2018 (10) TMI 1586 - AT - Income Tax

Transfer pricing adjustment on the entire cost of sales of CBU Unit of the Appellant instead of limiting it to the international transactions with Associated Enterprises in respect of purchase cost of CBU s - MAM - Held that - Approach adopted by TPO in comparing margins of controlled transaction i.e. import of spare parts and import of CBUs from associated enterprises and proposing adjustment on account of arm s length price of international transactions does not stand and the same is cancelled. Hence, the TPO had erred in applying RPM method. In any case, under the garb of RPM method, TPO has compared sale of spares with sale of passenger cars. Further, it may be pointed out that TPO compared margins of fully developed vehicles with margins of spare parts, but the two items cannot be said to be functionally comparable and hence, there is no merit in the stand of Assessing Officer / TPO in this regard. Application of most appropriate method in order to benchmark international transactions undertaken by assessee - Held that - We find that assessee had applied TNNM method by selecting certain concerns as comparables. Though the TPO in show cause notice had proposed to reject five companies out of total 12 companies identified by assessee in its TP study report, but there are no final observations of TPO / TO in this regard. The same also was not necessitated because the TPO had applied RPM method. In such scenario, where the TPO has failed to look into the comparability aspect of margins of assessee with mean margins of comparables, we remit this issue back to the file of Assessing Officer / TPO to consider submissions of assessee in this regard and after applying aggregation approach, compute the margins of assessee company and compare it with mean margins of concerns which are functionally comparable to the assessee. The assessee shall cooperate and furnish the details and Assessing Officer shall decide the limited issue after affording reasonable opportunity of hearing to the assessee. Transfer pricing adjustment made to royalty payment by taking the rate @ 3% as against rate of 5% paid by assessee - disallowing balance royalty expenditure, post TP adjustment considering the same to be capital in nature - Held that - We hold that payment of royalty is to be aggregated with production and sales activity and could not be benchmarked separately. Further, we also hold that there was no merit in the orders of Assessing Officer / TPO in applying CUP method and comparing the rate of royalty paid by assessee with the rate of royalty paid by Maruti Udyog Ltd. to Suzuki Motors Corporation, Japan, which was controlled transaction. Consequently, grounds of appeal No.2 and 3 raised by Revenue are dismissed. However, the benchmarking of said transactions along with other transactions needs to be computed by Assessing Officer / TPO by applying TNNM method as directed in earlier grounds of appeal. The Assessing Officer shall also include the payment of royalty while applying transfer pricing provisions in order to benchmark international transactions with its associated enterprises. Treating royalty payment as revenue expenditure, where the assessee had acquired enduring benefit - Held that - We are referring to the findings of Tribunal in assessment years 2003-04 and 2004-05, wherein vide paras 23 and 24, the said issue has been decided in favour of assessee and the grounds of appeal raised by Revenue were dismissed, but for the sake of brevity, we are not reproducing the same. Accordingly, the ground of appeal raised by Revenue is dismissed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment.
2. Aggregation of Transactions.
3. Selection of Comparable Companies.
4. Application of Resale Price Method (RPM).
5. Adjustment for Differences in Functions, Risks, and Assets.
6. Comparison with Controlled Transactions.
7. Benefit of +/- 5% Range.
8. Computation of Book Profits under Section 115JB.
9. Levy of Interest under Section 234B.
10. Disallowance of Expenses in Relation to Capitalized Cars.
11. Treatment of Royalty Payment as Revenue Expenditure.
12. Allowance of Project Assistance Technical Charges as Deductible Expenditure.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue raised by the assessee was against the transfer pricing adjustment made on account of international transactions. The assessee argued that the approach followed in the transfer pricing study report should be accepted, and the arm's length price of the international transactions should be accepted. The TPO had benchmarked the international transactions separately, particularly focusing on the import of CBUs and the payment of royalty.

2. Aggregation of Transactions:
The assessee contended that the combined transaction approach should be accepted, arguing that the transactions of import of raw materials, purchase of spare parts, and import of CBUs were closely linked to the main activity of manufacturing and selling passenger cars. The Tribunal held that transactions of import of CBUs and import of spare parts were closely and interlinked to the manufacture of passenger cars and should be benchmarked on an aggregate basis.

3. Selection of Comparable Companies:
The TPO had rejected certain companies identified by the assessee as comparable in its transfer pricing study report. The Tribunal remitted the issue back to the TPO to consider the submissions of the assessee and to compute the margins of the assessee company and compare them with the mean margins of functionally comparable concerns.

4. Application of Resale Price Method (RPM):
The TPO had applied RPM to benchmark the international transaction of import of CBUs by comparing the gross margin from trading of CBUs with the gross margin earned from trading of spares. The Tribunal held that the TPO erred in applying RPM and comparing the margins of controlled transactions, as controlled transactions cannot be used for benchmarking another controlled transaction.

5. Adjustment for Differences in Functions, Risks, and Assets:
The assessee argued that the adjustment to the purchase price of CBUs by applying the gross margin of the spares segment without considering differences in functions, risks, and assets was erroneous. The Tribunal directed the TPO to consider adjustments for differences in functions, risks, and assets while benchmarking the international transactions.

6. Comparison with Controlled Transactions:
The Tribunal held that the TPO had erred in comparing the gross margin from international transactions pertaining to the import of CBUs with the international transaction pertaining to the import of spares. It was emphasized that controlled transactions should not be compared with other controlled transactions.

7. Benefit of +/- 5% Range:
The assessee argued that the benefit of the +/- 5% range available under the proviso to section 92C(2) of the Income-tax Act, 1961, should be allowed while carrying out transfer pricing adjustments. The Tribunal directed that the benefit of the +/- 5% range should be allowed.

8. Computation of Book Profits under Section 115JB:
The assessee contended that the provision for compensation payable to module suppliers should be considered an ascertained liability and should not be added while computing the book profit under section 115JB. The Tribunal's decision on this issue is not explicitly detailed in the provided text.

9. Levy of Interest under Section 234B:
The assessee challenged the levy of interest under section 234B of the Act. The Tribunal held that the issue of charging interest under section 234B is consequential and directed the Assessing Officer to decide the same.

10. Disallowance of Expenses in Relation to Capitalized Cars:
The issue was whether the CIT(A) was justified in giving directions to the A.O. to verify and decide the admissibility of the claim of expenditure of capitalized cars. The Tribunal remitted the issue back to the file of the Assessing Officer to decide the same in accordance with the issue being decided in earlier years.

11. Treatment of Royalty Payment as Revenue Expenditure:
The CIT(A) had treated the royalty payment as revenue expenditure, which was challenged by the Revenue. The Tribunal upheld the order of the CIT(A), holding that the payment of royalty is to be aggregated with production and sales activity and could not be benchmarked separately.

12. Allowance of Project Assistance Technical Charges as Deductible Expenditure:
The CIT(A) had directed the Assessing Officer to allow Project Assistance Technical charges as deductible expenditure under section 37(1) of the Act. The Tribunal upheld the order of the CIT(A), following the same parity of reasoning as in earlier years.

Conclusion:
The Tribunal allowed the appeal of the assessee partly, dismissed the appeal of the Revenue, and dismissed the cross objections of the assessee. The issues were primarily remitted back to the Assessing Officer/TPO for fresh consideration and to decide the same in accordance with the directions provided in the judgment.