9911796707
TMI Blog2011 (6) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... arding royalty. Assessee had claimed a sum of Rs. 2,75,24,000/- as revenue outgo on amounts paid to one M/s Chevron Oronite Company LLC, USA (COCL). As per the assessee, this was running royalty. The A.O., however, was of the opinion that this was a capital expenditure, since assessee had acquired a right to use technology and technical know how from M/s COCL. However, the A.O. allowed depreciation thereof. 4. In assessee's appeal before the CIT(Appeals), argument of the assessee was that it was a revenue expenditure and such payments made to M/s COCL were separate and distinct from lump sum payments of royalties given to M/s COCL. Ld. CIT(Appeals) after considering submission of the assessee, held that 75% of the payments could be considered as revenue expenditure and only 25% could be disallowed as capital expenditure. For this, he placed reliance on the order of his predecessor for assessment year 1999-2000 in assessee's own case. 5. Now before us, as already mentioned, both parties are aggrieved. Assessee is aggrieved that 25% of the payment was considered as capital expenditure, whereas, Revenue is aggrieved that 75% of the payment was allowed as revenue expenditure by the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and against the Revenue." 8. Respectfully following the order of this Tribunal for the earlier assessment years, claim of the assessee has to be allowed for the impugned assessment year as well. Hence, appeal of the assessee for assessment year 2004-05 stands allowed, whereas, the related ground of the Revenue stands dismissed. 9. Coming to the only other issue, which is raised by the Revenue regarding adjustment towards arms length price, short facts apropos are that assessee had entered into certain transactions with related parties which, inter alia, included purchase of raw materials, purchase of finished goods, sale of finished goods, liaison activities, royalty and technical services charges. Such related parties being situated in Singapore, France and USA, Assessing Officer made a reference under Section 92CA of Income-tax Act, 1961 (hereinafter called "the Act") to the Transfer Pricing Officer (TPO). It is to be noted that assessee had filed Form No.3CEB certified by its statutory auditors as prescribed under Rule 10E of Income-tax Rules, 1962, for the international transactions entered into by it, during the relevant previous year. Assessee is a joint venture of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, royalty and technical services with associated enterprises, only the above transactions of purchase of raw materials and finished goods were considered by the TPO, under the Transactional Net Margin (TNM) method he adopted for computing the arms length price. In other words, as far as other transactions were concerned, the TPO accepted the arms length price worked out by the assessee for comparison. During the course of proceedings, before the TPO, assessee gave submissions justifying the method followed by it in valuing the international transactions. The TPO was of the opinion that the prices charged in respect of international transactions relating to purchase of raw materials and finished goods were not in accordance with sub-section (1) and (2) of Section 92C of the Act. According to the TPO, assessee had purchased 15 items of raw materials from associated enterprises, but, only two items were considered while adopting CUP method of comparison. Assessee had submitted before the TPO that no comparable details were available regarding 13 items out of 15 items supplied by the associated enterprises since these were proprietory in nature. TPO being not satisfied with the meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unctional, Risk and Asset Analysis (FAR) of the two companies and came to a conclusion that both the entities were performing similar functions, undertaking similar risks and having similar assets. A.O., thereafter applied the profit margin of 7.87% of M/s IIP, on the purchase cost of raw materials and finished goods totalling to Rs. 18,86,05,292 after aggregating it with profit margin of 1.51% of the assessee-company, and arrived at an arms length purchase price of Rs. 17,63,85,863/-. Computation made by the TPO is reproduced hereunder:- Computation of Arm's Length Price: Purchase price of Raw materials & Finished goods (A) : 18,86,05,292 Profit margin of Assessee company (B) @ 1.51% : 28,47,940 Sale price relatable to AE Purchases (A+B) (C) : 191453232 Arms length profit margin @ 7.87% (D) : 15067369 Arm's Length Purchase price (C-D) (E) : 176385863 Difference in Price (A-E) (F) : 12219429 He, therefore, directed the A.O. to adjust the total income of the assessee upwardly by a sum of Rs. 1,22,19,429/-. 10. In its appeal before the CIT(Appeals), argument of the assessee was that raw materials purchased for Rs. 13,55,90,154/-from COCL, Singapor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, came to a conclusion that M/s IIP was doing business in food industry, whereas, assessee was in automobile industry and hence, these two companies could not be compared at all. According to him, the size of operations also had great bearing and M/s IIP was having only insignificant turnover when compared to that of the assessee. Ld. CIT(Appeals) also noted that for subsequent assessment year 2005-06, the TPO had held that no adjustment was necessary in the international transaction entered into by the assessee. For these reasons, he deleted the addition made by the A.O. based on the order of the TPO. 12. Now before us, learned D.R., strongly assailing the order of ld. CIT(Appeals), submitted that M/s IIP was doing a comparable business and supplying additives. According to him, assessee had not given any good comparable case for the raw materials purchased from its associated enterprises abroad, claiming that 13 out of 15 items purchased were of proprietary nature. According to learned D.R., Assessing Officer had found the case of M/s IIP to be similar and made a FAR analysis and properly came to a conclusion that transaction net margin method was appropriate for valuing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Rs. 176385863) : Rs. 12219429 We find one major error committed by the TPO in above work out. Against the purchase of raw materials for Rs. 135590154/- as appearing in Form No.3CEB submitted by the assessee relating to its international transactions, it had specifically stated that these were two items, namely, Dodecyl Phenol and Zinc Di Thio Phosphates from the AEs. Assessee had also computed arms length value of such purchase by adopting CUP method and for such CUP method, it had given specific comparables of two unrelated parties, namely, Herdillia Schenectady and Lubrizol India Pvt. Ltd. vide Annexure-2(B) of the said Form, duly certified by its auditors. The TPO did not give any reason why he rejected the CUP method adopted by the assessee when assessee could show that such CUP method was based on prices charged or paid in a comparable uncontrolled transaction. On the other hand, we find that the TPO had rejected the method adopted by the assessee on a finding that out of 15 raw materials imported, assessee could not give comparison in 13 items, but, only for the above two items. If that was so, then the adjustment that should have been carried out was on such 13 items o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of comparable of uncontrolled transactions, whether that of assessee or of another similarly placed entity. Can we say that assessee has worked out the gross profit margin based on any comparable uncontrolled transaction? Assessee had made a working based on its own gross profit rate including that of the transactions related to the AEs and we cannot understand how an adjustment made on such gross profit rate, averaged for two years could result in any variation. It is only a reverse working of its own results. The primary principle behind determining the arms length price is that the comparison should come from uncontrolled transactions. When the comparison does not come from uncontrolled transactions, then such comparison cannot give any rationale results. No doubt, in so far as purchase of raw materials from associated enterprises are concerned, though the TPO committed a mistake in applying TNM method basing himself on the working results of an uncomparable entity, as already held by us, we find that no consideration whatsoever has been given by any of the authorities below regarding the correctness or appropriateness of the resale price method adopted by the assessee in com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not comparable at all. Hence, ld. CIT(Appeals) was justified in setting aside the adjustment on arms length price for purchases of raw materials. We find no reason to interfere on this aspect. Thus, in so far as the adjustments made on purchase of raw materials from associated enterprises is concerned, we sustain the deletion of addition made by ld. CIT(Appeals). But, in so far as determination of arms length price on purchase of finished goods are concerned, we are of the opinion that the matter requires re-visit by the Assessing Officer for the reasons mentioned above. In the result, we set aside the issue relating to the determination of arms length price of purchase of finished goods, back to the file of the A.O., whereas, in so far as determination of arms length price of the purchase of raw materials is concerned, we uphold the order of ld. CIT(Appeals). The A.O. shall, while determining the arms length price of the purchase of finished goods, proceed in accordance with law. 16. Appeal filed by the Revenue is partly allowed for statistical purposes. 17. To summarise the results, appeal of the assessee is allowed, whereas, that of Revenue is partly allowed for statistic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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