academic as the Tribunal upheld the internal TNMM method for benchmarking.

8. Import of Capital Goods:
The Tribunal directed the Assessing Officer to follow the DRP's directions and compute the adjustment being depreciation on capital goods, as the DRP had allowed the assessee's plea.

9. Benefit of +/- 5% Variation:
The Tribunal directed the Assessing Officer/TPO to consider the adjustment range of +/- 5% variation while computing any adjustment in the hands of the assessee.

Conclusion:
Both the appeals of the assessee and the Revenue were partly allowed. The Tribunal provided detailed directions on each issue, emphasizing the need for consistency and proper benchmarking methods in transfer pricing cases.

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