9911796707
TMI Blog2013 (1) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... and also special provisions to protect the tax base of the country from being eroded, they will over-ride all other provisions of the Act. Therefore, see no merit in this ground raised by the assessee that the definition of 'income' under the Act is not amended to include the T.P. adjustments as income and accordingly dismiss this ground TP adjustment without demonstration - Held that:- As in Coca Cola India Inc. v. Asstt. CIT [2008 (12) TMI 67 - PUNJAB AND HARYANA HIGH COURT] it is not necessary for the AO/TPO to demonstrate that profits are shifted out of India in order to determine the arm's length nature of any international transaction - thus no merit in the ground raised that no T.P. adjustment could be made in the assessee's case without there being any material against assessee. Use Of Multiple Year Data - Held that:- TPO is both empowered and also duty bound to determine the ALP using such contemporaneous data for this purpose even if it is not available to the assessee in the public data bases at the time of preparation of its report on the T.P. study - as mandated by rule 10B(4) of IT Rules, 1962, the TPO used data pertaining to the current year i.e. FY 2002-03 ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had made submissions on the said matter on which the experts opinion is now filed the experts opinion for being considered in the disposal of this ground of appeal admitted. Excise Duty Adjustment - Held that:- Assessee's ground on excise duty adjustment needs to be allowed as assessee collects excise duty as levied by the Central Government and there is no profit element involved in collecting the same and remitting it to the Government. TP regulations are based on the actual margins and 'pass through' items like excise duty are not to be considered while computing margins as is also the case with the comparable companies. DR too did not appear to have serious objections to the exclusion of excise duty in arriving at the margins. Customs duty adjustment - Held that:- Remand the matter, of examining the necessity of whether customs duty adjustment is to be allowed, as claimed by the assessee, to the file of the TPO. The TPO directed to examine the contentions keeping in mind the observations made in the light of the decision in the case of Skoda Auto (P.) Ltd.'s case (2009 (3) TMI 249 - ITAT PUNE-A) relied on by the assessee and the case of Sony India Pvt. Ltd.'s case (2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2003-04. 2. The facts of the case, in brief, are as under : 2.1 The assessee-company (hereinafter referred to as 'the assessee') is an Indian company engaged in the manufacture and trading of automobiles - namely, passenger cars (Corolla) and Multi Utility Vehicles (Qualis). The major shareholder of the assessee is Toyota Motor Corporation, Japan (hereinafter referred to as 'TMC') with 74% foreign equity participation and Kirloskar Systems India Ltd ;with 26% holding. The assessee imports components for manufacture of automobiles from TMC and other group companies. TMC provides the assessee with technical know-how for which it is paid royalty and fees for technical assistance received. 2.2 The assessee filed its return of income for Assessment Year 2003-04 on 27.11.2003 declaring a loss of Rs.6,21,90,723. Along with the return of income the assessee filed the report as required under section 92E of the Income Tax Act, 1961 (herein after referred to as 'the Act'). The return was processed under section 143(1) and the case was taken up for scrutiny by issue of notice under section 143(2) of the Act. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction Net Margin Method (TNMM) after making adjustment of the profits of comparable companies on account of differences in 'Operational efficiency' and depreciation. In TNMM, the operative margin before depreciation has been compared. The TPO has opined that the margins were lower because of the fact that the price paid for the purchase of components from AE's overstated. The adjustment was made to restate the purchase price at a lower figure than the reported figure by a sum of Rs.196.09 Crores. On receipt of the TPO's order under section 92CA of the Act, the Assessing Officer passed the order of assessment for Assessment Year 2003-04 under section 143(3) of the Act on 28.3.2006 wherein - (i) T.P. adjustment of Rs.196.09 Crores was made on account of the proposed adjustment to the ALP by the TPO. (ii) The Assessing Officer also disallowed expenditure amounting to Rs.9,03,028 incurred on software, holding it to be capital in nature and allowed depreciation thereon. 2.5 Aggrieved by the order of assessment for Assessment Year 2003-04 dt.28.3.2006, the assessee went in appeal before the CIT (Appeals)-IV, Bangalore. The assessee also filed a letter seeking rectification under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that the charging or computation provision relating to income under the head "Profits Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition under Chapter X is bad in law. 4. not appreciating that there being no disallowance under section 40A(2) for purchase of parts and components, adjustment under Chapter X ought not to be made. 5. passing the order without demonstrating the appellant had motive of tax evasion. 6. making transfer pricing adjustment for the year under consideration, although, the method adopted, the associated enterprises, the nature of transactions and the comparables were same as in the earlier years or subsequent years in which no similar adjustment had been made. 7. not appreciating that the value of the imported components having been accepted by the Customs Tribunal, the same therefore deserves to be accepted by the Income Tax Authorities also. 8. considering data which was not available to the appellant at the time of complying with the TP documentation requirements. 9. adopting a flawed methodology and process in arriving at the ALP. 10. not appreciating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging both the trading and manufacturing segments (Combined Transaction Method). Using the 'Prowess" database, the assessee selected the following seven companies as comparables whose business activity was classified as 'commercial vehicles and passenger cars' : (i) Ashok Leyland Ltd (ii) Bajaj Tempo Ltd. (iii) Eicher Motors Ltd. (iv) Hindusthan Motors Ltd. (v) Mahindra Mahindra Ltd (vi) Swaraj Mazda Ltd. (vii) Tata Engineering Locomotive Company Ltd. (TELCO). The data utilized in the assessee's T.P. analysis pertained to Financial Year 2000-01 and 2001-02. The assessee adopted cash profit to sales as the Profit Level Indicator (PLI) and operating profit to sales as additional PLI and made adjustments for excise duty and customs duty while computing the ALP. Since the cash profit margin and operating margin as worked out by the assessee at 8% was higher than that of the comparable companies, the assessee contended that its international transactions were at arm's length. 4.2 T.P. Analysis of the TPO The TPO on examination of the assessee's T.P. Study accepted TNMM as the most appropriate method and also the comparables selected by the assessee. The T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h parties, carefully perused and considered the orders passed by the TPO under section 92CA of the Act, the order of assessment for Assessment Year 2003-04 dt.28.3.2006, the grounds of appeal raised, the order of the learned CIT (Appeals), written submissions filed and the judicial decisions relied upon and proceed to dispose off the grounds of appeal raised by the assessee. Violation of principles of natural justice. 5. In support of the grounds raised at A-1, the learned counsel for the assessee has contended that the Assessing Officer had erred in passing the order disregarding the principles of natural justice by passing the order at the fag end of the limitation period; in a hurried manner and without affording proper opportunity of being heard and therefore the order of assessment is bad in law and liable to be quashed. We have also heard the learned Departmental Representative and perused the record. We find no merit in the claim of the assessee that the Assessing Officer had not afforded the assessee adequate opportunity of being heard. No evidence has been brought on record before us by the assessee to establish the violation of the principles of natural justice by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m's length price or should involve the TPO for this purpose. The reference is a step in the collection of material which might be useful for making assessments. No violation of any civil rights of the assessee is involved here. Mere reference does not tantamount to any adverse assessment or use of adverse material. Moreover, by virtue of Board Instruction No.3 of 2003 dt.20.5.2003 the CBDT decided that whenever the aggregate value of international transactions exceeds Rs.5 Crores, the case should be picked up for scrutiny and reference under section 92CA be made to the TPO. Thus, it is mandatory for the Assessing Officer to refer all the cases whenever the aggregate value of international transactions is more than Rs.5 Crores. These instructions are binding on all Assessing Officers. In these cases, there is no need for the Assessing Officer to make a prima facie opinion, except that he/she needs to examine the 3CEB Report to see the aggregate value of international transactions. In the instant case, as the aggregate value of international transactions based on 3CEB Report filed by the taxpayer before the Assessing Officer, exceeded Rs.5 Crores, he referred the case to the TPO. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not. In that process for the purpose of forming an opinion to approve or not to approve the proposed award, the Commissioner may satisfy himself as to the material relied upon by the Collector but he cannot reverse the finding as if he is an Appellate authority for the purpose of remanding the matter to the Collector as can be done by an Appellate authority; much less can the Commissioner exercising the said power of prior approval give direction to the statutory authority in what manner he should accept/appropriate the material on record in regard to the compensation payable. If such a power of issuing directions to the Collector by the Commissioner under the provision of law referred to hereinabove is to be accepted then it would mean that the Commissioner is to examine the said power to substitute his opinion for that of the Collector's opinion for the purpose of fixing compensation, which in our view is opposed to the language of section 11 of the Act." 7.2 In the case of Kailash Moudgil v. Dy. CIT [2000] 72 ITD 97 (Delhi) (SB) the issues before the Hon'ble Tribunal of Delhi was whether the Commissioner is required by law to give an opportunity of hearing to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d limits the jurisdiction of the authority i.e. the Commissioner, to apply its mind to see whether the proposal sent by the Assessing Officer is acceptable or not. In the context of section 92CA(1) of the Act, the word 'approval', in our opinion, does not mean anything more than confirming, ratifying, assenting, sanctioning or consenting. It will be doing violence to the scheme of the Act if we have to construe and accept the ground raised by the learned counsel for the assessee that the word approval amounts to an appellate power and thereby the Commissioner would have to give detailed reasons for approval. Further, in view of the decision of the Hon'ble Apex Court (supra), the Commissioner cannot go beyond the material placed before him by the Assessing Officer like records of assessment, Form 3CEB etc. Therefore, in our view, the approval of the Commissioner to the Assessing Officer's proposal for making a reference to the TPO as per section 92CA(1) of the Act is an administrative approval based on appraisal of Form 3CEB which contains information on international transactions entered into and the quantum of such transactions, suffers from no legal infirmity once the aggregate v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act clarifies that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the ALP and therefore the disallowance is made under section 92(1) and not under section 40A(2) of the Act. We, therefore, finding no merit in the arguments put forth by the assessee that disallowance even for TP adjustments require to be made under section 40A(2) of the Act, dismiss this ground of the assessee. 10.1 In support of the ground raised at A-5, the learned counsel for the assessee argued that the authorities below have erred in passing the orders making the TP adjustment and thereby enhancing the assessee's income without demonstrating that the assessee had motive for tax evasion or that the profits of the assessee were diverted elsewhere or that there has been any erosion in the base of taxable income in India. The main arguments of the learned counsel for the assessee is that the assessee did not intend to transfer/shift profits outside India and thus the TPO ought not to have made any adjustment without establishing that the assessee shifted profits outside India. The learned Departmental Representative's submissions we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to show transfer of profits outside India or evasion of tax between the two parties " Respectfully following the decisions of the Hon'ble Punjab Haryana High Court in the case of Coca Cola India Inc (supra) and of the ITAT, Pune Bench in the case of MSS India Pvt. Ltd. (supra) and of the Bangalore ITAT, Special Bench in the case of Aztec Software Technology Services Ltd. (supra), we do not find any merit in the ground raised that no T.P. adjustment could be made in the assessee's case without there being any material or finding by the TPO to show that there was transfer of profits outside India or evasion of tax in India and therefore dismiss this ground raised by the assessee. 11.1 In the ground raised at A-6, it has been submitted that the TPO made a T.P. adjustment for the year under consideration, although the method adopted, the AE's, the nature of transactions and the comparables were same as in earlier years or subsequent years in which no similar adjustment was made. 11.2 In this regard, after consideration of the submissions, we are of the view that the determination of ALP is a factual matter and there would certainly be variations/differences in the activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO erred in not appreciating that under the relevant rules, multiple years data pertaining to period of not more than two years prior to the relevant period may be used in the T.P. documentation. The submissions made are carefully considered with reference to the action of the TPO. We find that as mandated by rule 10B(4) of IT Rules, 1962, the TPO used data pertaining to the current year i.e. Financial Year 2002-03. We are also of the view that the TPO/CIT(Appeals) had rightly rejected the assessee use of multiple year data as the assessee failed to demonstrate before them how such data pertaining to the prior years had an influence or bearing on prices in the current financial year. Multiple year data may be used in case there is any effect in the case of the assessee or of the comparables on their profitability. The assessee has failed to establish how the use of multiple year/prior years data influenced the determination of transfer prices in relation to the transactions being compared. In our considered opinion the use of earlier years data was not warranted in the facts of the instant case and we find that the TPO aptly used only data of the relevant financial year and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances involving various types of transactions entered into, it was not possible to split the financial data to arrive at the net result from particular transactions. It was submitted by the learned counsel for the assessee that inspite of the assessee demonstrating the unified nature of the manufacturing and trading segments, the TPO had modified the T.P. analysis by segmenting the manufacturing and trading operations. It was submitted that the learned CIT (Appeals) concurred with the view of the TPO that the activities of manufacturing and trading segments were different and distinct each having its own functions, assets and risks. It is submitted that the learned CIT (Appeals) had further held that the import of components for manufacture of passenger cars and import of Camry passenger car for distribution is a distinct class of transaction and requires separate analysis. In support of his conclusion, the learned CIT (Appeals) relied on the decision of the Tribunal in the case of Star India Pvt. Ltd. v. Asstt. CIT IT Appeal Nos. 3585 3846 (Mum.) of 2006, dated 28-5-2008 Mumbai and UCB India (P.) Ltd. [2009] 30 SOT 95 (Mum.). 14.2 Before us, the learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to the relevant extracts from the Annual Reports of the comparable companies submitting that though purchase of traded goods are separately stated therein, the sales figure in some companies are the aggregate of trading and manufacturing items. For eg., in the case of Tata Motors on page 7 of the Annual Report, a cumulative figure of Rs.10,604.04 Crores is stated as 'sale of products and services'. Similarly, in the case of Mahindra Mahindra Ltd, page 65 of the Annual Report gives a single figure of sales - manufactured and traded goods. It is submitted that due to lack of details in the public domain, it is not possible to have segmental analysis of comparables. The learned counsel for the assessee also submitted that for Assessment Year 2004-05, the TPO accepted the T.P. analysis of the assessee without segmenting the results between trading and manufacturing segments. Based on the above, the learned counsel for the assessee submitted that segmentation of its results between trading and manufacturing was not called for and is bad in law. 14.4 The learned Departmental Representative supported the orders of the learned CIT (Appeals) in upholding the action of the TPO in taki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables is minimal and below threshold and entity level margins are required to be adopted, the learned counsel for the assessee submits that then on a parity of reasoning, in the assessee's case also margins need to be computed at entity level. (iii) In respect of the learned Departmental Representative's submission that the trading activity of the comparables is mainly in trading of spares and not in CBU's, the learned counsel for the assessee drawing our attention to the extracts of the Annual Reports of the comparable companies contended that their trading activities are not confined to spares alone but to other items also and in such circumstances to single out the assessee alone for evaluation of trading activity results separately is inappropriate. (v) The learned counsel for the assessee strongly argued that when the learned Departmental Representative had accepted that both the assessee as well as the comparable companies are engaged in trading in spares, comparison of segment profits of the assessee with enterprise/entity level results of the comparable companies would be incorrect. (vi) With respect to the learned Departmental Representative reliance on paras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds that functionally, assets and risks of both segments being different, therefore the combining or merging of both segments is inappropriate. The learned Departmental Representative also submitted that though the comparable companies have minimal trading activities, those are confined to spare parts only and not CBU's as in the case with the assessee. The learned counsel for the assessee countered this by submitting that even in the assessee's trading segment, 50% of sales is from sale of spare parts. 14.5.2 Taking into consideration the submissions made and the facts and circumstances of the case, we agree with the submissions of the learned counsel for the assessee. While it is true that function, assets and risks of the trading and manufacturing segments generally differ, however circumstances may warrant combining both of them. It is only in the specific facts of the case that the combining of both segments is advisable. In the instant case of the assessee, the sale of spare parts is triggered as a result of the manufacturing activities, including warranty commitments. Therefore, we are of the view that it would not be in the fitness of things for the sale of spare parts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparables at 22.57% and concluded that since the assessee has a high degree of operative efficiency, the difference in operating efficiency needs to be nullified and proceeded to make the said adjustment for operating efficiency. It was submitted that the learned CIT (Appeals) sustained the TPO's action holding that operating efficiency is an enterprise level adjustment and therefore is required to be carried out to eliminate material effect of differences in operational efficiency of the assessee vis- -vis the comparables. 15.2 The submissions of the assessee opposing the operational efficiency adjustment made by the TPO is as under : "(i) Operating Efficiency Adjustment is not contemplated by law : The law contemplates an adjustment to be made for transaction level difference or an enterprise level difference. These differences can either be in the functions performed or assets employed or risks assumed. An operating efficiency does not fall within any of the parameters warranting an adjustment. The difference in operating expenses is neither a difference in transactions nor enterprises. An adjustment for operating efficiency is thus not contemplated under the law. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other may therefore not be advisable. The TPO has erred in not appreciating that operating efficiency is significantly influenced by the quality of materials used. For example, if a person manufacturing bricks uses a bad quality of clay, it is very likely that : (a) the time consumed for the job would be longer; (b) the quality of product (bricks) would suffer; (c) wastages are going to be high; (d) acceptance of the product by the customer is bound to suffer. A good quality of clay on other hand would significantly reduce the above mentioned downsides. Operating efficiency and the quality of material used are thus interdependent. There is an interplay between them. One is inextricably linked to other. They cannot therefore be segregated. The approach of the TPO to segregate these components and thereafter draw adverse consequences against the appellant is faulty. The same needs to be disregarded. The correct approach would therefore be to reckon the operating costs and the material costs simultaneously and together. To give another example, cutting wood with blunt axe would take longer when compared to sharp axe. The cost of blunt axe may be less but the labo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pically require fewer number of inspections, fewer scrap and defects, lesser managerial supervision to ensure quality, lesser time to respond to customer requirement and so on. The TPS captures these aspects by its basic definition of various types of wastes inan organization. The appellant therefore submits that there is a strong relationship between the materials and operating expenditure. Correlation between them is negative since low material cost will lead to high operating expenditure. The concept of variance anlaysis under standard costing assumes relevance in this context. The relevant portion of the download from the website was filed with the CIT (Appeals) (www.bpp.com/acca/downloads/sc/ATF57-Sc.pdf) (page 211 212 of case law compilation). The down load consists of an explanation of the interdependency between material and efficiency and the impact of variance thereunder. It is suggested therefore that the individual variances should not be looked at in isolation. The variances are inter-related, and much of it occurs only because the other variance occurred too. When two variances are interdependent (inter-related) one will usually be adverse and the other one favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tates that net profit indicators may be directly affected by forces like management efficiencies, individual strategies, etc. The learned Departmental Representative also cited section 1.482-5 of the US regulations dealing with the impact of factors like differences in management efficiency etc on the operating profit and provides that if material differences are there, the same should be eliminated. (iv) With respect to the assessee's contention regarding inter-dependence between operating efficiency and quality of material, the learned Departmental Representative has stated that the tax payer has not brought on record any material to prove its contention that in the case of comparables, this model is not being followed. (v) With respect to the assessee's contention that the Toyota Production System believes in greater degree of outsourcing, the learned Departmental Representative submits that nothing has been brought on record by the assessee to demonstrate that the comparables do not follow the same model. (vi) With respect to the assessee's reliance on experts opinion, the learned Departmental Representative submitted that the same is additional evidence and therefore c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee and TPO as comparables for the T.P. Analysis. (v) The learned counsel for the assessee submitted that on a perusal of the Annual Reports of the comparable companies various components like engines, transmission, etc are produced in-house as against the assessee who has outsourced the manufacture of such components or imports the same. Therefore, direct comparison of operating cost of the assessee with that of the comparables would be incorrect. (vi) With regard to the learned Departmental Representative's contention that the assessee is making consistent losses, the learned counsel for the assessee submitted that its sales and profits have increased substantially in the subsequent years of operation. (vii) The learned counsel for the assessee also submitted that based on the above submission, it is clear that the adjustment for operating efficiency as proposed by the TPO is bad in law. Further, no operating efficiency adjustment has been made in the earlier years or immediately succeeding years and this inconsistency in such adjustment is proof enough that the said adjustment is to be removed. (viii) With respect to the expert opinion introduced as additiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld also be free to counter the expert opinion filed by the assessee with another experts opinion. 16. Admission of Additional Evidence We notice that Rule 29 of the ITAT Rules permit additional evidence to be admitted under the following circumstances : (i) To enable the ITAT to pass an order. (ii) If it is for any substantial cause. (iii) In the event of a situation where the income tax authorities have decided the case without affording the assessee sufficient opportunity to adduce evidence either on points specified or not specified by them. It is held in the case of CIT v. Salig Ram Prem Nath [1989] 179 ITR 239 that in order to do substantial justice, the ITAT is vested with the requisite authority to admit additional evidence. In the factual matrix of the case, we find that the assessee had made submissions on the said matter on which the experts opinion is now filed. The expert opinion is filed and available with the Department for subsequent years in the assessee's case as submitted by the learned counsel for the assessee. We also notice that the learned Departmental Representative while opposing the admission, argued on the fallacies and short comings of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween them. It was also contended by the learned counsel for the assessee that inclusion of excise duty skews the gross profit. It was forcefully argued by the learned counsel for the assessee that in the succeeding years, the margins have been computed by the TPO excluding excise duty and therefore submitted that for the year under consideration also, the computation be made on the basis of net sales (i.e. After excluding excise duty) and also excise duty be excluded from operating costs also. 17.3 The learned Departmental Representative supported the orders of the authorities below on this issue. The learned Departmental Representative argued that the accounting treatment of an item for the purpose of financial accounting would not be a determinant factor how that particular item should be treated for computing the operating cost for the purpose of transfer pricing. The learned Departmental Representative contended that excise duty is an integral part of operating cost and is also embedded in sales and therefore should be considered as part of cost as well as revenue. The learned Departmental Representative further contended that if the assessee wants to exclude excise duty from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the corresponding customs duty expense is proportionately greater leading to lower profits. In comparison to the assessee who is in a start up phase, the learned counsel for the assessee contends, the comparable companies are established players in the automobile market and have negligible import content due to indigenization of materials required for production. In these circumstances, the learned counsel for the assessee argues that the assessee's having to pay the higher customs duty component it would put the assessee at a disadvantage when compared with the other comparable companies as customs duty impact profit margins. It is submitted that as the import component increases, the material cost as a percentage of sales also increases and thereby leads to a reduction in profit margins. In view of the above, the assessee submitted that the adverse effect of customs duty warrants its exclusion so as to bring the assessee and the comparables on par. The learned counsel for the assessee relied on the decision of the ITAT, Pune in the case of Skoda Auto India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 319 and submitted that the proposition of customs duty adjustment is also supported b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents, while the normal selling price of the car was computed in the light of the cost as would apply when the complete facilities of regular production was in place. It is also submitted by the learned Departmental Representative that the Tribunal concurred with the findings in the Sony India decision (supra) and held that higher import content by itself does not warrant an adjustment, as it is a commercial decision. Further, in the Skoda Case, the Tribunal has given a clear finding that it is an assembler of cars whereas the comparable companies were manufacturers. In the case of the assessee, the learned Departmental Representative submits, it is a full fledged manufacturer with sufficient localization as evidenced by the local sourcing of 60% of its material consumption. The learned Departmental Representative also pointed out that in the case of Skoda (supra), it was the first year of operation and it was claimed that for want of local vendors it was found to import to the extent of 98.55% whereas the assessee is in its third year of operation and is in the business of manufacturing of passenger cars in India since 1999. It is thus submitted by the learned Departmental Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese facts, the TPO should examine the applicability of the decision in the case of Sony India Pvt. Ltd. (supra) that if the tax payer company has purchased imported components after payment of customs duty at a higher price than indigenous components, this decision must have been taken by it consciously taking into account all the commercial considerations including the obvious benefits of better quality which is bound to reflect or translate into a higher selling price of the product which hardly leaves any scope for adjustment to the profit margin of the comparables on this issue. (ii) No doubt, a higher import content of raw-material does not warrant an adjustment in operating margins as was held in Sony India Pvt. Ltd. case (supra), but what is to be really seen is whether the high import content was necessitated by circumstances beyond the assessee's control. (iii) Whether the higher customs duty component on account of imports impacts the profit margins of the assessee, putting it at a disadvantageous position, vis- -vis the comparable companies who would be paying more of central excise duty, sales tax etc. (iv) Whether if the sale price is market driven, a higher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets drive the revenues of a manufacturing concern and also the depreciation cost is a significant one, which is considered while fixing the price of a car, then depreciation effect cannot be eliminated by excluding depreciation while comparing profitability of the assessee with that of the comparables. The learned Departmental Representative further contended that in the case of new companies depreciation would be higher as compared to an old enterprise, but the expenses on repairs and maintenance would be lower in a new enterprise as compared to an older one and therefore the depreciation along with expenses on repairs and maintenance takes care of the age factor of the assessee vis- -vis the comparable companies. It is argued that in asset - intensive manufacturing concerns like the assessee, exclusion of depreciation distorts the comparability analysis and therefore cash PLI or PBDIT is not the appropriate PLI. In support of this proposition the learned Departmental Representative placed reliance on the decision of the ITAT, Mumbai in the case of Fiat India (P.) Ltd. v. Dy. CIT [IT Appeal No. 1848 (Mum.) of 2009, dated 30-4-2010]. 19.3 In rejoinder the learned counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t depreciation can be taken into account or disregarded in computing profit, depending on the context and purpose for which profit is to be computed. 19.4.2 In the case of Schefenacker Motherson Ltd. (supra) of the ITAT, Delhi, the issue of whether depreciation can be excluded for comparison has been discussed at length and it was held in para 22 thereof that - " The basic issue involved was whether the cost paid or charged for international transactions was at arm's length or not. The factors which go to influence price, cost or profits are/were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by the IT regulations. There is no way to dislodge the claim of the tax payer. The context and purpose of legislation and facts of the case overwhelmingly approve adoption of cash profit only." This case was relied upon by the assessee in support of its proposition that cash PLI or PBDIT is the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue for the simple reason that the comparable companies also suffer the impact of increase in steel prices as is borne out by the Annual Report of Tata Motors wherein this aspect is highlighted. In this view of the matter, we hold that no adjustment is required on this issue. 20.3 It is submitted by the learned counsel for the assessee that the assessee is part of a world renowned multi-national organization and as part of its global image has made substantial investments in establishing dealership networks, implemented global standards of office layout and thereby secured the highest satisfaction for both customers and dealers. We have carefully considered the submissions and find no merit in the claim for making any adjustment on this count. The assessee has failed to demonstrate that comparables do not invest in setting up dealership network. "Even otherwise TNMM is tolerant to minor functional differences and hence no adjustment is required for this difference in operation. 20.4 It is submitted by the learned counsel for the assessee that in the case of the assessee the technology belonged to the AE and therefore research and development activity was not assumed by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of spare parts and components. Admittedly, it is earned from incidental activities for rendering other services to the AE's and therefore its inclusion in operational income would lead to a distortion therein. 21.3 Provision for Warranty Costs The learned counsel for the assessee submits that when the assessee sells its vehicles to various customers, they have an attached warranty condition. In the event of a faulty design or manufacture, defects arise which were not originally visualized. It is submitted that in the relevant period, the assessee noticed a defect in the exhaust system of the automobiles manufactured by it. Apprehending that there would be increased expenditure to rectify these defects, the assessee made a special one time provision of 15.90 Crores towards warranty costs. The learned counsel for the assessee contended that the same being an unusual expenditure and also non-recurring, it ought not to have been included in the operating costs which was what the TPO did. It was further submitted that in the succeeding years, in the assessee's own case, the TPO had accepted that warranty provision is not operating expenditure and excluded it from operational c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment for marketing expenses. We have heard both parties and carefully considered the material on record. It is a matter of record that even though the assessee claims extraordinary marketing expenses were incurred on launch of a passenger vehicle, its marketing expenditure at 2.89% is less than that of the comparable companies which is 4.72%. It is common knowledge that the comparable companies also in the automobile industry would be launching new models/vehicles at regular intervals, for which they too, just like the assessee, would be incurring marketing expenses to promote their products. In these circumstances, we are of the opinion that these marketing expenses for launch of new vehicles are part and parcel of the normal business operations of the assessee and the comparable companies and therefore would comprise a part of the operational expenses. From an accounting perspective, it is generally perceived that marketing expenses have an impact on revenues over a period of time. However, in the assessee's case we find that all the marketing expenses have been incurred and claimed in the relevant period only. In view of the facts and circumstances as discussed above, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. v. Dy. CIT [IT Appeal No. 1433 (Delhi) of 2009, dated 12-11-2010] (vi) Dy. CIT v. Ankit Diamonds [2011] 43 SOT 523 (vii) Asstt. CIT v. T Two International (P.) Ltd. [2008] 26 SOT 583 (Mum.). The learned counsel for the assessee submits that the TP adjustment, if any, should be restricted to transactions with AE's only. 22.2 On a perusal of the order of the learned CIT(Appeals), at para 7.31 thereof, we find that the CIT(Appeals) has held that the ALP adjustment has to be restricted to the extent of import/purchases from AE's only and cannot be extended to purchases made from Non-AE's and has remitted the matter back to the file of the TPO for computation of the same. Since this issue is not disputed before us, we decline to adjudicate thereon or interfere therein. 23. Benefit +/- 5% Safe Harbour 23.1 In the ground No.5 on Safe Harbour - the assessee has sought the benefit of +/- 5% as set out under the proviso to section 92C(2) of the Act citing several judicial decisions in support of this proposition. Prior to the amendment made by Finance (No.2) Act, 2009 and the Finance Act, 2012, the proviso to section 92C(2) of the Act provided that the ALP would be taken t ..... 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