9911796707
TMI Blog2009 (3) TMI 249X X X X Extracts X X X X X X X X Extracts X X X X ..... e first appellate proceedings - HELD THAT:- The CIT(A) has brushed aside fundamental questions, and proceeded to reject the appeal for want of details in general terms. The relevant details or at least a part of relevant details, as we have noted, were furnished by the assessee and in any case all those details were in the assessment records. It is not, therefore, wholly correct to say that the assessee did not at all co-operate before the CIT(A) or that the assessee failed to furnish the necessary details to the CIT(A) and that, for this reason alone, we are denuded of powers to deal with the matter on merits and simply remit the matter to the file of the CIT(A). We therefore decline to sustain the preliminary objection raised by the assessee (sic-Revenue). We will consider the matter in entirety, and, we see no need to restrict the options available to us for doing justice in the matter. We have noted that there are references to the determination of arm's length price on the basis of CUP (comparable uncontrolled price) method, but, in the course of hearing before us, ld counsel for the assessee admitted that the transactions which were relied upon were transactions tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel, ALP adjustments can be done in the profits relatable to the international transactions alone and not to the profits as a whole. Finally, learned counsel submitted that even when TNMM method is to be adopted, adjustment of 5 per cent variation from the arm's length price is permitted to the appellant under the provisions of s. 92C(2) of the Act. Our attention was also invited to some judicial precedents by the Co-ordinate Benches which cover this issue in favour of the assessee. The crisil report which has been repeatedly referred before us was apparently not available to the TPO. In these circumstances and bearing in mind the fact the year before us was only second year of implementation of transfer pricing regime and it was a new area of taxation laws in which law had not developed, we think that it will meet the ends of justice that the assessee has liberty to raise all these arguments before the TPO so that the TPO can examine all the relevant contentions and decide the same by way of a speaking order in accordance with the law. As we are remitting these issues to the file of the TPO, and as these issues are somewhat academic at this stage which will be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a decision be taken on the merits. Our suggestion for remitting the matter to the file of the CIT(A) for adjudication de novo was declined by the assessee. The TPO was also allowed to make his submissions before us on merits, and he was also heard. It is in this background that we are adjudicating upon the appeal. Various grounds of appeal, as set out in memorandum of appeal and which are reproduced below for ready reference, are primarily arguments in support of these two main grievances. which were pressed and argued, before us, i.e., (a) against CIT(A) confirming the addition of Rs. 23.59 crores on account of transfer pricing adjustments; and (b) against CIT(A) not considering the +/- 5 per cent variation in terms of the provisions of s. 92(2) of the Act: Ground No. 1: - The learned CIT(A) has erred in not adjudicating on the following grounds of appeal on merits considering the various facts and various submissions made by the appellant before the CIT(A), the AO and the TPO. - The learned AO has erred in making a reduction to the loss of the appellant for the previous year ended 31st March. 2003 by an amount of Rs. 23.59 crores based on the transfer pricing adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty and technical know-how fees, amounting to Rs. 44,57,21,276 to assessee's parent company i.e., Skoda a/s. The details of all the transactions with the associated enterprises, in the relevant financial period, are as follows: 1. Purchase of materials for Rs. 2,24,33,92,720 from Skoda Auto a/s 2. Purchase of finished goods for Rs. 9,11,891 from Skoda Auto a/ s 3. Purchase of cars amounting to Rs. 24,60,435 from Skoda Auto a/s 4. Purchase of materials for Rs. 46,74,224 from Volkswagen AG 5. Purchase of tangible assets for Rs. 26,20,994 from Volkswagen AG 6. Royalty and fees for know-how of Rs. 44,57,21,276 to Skoda Auto a/s 4. In the course of assessment proceedings, and as international transactions with the associated concerns exceeded Rs. 5 crores; a reference was made to the TPO under s. 92CA of the Act. The TPO referred to the details filed by the assessee, which were forwarded to him by the AO, and noted that the method of determining arm's length price (ALP) was stated by the assessee as TNMM (transactional net margin method) and CUP (comparable uncontrolled price) method. It was also noted that, according to the assessee, "out of five methods prescribed under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct products, being outcome of extensive research carried on by the AEs over the years, are unique and distinct bearing certain features and quality, and the absence of homogeneity cannot be overemphasized while considering comparability of prices of similar items". It was thus contended that the arm's length price of purchases of material from the Skoda a/s is on ALP, on the basis of CUP method. 6. The TPO also took note of the updated chart of net margins of the comparable companies, as filed by the assessee in the course of proceedings before him. The TPO was of the view that out of six comparables relied upon by the assessee, one comparable could not be accepted for want of availability of data for the relevant financial period and the preceding period. One of the comparables was rejected on the ground that it was the case of a company incurring sustained losses which indicated abnormality of circumstances with regard to that particular company. These two comparables were of Ford India and General Motors respectively. When these views were put to the assessee, it was submitted by the assessee that such an exclusion would not be justified as, under the TNMM method, the emphasis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnish the requisitioned information for the reason that such fine details of those comparable's, as such an exercise would require, are not available in public domain. It was also submitted that, notwithstanding the above handicap, the assessee did make efforts to collect the data from corporate databases, web sites and other sources, but the assessee could not succeed in these efforts. Without prejudice to these submissions, the assessee pointed out that on the basis of certain assumptions, as necessitated by the nature of exercise, the assessee has adjusted profits for eliminating the impact of high imports and profits so computed compare favourable with assessee's peers. The TPO further requisitioned the financials of the comparables relating to the periods of their incorporation and subsequent two years to prove that even they were reporting losses in that period. The assessee regretted the inability to do so as the relevant data are not in public domain. It was also submitted that the economic conditions, marketing conditions and laws pertaining to that period would be totally different vis-a-vis the conditions prevailing in the relevant period and this fact would also make t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above companies in the initial years of incorporation should be considered, and observed that while the assessee was given an opportunity to make the necessary adjustments, the assessee could not furnish the same. It was in this background that the TPO adopted the following com parables and, accordingly, computed arm's length price: Hindustan Motors Ltd. 0.85% Honda Siel Motors India Ltd. 7.89% Hyundai Motors India Ltd. 8.75% Maruti Udyog Ltd. 4.35% ----- Arithmetic mean of the above 5.47% ----- 9. On the above basis, the adjustment on account of arm's length price was computed as follows: Margin @ 5.47% as earned by comparable companies 20.98 crores on sales of Rs. 383.61 crores Add: Loss incurred by the assessee 2.61 crores ------------ Adjustment required to be made 23.59 crores ------------ 10. The TPO also noted that the assessee has also paid a royalty of Rs. 42 crores to its parent company. It was also noted that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking observations to the effect that customs duty should have been passed on to the consumers and the assessee's reliance upon Hon'ble Bombay High Court's judgment in the case of CIT vs. Sales Magnesite (P) Ltd. (1995) 125 CTR (Bom) 389 : (1995) 214 ITR 1 (Bom), and agreed that "there is no dispute that it is the businessman's domain as to what should he do. but nevertheless the businessman has to furnish the details of what he has done, for perusal of the Revenue authorities". The CIT(A) again referred to non-availability of details about working of PBIT, PBDT and OPM and observed that "it is necessary to see whether any extraordinary items affected the final figure. The CIT(A) further observed that "the segment of car of Skoda (the appellant) is to be compared with an equal category of the cars involved in the comparable companies, because the comparable companies, for example Maruti Udyog, apart from equivalent category car of Skoda's, manufactures other cars as well" and that "the revenues (receipts and outgoes) of the comparable are to be looked into while comparing the data of the appellant with that of the comparable and then apply TNMM". The CIT(A) then noted that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can at best, if satisfied that the assessee was prevented by reasonable cause to do so, remit the matter to the file of the CIT(A). The assessee before us seriously contended CIT(A)'s observations that the relevant details were not furnished before him. It was submitted that the CIT(A) requisitioned details which were not germane to the issues raised by the assessee. It was submitted that the assessee had already admitted his inability to give any details about the adjustments on account of the fact that these were assessee's initial years of operations since the figures which are required to do such an analysis are not available in public domain. Similarly, while the impact of high import content could only be shown on the basis of certain assumption in the absence of precise details, these details were not accepted by the authorities below. It was submitted that the observations of the CIT(A), with regard to non-submission of information, are not factually correct, and, at the minimum, wholly misleading. The assessee contends that he was asked to produce such information as were, not in his knowledge. It was submitted that beyond these requisitions, which the assessee was inhere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, nothing prevented the CIT(A) to call for records from the AO and examine all the necessary details as were before the assessing authorities. It is not even the case of the assessing authorities that the assessee has not shared the available information with them. The TPO has examined the contentions of the assessee on merits and rejected the same. The information which was not given to the TPO is the information which, according to the assessee, is not available with him and which he is not in a position to furnish. As far as the information part is concerned, CIT(A) should have adjudicated on whether or not, based on the information supplied by the assessee, the claim of the assessee was to be accepted in the light of the legal arguments raised by the assessee, and whether or not the assessee can indeed be faulted for not being able to supply the information which he has not supplied or which the assessee claims to be incapable of supplying. The CIT(A) has brushed aside fundamental questions, and proceeded to reject the appeal for want of details in general terms. The relevant details or at least a part of relevant details, as we have noted above, were furnished by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into with its parent company were at an arm's length price. 16. Learned counsel submits that rejection of CUP method does not make a material difference to the outcome of the appeal. It is stated that, without prejudice to the assessee's reliance on CUP method, the assessee agrees with the TPO that the most suitable method of determining ALP in the present case in TNMM method and that when TNMM method is correctly applied to the facts of this case, no ALP adjustment is warranted on the facts of the case. 17. On the applicability of TNMM method, however, learned counsel for the assessee has raised a large number of issues and addressed the same at length. The stand taken before the authorities below was reiterated. It was submitted that the proviso to r. 10B(4) permits to the use of data of the relevant previous year if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. Learned counsel then makes elaborate submissions about the peculiarities of automobile market pattern. Based on the automobile industry report published by CRISIL-CRIS-INFAC report (Annual Review: Car and Utility Veh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the comparable uncontrolled transactions, or between the enterprise entering into such transactions, which could materially affect the amount of net profit margin in the open market. A reference was also made to r. 10B(3) of the Rules which provides that "an uncontrolled transaction shall be comparable to an international transaction if-(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences". It is thus submitted that law clearly permits adjustments in margins of the enterprise entering into international transactions for any differences between such international transactions and the transaction of the comparables or between the enterprise entering into international transactions and comparable companies. With respect to the argument that the duties are always inbuilt in the sales price, it was submitted that the Indian automobile industry is highly competiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of the assessee. 18. Learned CIT-Departmental Representative and learned TPO vehemently oppose the submission of the assessee. It is submitted that the assessee is raising issues which have not been raised before any of the authorities below. It is submitted that it will be highly improper for the Tribunal to entertain these arguments at this stage without further verification and ascertainment of facts. As for the multiple year data, it is submitted that r. 10B(4) is clear that is that computation of margins is allowed based on current year data and use of preceding years data can only be an exception and not a rule. It is submitted that passenger car segment in the auto industry is one sector which has shown consistent growth and there is no reason to take into account the results of earlier years. Such an exercise would distort the ground realities, rather than, show the same. It was submitted that the assessee has not substantiated that use of earlier year's data has influenced the transfer prices. It was submitted that the assessee's arguments about regarding the business and product lifecycles in the automobile industry are new arguments at this stage, and, in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product cycles are not really much relevant. It was then submitted as for the turnaround by the General Motors, additional facts will have to be ascertained. 18.1 In rejoinder it was submitted that growth of passenger car segment in the auto industry was not the issue, as has been made out by the learned Departmental Representative. What the assessee seeks to rely upon is not the economic cycle but the product cycle. It was submitted that the passenger car segment of the auto industry was somewhat cyclic in the nature that there are product cycles and there is clear impact of every new launch of product on profits. An effort was made to show this impact from the results referred to in the crisil report filed by the assessee. As regards exclusion of loss making companies, it was noted that the Revenue Authorities have agreed that a loss making company, for the reason of loss making alone, cannot be ignored as a comparable. Once again a reference was made to the crisil report which shows positive results of General Motors for 2003-04 and it was submitted that what is to be seen is similarity in functionality. It was also submitted that the General Motors had also launched new prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. No doubt, a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd.'s case, but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. As was observed by a Co-ordinate Bench of this Tribunal in the case of E-Gain Communication (P) Ltd. "the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect", We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the business models of the comparables that the TPO has adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was forced to have higher import content in raw material as the manufacturing facilities, and vendor development, was not complete, as also dealing with the contention that the business model in this year of operation was fundamentally different from the business model of the comparable concerns. The TPO will also consider whether the import content of the raw material have substantially come down in the succeeding years and will take into account the conclusions that can be drawn from such a decline or consistency, as the case may be, of the import content in the raw material. In case the TPO comes to the conclusion that adjustments in operating profits margin on account of peculiarities of business model resulting in higher import duties, the TPO will consider the manner in which impact of the same can be reasonably neutralized in a practical manner. One of the suggestions that the assessee has advanced before us is to take into account impact of the non-cenvatable import duty additionally borne by the assessee. The TPO has to consider the same, and other options which can be put into service to neutralize the impact of such higher costs. While so deciding the matter afr ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
