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TMI Blog2010 (11) TMI 730X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in holding that the amount paid to the assessee for royalty and technical know-how should be nil. (3) On the facts and the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in applying the TNMM, whereas the cost plus method was the most appropriate method for determining the ALP and also ignoring the internal comparable between international and non-international transactions for the cost plus method submitted by the assessee. (4) On the facts and the circumstances of the case and in law, the learned CIT(A) has erred in ignoring and in not giving the assessee the benefit of the fact that no adjustment has been made in the assessee's transfer pricing assessment for the next asst. yr. 2005-06, where the facts and circumstances were absolutely the same. (5) The order of the learned CIT(A) is bad in law and on the facts of the case arid is based on the surmises and conjectures only and without considering the facts and submissions made." 2. Brief facts are that the assessee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 3. Rane (Madras) Ltd. 201.66 23.39 11.58 4. Sona Koya Steering Systems Ltd. 281.47 20.20 7.17 5. Talbros Engineering Ltd. 22.95 1.51 6.57 6. Bharat Gears Ltd. (automotive segment) 92.69 4.95 5.34 Average 9.21% 2.4 As the appellant's net operating margin on overall basis was 4.56 per cent as against 9.21 per cent for the comparables adopted by the TPO, accordingly AO made a downward adjustment by Rs. 3,18,89,975 to the international transaction. 3. Aggrieved, the assessee preferred first appeal where the detailed submissions were made. The CIT(A) however, enhanced the addition in respect of international transactions to 10.74 per cent average operating margin by following observations:- "15. In view of the above discussion, I hold that the following 6 comparables chosen by the TPO are correct for making comparability analysis for determining the ALP for the international transactions comparing payment for raw material, royalty and technical know-how. 15.1. The average operating margin of the following comparables is 10.74 per cent, the details of which were communicated to the appellant vide this office letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Takata Asia Pte Ltd., Singapore. This collaboration provides technology for new seat belts coming. AAIL is also doing business of window regulators (power and manual) for cars and supplys to Tata Motors and Hindustan Motors. AAIL buys seat belt components from Takata, assembles them and sells to Honda and Maruti Udyog. AAIL's total equity capital is 13,00,000 shares, of which 70 per cent is being held by Indian shareholders and balance 30 per cent is held by Takata's Group. 1.2 The major international transactions reported in Form No. 3CEB are as under:- Sl. No. Description of transaction Method Value (in Rs.) 1. Purchase of raw material None 8,27,84,638 2. Purchase of machines None 33,27,876 3. Payment of royalty None 16,09,505 4. Fee for technical know-how None 1,10,00,000 5. Interest on loan None 10,26,843 Purchase of raw material:- "During the previous year, certain transactions for purchase of raw material have been entered into with M/s Takata Asia Pte Ltd. an AE. These purchases have been made for specifically designed product as per requirement of car manufacturers, developed with the help of technology provided by Takata. &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring and supplying safety seat belts for automobiles to all OEMs in India like Maruti Udyog Ltd., Honda Siel Cars Ltd., Tata Motors Ltd., Hindustan Motors Ltd. and Swaraj Mazda Ltd. In 2000, AAIL entered into a technical collaboration with Takata Asia Pte Ltd., Singapore (previously known as Automotive Safety System Pte Ltd), a subsidiary of Takata Corporation, Japan. Takata Asia also holds 30 per cent equity shares in Abhishek Auto Industries Ltd. (AAIL). Takata has developed seat belts for Honda Siel Car India Ltd. and Maruti export model. These are specifically designed seat belts for particular model of car and cannot be used in other cars. Abhishek Auto buys this material from Takata and does some assembly work and supplies to Honda and Maruti. Initially, the prices are fixed according to purchase price from Takata and later on foreign exchange fluctuations are adjusted by Honda and Maruti for these products. Takata has developed seat belts for Honda's all models and Maruti export model. Their product is guaranteed by Takata. AAIL is only doing some assembling work under the supervision of Takata's Japanese staff stationed in AAIL. Any failure of produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,090 Other income Rs. 16,10,614 Financial expenses Rs. 1,39,37,372 Net operating profit (Profit before tax - other income + financial expenses) Rs. 3,14,43,848 Net operating margin 4.56% Net operating profit at arm's length margin = 9.21% of Rs. 68,76,63,661 Rs. 6,33,33,823." 5.7 Learned counsel contends that TPO thus concluded in his order as under:- "5.9 Accordingly, at arm's length the assessee company was required to obtain a net operating margin of 9.21 per cent over sales which translates into Rs. 6,33,33,823. The net operating profit of the assessee is Rs. 3,14,43,848 accordingly the value of 'international transaction' related to purchase of raw material and machines needs to be adjusted downward by an amount of Rs. 3,18,89,975 which is the difference of net operating margins at arm's length i.e. Rs. 6,33,33,823 and the net operating margins of the assessee i.e. Rs. 3,14,43,848. 5.10 Accordingly, the value of 'international transaction' relating to purchases of raw materials is determined at Rs. 5,08,94,663. 6. In the earlier part of this order, the arm's length price of the 'international transaction' related to payment of royally and kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total expenses of Rs. 67,01,57,185. On the perusal of the schedule of the P and L a/c it is noticed that the difference is on account of non-allocation of the following expenses:- (a) Technical know-how payment made to Takata amounting to Rs. 1,10,00,000. (b) Depreciation amounting to Rs. 2,64,03,411. (c) Finance expenses amounting to Rs. 1,39,37,372. The above expenses also need to be allocated to both the segments either on the basis of some allocation key or if they are directly attributable to a particular segment. 8.7 On the perusal of the nature of the international transactions undertaken by the appellant it is noticed that the payment of technical know-how fee is for manufacturing Takata based products only. Thus the technical know-how payment needs to be allocated to the segment pertaining to sales made of Takata products. The depreciation charged on the fixed assets is to be allocated on the basis of the turnover of these segments. As for the financial expenses, they primarily pertain to interest expenses which are non-operating in nature. However the bank charges of Rs. 18,79,136 need to be allocated to both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - "Hence in the absence of any internal comparable TNMM is the most appropriate method to compare the company-wise margins earned by the appellant with external comparables undertaking similar manufacturing activities." 5.14 In view of the above calculations, the CIT(A) enhanced the addition as calculated by him on p. 25 para 15.1 of his order to Rs. 4,24,11,209. 5.15 Learned counsel canvassed following points before us:- (A) Written agreements which are duly executed by parties based on commercial expediency cannot be disregarded without giving any cogent reasons; reliance is placed upon the following judgments:- (i) Union of India and Anr. vs. Azadi Bachao Andolan and Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC); (ii) CIT vs. Gillette Diversified Operations (P) Ltd. (2010) 324 ITR 226 (Del); (iii) CIT vs. Walfort Share and Stock Brokers (P) Ltd. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233; (iv) Sony India (P) Ltd. vs. Dy. CIT (2008) 118 TTJ (Del) 865 : (2008) 14 DTR (Del)(Trib) 228 : (2008) 114 ITD 448 (Del)(relevant para 100, p. 520). No finding has been given that agreements are non-genuine or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the TPO as well as the AO have accepted the existence of this joint venture agreement and have not proposed any additions either on account of royalty payment or on account of purchase of raw materials in the subsequent years. E. Only international transactions are covered by Chapter X on transfer pricing regulations and the transactions which have no international transaction element are not amenable to adjustments and for this proposition he has cited the following authorities:- (i) IL Jin Electronics (I) (P) Ltd. vs. Asstt. CIT (2010) 36 SOT 227 (Del) (relevant para on p. 230); (ii) Dy. CIT vs. Starlight; (iii) Twinkle Diamond vs. Asstt. CIT; (iv) Addl. CIT vs. Tej Diam (2010) 130 TTJ (Mumbai) 570 : (2010) 39 DTR (Mumbai)(Trib) 185. 5.16 It will be seen that the operating profit on sales for the international transactions with Takata gives a PLI of 10.495 per cent which is higher than both the workings by the TPO of 9.21 per cent and by the CIT(A) of 10.74 per cent - 5 per cent = 10.27 for which he has invoked the safe harbour rule. Since the lump sum transfer of royalty has been capitalized by the appellant in the fixed assets a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as against turnover of Rs. 12.74 crores in the AE segment. All the sales of the appellant company are to domestic, non-related parties only, there is no export sales. The only difference in the Takata segment is the use of technology of Takata and the raw material is also imported from them. Normally in a transfer pricing regulation, this should be tested on the fact that where Takata transactions are leaving a lower operating profit than the non-Takata transactions and in this case the operating profit in Takata transactions is much more than the transactions in the non-Takata transactions. Therefore, according to learned counsel, this internal comparable available in the appellant company itself should not have been disregarded by the TPO and the CIT(A). 5.19 The next proposition is that the net margins worked out by CIT(A) in the six companies on p. 24 of order are not correct, as per data filed which is collected from RoC by the appellant, the margins are much lower than the ones calculated both by the TPO and the CIT(A). A revised working of 3 comparable companies is furnished (Annex. 'C') on record, it supports assessee. 6. Learned CIT-Departmental Representat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with law. In such circumstances, we are of the view that TPO and the CIT(A) were not correct in disregarding this agreement without assigning any cogent reasons except challenging the commercial need for such arrangement which is in the domain of the businessman and not of the Revenue authorities. 8.1 We have observed that the TPO in his order has accepted the international transactions of purchase of machinery from the AE however an inference has been drawn that assessee was competent to make independent use of such machinery. Assessee has met this finding that machineries were imported to manufacture the assembly line for manufacturing of seat belts for which the technical know-how and foreign technicians were also deputed by the AE. Whenever international transactions of such nature are undertaken, it is a combination of technical know-how, royalty, technical assistance through the deputation of ex-pat employees on the rolls of the person obtaining the technical know-how. There is merit in assessee's submissions that merely by importing machinery, it cannot be said that the assessee would become competent to make use of such machinery. Technical know-how and technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant. As per calculations of the CIT(A), as corrected by an error on account of technical know-how fee which was not claimed as revenue expense, the segment which did not have the benefit of foreign technology and foreign raw material had an operating profit to sales margin at 2.88 per cent, whereas the segment which had this benefit had a margin of 10.49 per cent. It is obvious that the transactions are at arm's length and no adjustments are called for. 8.5 Taking external comparables as given by the TPO and the CIT(A) and by looking at the average PLI calculated by the CIT(A) in para 15.1 of his order of 10.74 per cent and if we reduce 5 per cent thereof, it will come to 10.20 per cent, i.e. 10.74 - 5 per cent = 0.537. If this is reduced from 10.74, it will come to 10.20. This will be the PLI after adjustment as per the proviso to s. 92C. This, in any case, is less than the PLI of the Takata transactions of the appellant which is 10.49 per cent. Therefore even if we uphold the work done by the authorities below and adjust it by 5 per cent and then compare it with the international transactions, then again there is no need, in our opinion, to make any adjustment as t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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