9911796707
TMI Blog2013 (11) TMI 668X X X X Extracts X X X X X X X X Extracts X X X X ..... import of capital asset, payment of royalty, design and drawing fee. For justifying the costs, assessee had used Transaction Net Margin Method (TNMM) using its operating margin to total cost as Profit Level Indicator (PLI). 4. Assessing Officer, during the course of assessment, made a reference to Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act for determination of arm's length price on the transactions recorded by the assessee in Form No.3CEB filed by it along with its return. A perusal of the order dated 29.10.2009 of TPO clearly brings out that an adjustment was recommended only in respect of cost of components imported by the assessee from Koito Manufacturing Company Limited, Japan and not on any of the other international transactions. As per the TPO, the costs of the components imported from the said Associate Enterprise, were higher than the arm's length price attributable to such components and for reaching this conclusion, she applied TNMM method and the companies which she selected as comparables were Japan Lighting, Lumax Industries Ltd., Minda Industries Ltd. and Phoenix Lamps Ltd. Though in the order dated 29.10.2009, TPO recommended a downward adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iving the benefit of plus or minus 5%, since the arm's length price for the components imported by the assessee fell above such limits. Considering the DRP recommendations, assessment was finally completed, carrying out the adjustments required by the TPO on the prices paid by the assessee for the components purchased by it, from its Associate Enterprise. 6. Now before us, learned A.R., strongly assailing the order of TPO, at the outset, submitted that various figures given by the TPO while working out the arm's length price, reproduced at para 4 above, was not disputed by him, except for the part relating to computation of the non-AE costs. According to him, reduction in cost as a whole was computed based on the average profit margin of comparables. However, the TPO had considered the effect of such reduction as entirely attributable to the purchases from the Associate Enterprise. According to him, the purchase made from the Associate Enterprise constituted only 12.91% of the whole cost. Methodology followed by the TPO for computing arm's length price in an international transaction was incorrect. What was worked out by the TPO was arm's length price of the total cost incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt is the arm's length price of the imported components. Therefore, according to him, the analysis made was correct and excess of Rs. 0.79 Crores paid by the assessee had to be adjusted by making a downward reduction of such amount from the total cost. Such amount Rs. 0.79 Crores exceeded 5% of the actual cost of components imported from Associate Enterprise, which came to Rs. 13.19 Crores. Therefore, assessee could not claim any benefit under second proviso to Section 92C(2) of the Act. 8. We have perused the orders and heard the rival submissions. For better understanding the work-out given by the TPO for calculating arm's length price of raw materials imported by the assessee, we are reformatting the chart given at para 4 above, as under:- Operating Income of the assessee-company Rs. 109.86 Crores Operating cost of assessee-company after adjustment of freight and rejection Rs. 103.90 Crores Operating profit of assessee-company Rs. 5.96 Crores Operating profit as a percentage of operating income of assessee-company 5.43% Operating profit as a percentage of operating income in the case of candidate companies or PLI 6.65% (erroneously shown by TPO as 6.15%) Operating co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etter understanding, the determination of ALP done by the TPO, we are re-formatting his work-out without substituting the corrected PLI, upto the level of arriving at the operating costs hereunder:- Operating income of assessee-company 265.83 Crores Operating cost of assessee-company 251.04 Crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; = 237.86 Crores Upto this level, the figures are exactly what has been arrived at by the TPO. Of course, we have taken 10.52% as the PLI of comparable companies, whereas, the actual PLI is 10.15%. This has been done with the purpose of making a meaningful analysis for finding out what logical error if any was committed by the TPO while working out the ALP. In our opinion, a logical error happened in the next stage, i.e. determination of non-AE cost. The non-AE costs are the costs relatable to transactions with non-Associated Enterprises and this has been taken by the A.O. as Rs. 235.29 Crores. He arrived at this amount by deducting from the operating cost of Rs. 251.04 Cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms is not relevant since, whatever the method of work-out, it all starts from PLI based on operating margins as a percentage. We, therefore, set aside the orders of authorities below and remit the issue back to the file of the A.O. for consideration afresh. The A.O. is free to get appropriate reports from TPO, which he deems necessary for the purpose. Ground of the assessee with respect to calculation of ALP is allowed to the extent cited above." 9. As mentioned in the above order, when calculating the non-AE cost, reducing the cost of raw material imported alone from the total cost, will not lead to a logical conclusion. When cost is distributed, it has to be so done evenly. TPO attributed the difference is ALP of cost entirely to the purchase of components made by the assessee from its Associate Enterprise which, in our opinion, will not give fair results. In any case, there is much strength in the argument of the learned A.R. that adjustment that can be carried out at the best is only on the proportionate sale that are relatable to the components imported by the assessee from its Associate Enterprise and not on the whole of the operational income. In the circumstances, we ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a foreign company in respect of manufacturing methods of the products and the licence granted to the assessee-company to manufacture and sell the products was treated by the Assessing Officer as acquiring of an advantage of enduring nature and thus, held it to be a capital expenditure. On the other hand, the argument advanced by the ld. AR is that those expenses for acquisition of technical know-how year after year have been held by the Hon'ble Madras High Court as 'revenue expenditure'. In this regard, reliance was also placed on the decision of Hon'ble Supreme Court rendered in the case of Alembic Chemical Works Co. Ltd v. CIT , 177 ITR 377. The ld. DR has relied on various decisions and has filed their zerox copies before us. 4. A piquant situation has arisen because it is a case where royalty was paid initially and also running expenses towards royalty are being paid year after year. As per this agreement for transfer of know-how as technical aid, initial royalty of 9 lakhs US Dollar has to be paid, and thereafter running royalty at the rate of 3.5% of the net sales is required to be paid by the assessee. We have to examine the stipulations made in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are that all drawings/specifications and other data furnished to SS were to be in English with measurement shown in the system currently used by brush but shall be the property of SS on the condition that SS shall agree to hold such property always subject to the continued fulfillment in clause 6(c), 6(d), 23 & 25 of this agreement and the period of ten years thereafter. But technical assistance contemplated in the agreement covered the establishment of the factory and the operation thereof for the manufacture of transformers of all kinds and types. Thus, the property in that case, i.e, the drawing, was transferred to Indian company and the technical know-how transferred was also for the setting up of the factory which are all in the capital field. In those circumstances, 25% of the payment had been held to be capital because only 25% of the initial lump sum and royalty payment was considered as capital. In the given case, no such property has been transferred to Indian Company nor is the technical data provided to set up the plant. Keeping in view the differential nuance of facts between the facts of assessee's case and other decisions of Hon'ble Madras High Court referred to abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion. 6. The ld.DR has relied on the decision of Hon'ble Supreme Court rendered in the case of Southern Switchgear Ltd. v. CIT , 232 ITR 359. About this decision, we have already mentioned that the facts are slightly different in that case. Similarly, the facts in the case of CIT v. W.S. Insulators of India Ltd. , 243 ITR 348 (Mad), are akin to the case of Hon'ble Supreme Court in Southern Switchgear Ltd. (supra), in which products manufactured by the assessee were to be tested by the licensor and the drawings and documents were not to be used by the licensee for the purpose other than the purpose of the agreement which was acquiring know-how and licence for manufacture of products based on drawings provided by the foreign company. In that case, it was held that payment for obtaining know-how, drawings and information is primarily a capital expenditure, but still the Assessing Officer had allowed 20% of such expenditure as revenue which was treated as attributable to technical advice regarding day-to-day operations, layout, etc. In our opinion, this decision is not directly applicable to the facts of the given case. Another decision relied on by the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
