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TMI Blog2009 (3) TMI 249X X X X Extracts X X X X X X X X Extracts X X X X ..... ued the matter at length on merits as well, and with a view to ensure that this matter reaches finality within a reasonable time-limit, the matter need not to sent back for fresh adjudication and 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. - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a/s, Czechoslovakia, and Volkswagen AG, Germany. The main transactions are of purchase of materials of Rs. 2,24,33,92,720 from assessee's parent company, and of payment of royalty 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assumed by such other third party resellers and contractual terms relating to uncontrolled transactions. As for external comparable, the assessee submitted that "the subject 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 respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee to data of the comparables, duly adjusted on account of variations pointed out by the assessee, it was submitted by the assessee that it is not possible to furnish 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, mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that in the previous year, the assessee had not commented upon the high import contents. Finally, the TPO noted that the assessee had contended that margins of 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 abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee incurred losses. In his view this factor would have called for transfer pricing adjustments. He, however, noted that since TNMM is being used to apply the benchmark the assessee's margins, the ALP adjustment being made on that basis will adequately cover the excessive expenditure on royalty and fees for technical know-how. Accordingly, the TPO did not recommend any separate adjustment for the payments for royalties and fees for technical know-how, though he recommended adjustment of Rs. 23.59 crores as elaborated in preceding para. Based on these recommendations, the AO made an addition of Rs. 23.59 crores to the total income as per return of income. As against a returned income of Rs. 9,22,75,170 thus, the assessee was assessed to tax on an income of Rs. 32,81,70,170. 11. Aggrieved by the stand so taken by the assessing authorities, assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) noted that the assessee has not submitted entire data and information which was supplied to the AO and the TPO. He also noted that the basis on which PBT, PBIT, PBDT are arrived at are also furnished. The CIT(A) did take note of the assessee's su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases where difference between ALP and transaction price is less than 5 per cent but once it is found that the price at which transactions are entered have a variation of more than 5 per cent, the adjustment on account of difference between the ALP and the price at which transaction is entered into is to be made in entirety. On the question of applicability of interest under ss. 234B and 234C, the CIT(A) observed that the levy of interest under these sections is mandatory. The appeal of the assessee was thus dismissed. The assessee is not satisfied by the order so passed by the learned CIT(A) and is in further appeal before us. 12. We have heard the learned representatives at considerable length. The TPO also appeared before us and made elaborate submissions. We have given due consideration to the rival submissions, and we have considered applicable legal position in the light of the material produced before us. 13. At the outset, we would like to take note of a preliminary objection taken by the Revenue that we should not deal with the matter on merits as the assessee has not co-operated in the first appellate proceedings. It is submitted that since the CIT(A) has rejected the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in at this level. In case the assessee can satisfy us that non-co-operation in appellate proceedings was for good reasons, we can at best remit the matter to the file of the CIT(A). It is submitted that our adjudicating on merits, at this stage, will be contrary to the scheme of the Act and will encourage the asses sees who do not fully co-operate in the proceedings before the IT authorities. Without prejudice to this stand, however, learned Departmental Representative and the learned TPO made elaborate submissions on merits of the case. 14. We have noted that, as evident from submissions before the CIT(A) vide letters dt. 28th July, 2006 and 2nd Aug., 2006-copies of which were placed before us in the paper book pp. 174-182. the assessee has made elaborate legal submissions and given factual details in support thereof, but the CIT(A) has simply brushed aside these submissions, as also submissions made during the hearings referred to in these documents, on the ground that complete details about certain computations are not furnished. As evident from these written submissions to the CIT(A). the assessee had also filed copies of submissions before the TPO as Annexures to these writte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee also submitted that external CUP is not available because the product is unique. To our understanding, this argument is totally devoid of any merits. To be considered as internal CUP also, the transaction has to be an independent transaction i.e., between two entities, which are independent of each other. The sale of car kit has admittedly taken place only between the associated concerns. Therefore, the price at which such transaction has taken place is irrelevant for CUP analysis; what is referred to as CUP (comparable uncontrolled price) is price of a comparable but controlled transaction, since to be termed as an uncontrolled transaction, the transaction has to be between two entities which cannot influence or control each other's decision. The transactions between AEs obviously do not satisfy such a criterion. There is thus no internal CUP, as claimed by the assessee before the authorities below and as stated in the information filed along with the IT return. The assessee also accepts that there are no external comparables available. Under these circumstances, in our considered view, the authorities below rightly rejected the assessee's case that even as per CUP method, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluding Ford India Ltd. and General Motors Ltd. from the comparables. It was submitted that the transfer pricing legislation provides that the assessee should compare itself with functionally similar companies. It does not provide that functionally similar companies do not include loss-making companies. A reference was also made to the OECD guidelines which suggests that it is important to take into account a range of results when using the TNMMs as to reduce the impact of variations in the business characteristics of AEs and any independent enterprise engaged in comparable uncontrolled transactions. A reference was made to Tribunal's decision in the case of Sony India (P) Ltd. vs. Dy. CIT (2007) 108 TTJ (Mumbai) 445 : (2007) 106 ITD 175 (Mumbai) [sic-(2008) 118 TTJ (Del) 865 : (2008) 114 ITD 448 (Del)] wherein it is observed that merely on account of losses, exclusions may not be justified. It is then argued that the learned AO has erred in not considering the said adjustment, on account of high level of import content in the raw materials, A reference was also made to r. 10B(1)(e)(iii) which, inter alia, provides that adjustment to take into account the differences, if any, betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7) 112 TTJ (Del) 408 : (2007) 109 ITD 101 (Del), Sony India (P) Ltd. It was then contended that there was a gross underutilization of capacity as a result of which profitability was affected. It was submitted that the assessee company had utilized only 37.19 per cent of its capacity whereas average capacity utilization of comparable companies works out to 68.15 per cent. It was thus contended before us that the computation of TNMM was vitiated inasmuch as the comparison was without taking into account (a) multiple year data; (b) the results of Ford India Ltd. and General Motors Ltd.; (c) adjustments on account of high level of import content of raw material; and (d) adjustments on account of lower capacity utilization. In any event, according to the learned 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-ordinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant's plea that the adjustments need to be made on account of higher import duties and underutilization of capacity is devoid of legally sustainable merits. According to the learned TPO, merely because the appellant is paying higher import duties does not affect its net profit margin in the open market. It was also contended that a plain reading of the legislative provisions would show that the adjustments are not confined to such profit as are relatable to the international transactions with the AEs but to the profits of the assessee as a whole. This demarcation Of profits, according to the learned TPO, is unreal and unwarranted. On the question of relaxation of 5 per cent, learned TPO submitted that as evident from the press release, a copy of which was filed before us, it was a temporary measure not to pursue the cases in which variation between ALP and the transaction price is less than 5 per cent, but that does not mean that relaxation of 5 per cent is to be allowed even it is established that the variation between the ALP and the transaction price is more than 5 per cent. He pointed out that the assessee had launched only one model of the car in the relevant period and, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... import content of the raw material in the cases of the comparables selected by the Revenue authorities. The import content of taw material in these cases ranged from 26 per cent to 56.83 per cent (Hindustan Motors-31 per cent; Honda Siel-48.2 per cent; Hyundai Motors-25.29 per cent; General Motors-56.83 per cent and Maruti Udyog-26 per cent). This variation is particularly important since the business model of a car maker having 98.5 per cent import content in raw material normally cannot be the same as of a car maker having import content of 26 per cent to 56.84 per cent. While the latter shows substantial indigenous inputs in the raw material, the former is virtually an assembly job of the imported knocked down kits. These business models are so fundamentally different that, in our understanding, no comparisons are possible unless the impact of the import contents are eliminated, or unless it is the case, as was the case before the Tribunal in Sony India (P) Ltd., that the decision to have such a huge import content was a conscious decision taking into consideration all commercial considerations including the obvious benefits of a better quality which is bound to reflect or tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was in these circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Co-ordinate Bench and we are in respectful agreement with the views of our esteemed colleagues. This additional argument was not available before the authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations and particularly dealing with the contention that the present year being firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 relevant only when the assessee's plea regarding adjustment on account of higher import duties being warranted by peculiarities of operations in this year, we refrain from making any observations on the merits of the case. With the above observations, we hereby remit the matter to the file of the TPO so far as question of determination of ALP under the TNMM method is concerned. 20. The only other issue that is argued before us is the adjustment for +/- 5 per cent. Learned representatives agree that this issue is now covered in favour of the assessee by a series of Tribunal decisions including decision in the case of Sony India (P) Ltd. even as learned Departmental Repres ..... X X X X Extracts X X X X X X X X Extracts X X X X
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