2018 (8) TMI 378 - AT - Income Tax

Transfer pricing - transaction with AE at arm s length or not - Taxpayer not contract manufacturer of its AE - Held that - On facts as it transpired, the inferences of the TPO were not correct. The CIT (A) appraising the facts noted that there were negligible purchases of raw material from the AE and the total sales to its AE were also negligible. In the facts of the present case, we note that it has not been disputed by the Revenue that the total export sales of the assessee to the AE was only 5% of its total sales and the assessee conducts sales to some OEM outside India through the AE to utilize its capacity. Some of these companies are Ford, General Motors, etc. for their production facilities outside India and since the AE of the assessee is a global leader in automotive glass segment, the assessee takes advantage of the AE s reputation and business base to have exports on good commercial and price terms with secured payment from the AE for better logistic and best payment through the AE . In the facts of the present case, the goods produced by the assessee are directly supplied to the OEMs and in the circumstances, out of the total consumption of raw material consumed by the assessee which, it has been noticed, is less than 20% procured from the AE and import of stores and spares from the AE is also 10% of the total consumption. The allegation of the TPO that the assessee has purchased raw material from the AE and is exporting again to the AE in the facts of the present case is misplaced. At the cost of reiteration, the export to the AE is only 5% and royalty paid on sales to the extent of 94% is for sales to non-AE and only 6% sale to the AE. The inferences drawn by the TPO, it is found, were de hors facts. It is also being claimed on behalf of the assessee that the export turnover of the assessee over the years has been reducing and most of the years, sales made to the AE is less than 2%. Be that as it may, in the facts of the present case, we find that where admittedly from the turnover of ₹ 1,300 crores, the export sales is only ₹ 65 crores and noting the fact that the assessee is domestically selling its product to Maruti Udyog Ltd., Honda Motors, Hyundai, Toyota, Mitsubishi, VoxWagon, General Motors, Skoda and Tata Motors, we find that the appeal of the Revenue on facts has to be dismissed. - Decided against revenue

Summary

Issues Involved:
1. Whether the CIT(A) erred in deleting the addition made by the TPO by holding that the taxpayer was not a contract manufacturer for its AE.

Issue-wise Detailed Analysis:

1. Whether the CIT(A) erred in deleting the addition made by the TPO by holding that the taxpayer was not a contract manufacturer for its AE:

The Revenue filed an appeal against the order of CIT(A)-44 New Delhi, which deleted the addition made by the TPO. The TPO had concluded that the assessee was paying royalty to its AE for exports made to the AE, and thus, the transaction was not at arm’s length. The TPO held that the payment of royalty for exports to AEs should be 'nil' and directed the enhancement of the assessee's income accordingly.

The TPO's analysis included a FAR (Functions, Assets, and Risks) analysis, which concluded that the assessee, by paying royalty to its AE for exports, was effectively acting as a contract manufacturer. The TPO cited various judicial precedents to support his stance that the payment of royalty should be benchmarked separately and not aggregated with other transactions.

The CIT(A), however, noted that the total export sales to the AE constituted only 5% of the total turnover, and the purchases from the AE were minimal. The CIT(A) relied on the decision of the ITAT in the case of Sona Okegawa Precision Forgings Ltd. vs. Addl. CIT, where it was held that the assessee was not a contract manufacturer since only a fraction of goods manufactured were sold to the AE and the bulk of sales were to uncontrolled parties. The CIT(A) concluded that the assessee was not a contract manufacturer and directed the deletion of the adjustment made by the TPO.

The ITAT, upon reviewing the submissions and material on record, found no infirmity in the order of the CIT(A). It was noted that the TPO's inference that the assessee was a contract manufacturer was incorrect, as the purchases from the AE and sales to the AE were negligible. The ITAT upheld the CIT(A)'s findings that the assessee's business operations were not dependent on exports to the AE and that the assessee's royalty payments were justified.

The ITAT dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition made by the TPO. The ITAT concluded that the relief granted by the CIT(A) was fully supported by the facts and judicial precedents, specifically the case of Sona Okegawa Precision Forgings Ltd. vs. Addl. CIT.

Conclusion:

The appeal of the Revenue was dismissed, and the order of the CIT(A) was upheld, confirming that the assessee was not a contract manufacturer for its AE and that the deletion of the addition made by the TPO was justified.