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TMI Blog2013 (11) TMI 1238X X X X Extracts X X X X X X X X Extracts X X X X ..... o analyze the inter-company transactions in the case of the assessee by selecting GMDAT as 'tested party' as directed above, this issue is restored on the files of the TPO. - matter remanded back. - IT Appeal Nos. 3096 (Ahd.) of 2010 and 3308 (Ahd.) of 2011 - - - Dated:- 2-8-2013 - G. C. Gupta And A. Mohan Alankamony, JJ. For the Appellant : S. N. Soparkar For the Respondent : S. C. Tiwari and D. P. Gupta ORDER PER : A. Mohan Alankamony These two appeals of the assessee company are directed against the orders of the AOs u/s 143(3) r.w.s. 144C of the Act dated 20.9.2010 and 28.10.2011 for the assessment years 2006-07 and 2007-08 respectively. The above orders of the AOs were based on the directions of the Dispute Resolution Panel [DRP] dated 27.8.2010 and 27.9.2011 for the AYs 2006-07 and 2007-08 respectively. I. ITA NO.3096/A/10 - AY 2006-07: 2. For this assessment year, the assessee company ['the assessee' in short] had, in fact, raised six grounds in an elaborate and illustrative manner. However, the assessee has, subsequently, come up with its concise grounds along with an additional ground vide its letter dated 5.9.2012, according to whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory made by the assessee in respect of some items in accordance with the method of accounting consistently followed by it; - in disallowing the said amount which was the cost of inventory for which provision had been made; (7, 8, 9 10) In making a transfer pricing adjustment of ₹ 227,21,60,504/- [Rs.206 crores + 16.32 crores]; - by reducing the expenditure of ₹ 206 crores on purchase of CKD Kits by the assessee from its AEs; - by making an addition of ₹ 16,32,00,000/- with respect to its Tech. Centre operations; (11) by making an addition of ₹ 4,89,60,504/- to the taxable income with respect to royalty transaction; (12) by not providing relief on account of working capital adjustment to reflect the differing levels of trade receivables, trade payables and inventories (working capital adjustments) between the assessee and the potential comparables; (13) by not providing the assessee the benefit of 5 per cent range as provided by the proviso to s. 92 C(2) of the Act. 3. As the facts of the issues involved in these appeals being almost similar and identical, for the sake of convenience and clarity, they were heard, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the international transaction as detailed in the audit report in Form No.3CEB. The TPO had passed an order u/s 92CA (3) of the Act, proposing an adjustment of ₹ 152.44 crores thereby enhancing the income of the assessee by the said sum. In the TP proceedings, the assessee had made various submissions with regard to reduction in the expenditure on purchase of CKD Kits and services, change of tested party, partial/total disallowance of extraordinary expenses on account of adjustments made to compensate for lower capacity utilization, reduction of cost on account of lower level of indigenization, reduction in the quantum of additional marketing, advertisement, selection of companies which related to party transactions etc. In respect of Tech. Centre operations also, various submissions were made with respect to selection of comparable companies with different business profits, use of single year data for the purpose of comparison, claim of benefit of 5% range and other objections. The TPO dealt with each issue and other objections in his order and made an adjustment of ₹ 33.49 crores in purchase of CKD kits and services and ₹ 19.66 crores in Tech. Centre operations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the main issue raised in Ground Nos. 7, 8, 9 11 and Gr. Nos.7, 8, 9 10 for the AYs. 2006-07 and 2007-08 respectively are taken up for adjudication, as under: 9. It was the contention of the assessee before the TPO/DRP that the functions performed by GMDAT include designing and developing of CKD kits and components, research and development from time to time, production of the CKD Kits and components required by CKD Assemblers, procuring CKD Kits and components from third parties, quality control and testing as necessary in respect of manufactured and procured CKD Kits and components, packing, storing and shipping of the CKD Kits and components to CKD Assemblers based on the purchase orders. GMDAT owns routine tangible assets like fixed assets, inventory and accounts receivables. It has the requisite infrastructure such as land and buildings, machinery and tools for manufacturing of kits. It also owns manufacturing facilities such as necessary manufacturing equipment and tools. 9.1.1 A comparative chart giving functions performed by the assessee and GMDAT was produced to make an impact that the assessee carries the entrepreneurial role in relation to sale of GM Cars in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by M M and, hence, Force Motors Limited should be considered as comparable. It was pointed out that during the year, Force Motor Limited utilized 57.89% capacity with respect to on-road automobiles having 4 or more wheels, imported certain technology for manufacture of cars and spent considerable sum on R D. 9.1.5 Hindustan Motors Limited is the well known brand in the Indian market and during the period under consideration, Hindustan Motors Ltd has imported certain technology for manufacture of cars, has reported export earnings, launched new products and made a profit of ₹ 12.78 crores before tax. Merely on account of losses, it cannot be rejected. 9.1.6 It was argued before the authorities below that if stringent comparability analysis as adopted by the TPO were to be adopted, M M should also be put to such stringent comparability criterion. M M is also involved in the manufacture of multi utility vehicles, light commercial vehicles as well as three wheelers apart from passenger cars. If Force Motor Limited is to be rejected on the basis of different product profile, M M should also be rejected on the same basis. A comparative chart is as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ...The tested party has to be participant in the controlled transaction whose operating profit attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustment and for which reliable data regarding uncontrolled comparables can be located. Consequently, in most cases the tested party will be the least complex of the controlled tax payers and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. As GMDAT is not only a complex entity owing valuable intangibles, the data for comparability of GMDAT or the comparables is also not available. It was stated that in case Mahindra Mahindra Ltd is taken as a comparable then Force Motors Ltd., being functionally similar, should also be taken as a comparable with General Motors as its sales growth is almost NIL whereas General Motors is showing growth well above the industry standard in the last few years. For F Y 2007, 2008 and 2009, Force Motors is showing net losses. The company is not financially stable; it is not treated as comparable. Force Motors is never considered as a part of industry wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rplay the functions actually performed by the assessee vis- -vis GMDAT. 10.1.2 The functions performed by the assessee and GMDAT with respect to purchase of CKD kits and components are provided as under: 10.1.3 GMDAT is the successor to Daewoo Motor Company which was originally established in 1965 as Shinjin Motors and in 1972; Shinjin Motors entered into a joint venture with GM and changed its name to General Motors Korea and later on in 1976 to Saehan Motor. In 1982, when the Daewoo Group gained control over the company, the name was changed to Daewoo Motor Company. It was, further, submitted that the Daewoo group of companies which included many businesses of which Daewoo Motor Company was one, went bankrupt in Asian financial crisis and in 2002, the trade and assets of Daewoo Motor Company were purchased by General Motors. GMDAT at that time was owned 55.4 per cent by third parties and 44.6 per cent by GM. 10.1.4 The company develops, manufactures and markets passenger vehicles and associated replacement parts and accessories. It owns and operates four manufacturing facilities, a R D Centre and a design centre in Korea. The shareholding pattern of the company for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly the key components where the significant portion of the automobile parts are indigenized; (vii) That at a start of each financial year, a price-walk is performed and a pricing approach is then established based on budgeted costs and revenues of the parties involved. Pricing of CKD Kits follow cost plus mark-up based approaches internally referred to as 'fully costed prices'; (viii) That under this method, the transfer prices of CKD Kits consist of the following components: (a) cost of supplying in-house parts plus a 8 percent markup; (b) cost of purchasing parts from outside vendors plus a 4 percent markup; (c) cost of consolidating and packaging into CKD Kits plus 5 percent mark-up; (d) market adjusted prices; (ix) That in cases where the fully costed pricing cannot be adopted, then the market adjusted prices were used. This was a market based approach since market conditions were also considered for determining the transfer prices. In such a scenario, GMDAT and CKD Assemblers negotiate the final transfer price having regard to the market conditions and other macro economic factors in the CKD Assembler's jurisdiction; (x) As regards to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of GMI (the assessee) as the tested party, the learned Sr. Counsel submitted that - (i) GMI acts as an entrepreneur in relation to sale of GM Cars in India undertaking full risks is in this regard. On the other hand, GMDAT act as a contract manufacturer undertaking limited risks and owning routine intangibles; (ii) GMI is entirely responsible for the sale of cars assembled by it in India. Towards this end, GMI markets the cars through its extensive network of dealers throughout the country; (iii) GMI is also involved in supply chain management including identifying the market opportunities, purchasing, designing, logistics, production, research and development, assembling, distribution, marketing, finance and sale of finished products; (iv) GMI's profitability is impacted by a number of factors including external market conditions, market competition etc., it is difficult to accurate adjustments to make such data comparable to that of the comparables; (v) Indian transfer pricing regulations do not stipulate use of only Indian company as the tested party; (vi) Thus based on the above, it was concluded that GMDAT carries out limited functions in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in its transfer pricing documentation had selected GMDAT as the tested party as GMDAT with respect to its transaction with GMI is engaged in manufacturing and supplying CKD Kits and components and in other words, GMDAT acts as an Original Equipment Manufacturer [OEM] for GMI and, therefore, the functional profile of the comparables should also be same as that of GMDAT etc., it was submitted that all the comparable companies selected by the assessee were functioning as OEM of automobile components, spares and accessories and, therefore, they were comparable to GMDAT with respect to the international transaction relating to manufacture and supply of CKD kits and components. Hence, based on the above, it is reasonable to conclude that the argument put-forth by the revenue is erroneous and without any rationale whatsoever. 10.1.11 With regard to the Revenue's concern over the geographical variances between the comparable companies selected which were operating out of Asia Pacific region and the tested party which is operating out of South Korea region, the assessee contended that it had submitted a set of 27 comparable companies operating out of South Korea region, only which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the financial information submitted for the comparable companies and till the time those financial statements enable the TPO to reliably compute the profit level indicator and there should not be any concern whatsoever. 10.1.15 Rejecting the Revenue's allegation that sufficient financial data was not available for the tested party, it was submitted that the segmental financial data for benchmarking a part of GMDAT's business which relates to manufacturing and sale of CKDs to the assessee was furnished to the TPO and on his request, the financial statement of GMDAT (at company level) was also furnished. 10.1.16 With regard to the averment of the TPO as well as the DR during the course of hearing proceedings that the segmental financial statement of GMDAT was not reliable, the learned Sr. Counsel reiterated that the segmental data relied upon for benchmarking international transactions relating to import of ACKD Kits and components was completely reliable and was based on sound allocation keys. In this regard, it was submitted that a review was done for GMDAT's segmental profitability in relation to export of CKD Kits and components to the assessee and the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (ii) Development Consultants (P.) Ltd v. Dy. CIT [2008] 23 SOT 455 (Kol.); (iii) Star India (P) Ltd. v. ACIT [IT Appeal No. 3585(M) of 2006, dated 28-5-2008]; (iv) Ankit Diamonds v. DCIT [8 ITR (Trib) 487]; (v) Technimount ICB Pvt. Ltd v. ACIT [ITA No.7098/Mum/2010]; (vi) Destination of the World (Sub-continent) Pvt.Ltd [ITA No.534 (Delhi Trib) 2010 AY 06-07]; (vii) Addl. CIT v. Tej Diam [2010] 37 SOT 341 (Mum); (viii) Twinkle Diamond [ITA No.5033/Mum/07] 10.1.21 In conclusion, it was emphasized that in view of the specific requirements of Indian TP regulations, OECD Guidelines and existing judicial precedents on the issue, transaction-by-transaction approach should be preferred over aggregation approach. Therefore, based on the above considerations, it is reasonable to conclude that GMDAT should be selected as the tested party for analyzing the inter-company transactions. 10.1.22 To drive home his points, the learned Sr. Counsel sought to place reliance on the following case laws: (i) Mastek Limited v. Addl. CIT in ITA No.3120/Ahd/2010 dated 29.2.2012; (ii) AIA Engg. Ltd v. Addl. CIT 2012 50 SOT 134; (iii) Development Consultants (P.) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f AE has not been produced before the TPO. The assessee has not been able to submit any reliable segmental data or reliable basis on which the global accounts have been segregated and the accounts with respect to Indian transactions have been prepared. Hence, it was claimed, the data utilized by the assessee in respect of the tested party is unreliable and unsubstantiated. If the assessee is to choose its tested party, it has to make available correct, verifiable and validated data in respect of such tested party. From the functional analysis of the assessee as well as GMDAT, it is clearly brought out that GMDAT is a far more complex entity catering to a number of subsidiaries, having plants at multiple locations, intangibles on which royalty is being paid even by the Indian company. The annual accounts filed by the assessee reveal the complex nature of operation of the AE as against the simple manufacturing function of the Indian party without owning any distinct intangibles. With operations across multiple geographies and substantial related party transactions, GMDAT not only fails the test of minimum adjustments but is clear that it is not possible to estimate the degree of adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gle set of data for comparison with a Korean company without any adjustment in margins. It is clear that sufficient financial data is not available either in the case of the tested party or in the case of selected comparables. 10.2.5 To strengthen his stand, he had placed strong reliance on the following case laws, namely: (i) Onward Technologies Ltd. (supra) (ii) Aurionpro Solutions Ltd. (supra) 11. We have carefully considered the rival submissions, perused the relevant materials on record and also voluminous evidences produced by either party in the shape of Paper books. 11.1 We shall now proceed to peruse the judicial views on the issue. The case laws relied on by the assessee is as under: (i) Mastek Ltd. (supra) In this case, the question came up for consideration before the earlier Bench of this Tribunal was as to whether a minute examination of functional profile is necessary for the selection of comparables and the answer given was that functional profile must be first examined and after that proceed to select the comparable. In this case, the comparables chosen by the assessee were discussed by the TPO and those were discarded for the basic reason that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct distribution whereas the TPO was of the view that the AE was nothing but 'front office' of the assessee and simple engaged in marking activity. In this context, we are of the view that in order to determine the most appropriate method for determining the arm's length price, first it is necessary to select the 'tested party' and such a selected party should be least complex and should not be unique, so that prima facie cannot be distinguished from potential uncontrolled comparables. We are in agreement with the findings of the earlier Bench (supra) that such a selected party should be least complex and should not be unique. (ii) Development Consultants (P) Ltd. (supra) followed by Sony Indis (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi) The issue before the Tribunal was that the CIT (A) had confirmed the adjustments to the international transactions of the assessee with its AEs based at Bahamas, USA without considering the submissions and the financial of the AEs explaining the facts etc. In case of the merits of the case for international transactions entered by the assessee with TKC, the submission made on behalf of the assessee was as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one party to the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. It is also true that generally least of the complex controlled taxpayer should be taken as a tested party. But where comparable or almost comparable, controlled and uncontrolled transactions or entities are available, it may not be right to eliminate them from consideration because they look to be complex. If the taxpayer wishes to take foreign AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. The taxpayer is not then entitled to take a stand that such data cannot be called for or insisted upon from the taxpayer. In substance, a foreign entity (a foreign AE) could also be taken as a tested party for comparison. 11.2 At this juncture, we would like to refer to the Uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned DR that the assessee had not furnished any financial information of the comparable companies. 11.2.2 The United Nation's Practical Manual on Transfer Pricing also contradicts the TPO's argument that GMDAT should not be selected as the tested party as the comparable companies selected by the assessee doesn't fall within his jurisdiction and he can neither call for any additional information nor scrutinize their books of accounts etc., 11.2.3 However, we find inconsistency in the stand of the TPO to the effect that while rejecting the assessee's approach for selecting GMDAT as the tested party by citing a reason that there was no reliable data available for both GMDAT and comparables and, therefore, GMDAT cannot be taken as the 'tested party', however, on the same breath, as rightly highlighted by the assessee, the TPO had taken GMDAT as the tested party while making adjustment to transaction relating to payment of royalty by GMI to GMDAT. 11.2.4 Rebutting the Revenue's allegation made during the course of proceedings that the segmental financial statement of GMDAT was not reliable, the assessee reiterates that the segmental data relied up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained . 11.3 We shall now peruse the case laws on which the learned DR had placed reliance in the findings of the Hon'ble Mumbai Tribunals in the cases of (i) Aurionpro Solutions Ltd. (supra) and (ii) Onward Technologies Ltd. (supra). (i) In the case of Aurionpro Solutions Ltd. (supra), the issue before the Hon'ble Bench was that the assessee engaged in the business of software development and web designing services and that the assessee had lent loans to its AEs stationed at USA, Singapore and Bahrain. The assessee had claimed that the said loans as working capital advanced to its 100% subsidiary outside India. When the issue was referred to TPO, the TPO took a view that as in a third party comparable situation, advances would bear interest and, therefore, need to charge a markup as per CUP method. Accordingly, the TPO proposed to benchmark the loans at dollar denominated LIBO [London Inter Bank Operative] rate plus mark up of 3%. When the issue landed up before the DRP, the DRP had, after analyzing the issue, directed the AO/TPO to compute the interest on loans to AE @ 14% per annum thereby enhanced the transfer pricing adjustment. Aggrieved assessee took up the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction' u/s 92B and rule 10B redundant. This is patently an unacceptable position having no sanction of the Indian transfer pricing law. Borrowing a contrary mandate of the TP provisions of other countries and reading it into our provisions is not permissible. The requirement under our law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to as prescribed. This contention is, therefore, repelled. With have duly perused the findings of the Hon'ble Bench cited supra. In this connection, we would like to point out that various Tribunals have taken divergent views in respect of selection of 'tested party'. To illustrate, the earlier Bench of this Tribunal in the case of Mastek Ltd. (supra) had stressed that (at the cost of repetition) we are of the view that in order to determine the most appropriate method for determining the arm's length price, first it is necessary to select the 'tested party' and such a selected party should be least complex and should not be unique, so that prima facie cannot be distinguished from potential uncontrolled comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e data for comparability of GMDAT or the comparable is also not available. 11.5.2 This view of the DRP has been denied by the learned Sr. Counsel during the course of hearing which has not been contradicted by the Revenue with any documentary evidence. 11.6 To sum up, it was the argument of the assessee that if stringent comparability analysis as adopted by the TPO were to be adopted, and then M M should also be put to such a stringent comparability test. It was, further, argued that M M is also involved in the manufacture of multi utility vehicles, light commercial vehicles as well as three wheelers apart from passenger cars. It was, further, countered by the assessee if Force Motor Limited were to be rejected on the basis of different profit profile and then M M should also be axed on the same logic. We find force in the above argument of the assessee. According to the assessee, GMDAT is only engaged in manufacturing and supply of certain components used in manufacturing of cars only. This has not been disputed by the revenue. 11.6.1 We are in disagreement with the revenue's argument that GMDAT should not be selected as a 'tested party' as the comparable as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of lease-hold land. The lease-hold land was initially acquired under a lease agreement by Hindustan Motors Limited from Gujarat Industrial Development Corporation. Subsequently, the land was assigned by HML to the assessee vide assignment deed. By virtue of such an assignment, according to the assessee, the assessee has only got right to use the lease-hold land for the purpose of its business. The assessee has the right for the possession and use of land till the expiry of the said lease period. However, the AO had disallowed the amounts claimed by the assessee by following the decision of the earlier Bench of this Tribunal in the assessee's own case for the AYs 1997-98 and 98-99. The DRP upheld the disallowance by placing reliance in the case of United Phosphorus Ltd. v. Jt. CIT [2002] 81 ITD 553(Ahd.). 12.1 Before us, the learned Sr. Counsel submitted that the Hon'ble jurisdictional High Court in the case of Dy. CIT v. Sun Pharmaceuticals Ind. Ltd. [2010] 329 ITR 479 (Guj.) on similar facts ruled in favour of the assessee. A SLP filed by the Revenue against the said ruling was also dismissed by the Hon'ble Supreme Court vide Spl. Leave Appeal (Civil) CC 19002/200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was claimed by the assessee that the expenses incurred duly satisfy the conditions stipulated in s. 37(1) of the Act as the same were neither in the nature of capital nor personal. It was, further, claimed that the expenses were incurred for maintaining and furthering good and cordial business relationship with its business associates including the employees and promoting the business activities of the assessee on an on-going basis. It was, further, justified that the practice of giving such gifts is customary and unavoidable having regard to the competitive environment the assessee operates in and the same of utmost requirement to enable smooth running of its business so as to generate goodwill etc. It was asserted that the expenses have since been incurred wholly and exclusively for the purposes of the business, the assessee had satisfied the conditions stipulated in s. 37(1) of the Act. To strengthen its argument, the assessee sought to place reliance on the various judicial pronouncements including the following case laws: (i) S.A. Builders Ltd v. CIT 288 ITR 1 (SC); (ii) CIT v. S L M.Maneklal Industries Ltd [1977] 107 ITR 133 (GUJ); (iii) Karjan Co-operative Cotton S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the Tribunal's order in the assessee's own case for the AYs 1997-98 98-99 wherein it was held that the market value of the wastage/obsolete materials should be included for calculating the total income. 14.2 The DRP, on its part, rejected the assessee's objection on the premise that the assessee had not led any evidence that the findings of the jurisdictional Tribunal has been challenged or reversed by the Hon'ble High Court. 14.3 During the course of hearing, the submissions of the learned Sr. Counsel are summed up as under: (a) That according to the regular accounting method followed, the closing stock of inventories is valued at cost or market value whichever is lower; (b) That a provision was, therefore, created for inventory which is identified as slow moving or obsolete. The slow moving/obsolete inventory level is determined through SAP as per the uniform policy adopted for identification of such inventory and it does not involve manual intervention. There are over 24000 different parts required in assembly of a single car and it is practically not possible to determine the market value of each and every part as and when the parts are identifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... added back. The disallowance has been made on the ground that the market value of the obsolete stocks needs to be added as directed by the Hon'ble Tribunal for the AYs. 1997-98 and 98-99.The AO had, erroneously assumed that the entire sums of ₹ 2.5 crores and ₹ 2.44 crores represent the market values of the inventory and had failed to appreciate that the above amounts represent the cost of inventories to the assessee and not the market value thereof. Even if any addition can be made for the market value of such obsolete inventories, it was evident that proposed disallowances of ₹ 2.5 crores and ₹ 2.44 crores were unjustified as that values represent the cost and not the realizable value/market value of such obsolete stocks; (g) That the Hon'ble Bench had held that the market/scrap value of obsolete stock should be included for computing the total income and, accordingly, the AO was directed to adjudicate the issue afresh. The AO had granted relief to the assessee as per the directions of the Tribunal for the AYs 1997-98 98-99 after taking into consideration the realizable value estimated and assigned to scrap which had already been accounted fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irections of DRP are extracted as under: 73.4.11. Further, vide supplementary submissions filed on 10th June, 2010 with the Panel, the assessee has submitted a chart showing movement of slow moving/obsolete inventory under various heads for the previous years ended March 31, 2005 and March 31, 2006 indicating that there has been a net reversal of provision amounting to ₹ 1,16,35,084/- during the financial year 2005-06 as summarized below. Increase in provision amounting to ₹ 2,50,68,560/- under the sub-head 'Inventory vehicles-excess obsolete basic' Reduction of provision amounting to ₹ 3,67,03,644/- under the sub-head 'Inventory P A - excess and obsolete'. It has been submitted that the AO has proposed to disallow the incremental provision, without considering the reversal of provision amounting to ₹ 3,67,03,644/- on other items. It has been submitted that in case the addition in respect of slow moving/obsolete stock is sustained in principle, then without prejudice to the claim of the assessee, a further deduction of ₹ 3.67 crores (being provision reversed during the year which have been disallowed in earlier year(s) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e P L account had already been disallowed in earlier year(s) and the same having been verified and accepted by the AO himself in the remand report furnished before the DRP. 15.2 1 The learned DR present was also heard. 15.3 We have carefully considered the submission of the learned Sr. Counsel on the issue. Ironically, the DRP took a stand by citing the findings of the earlier Bench of this Tribunal for the AYs 1997-98 and 98-99 (supra) that the market value of such obsolete material as on 31st March 2006 is to be taken and added to the total income. However, the learned Sr. Counsel for the assessee stated that the AO granted relief to the assessee as per the directions of the ITAT for the AYs 1997-98 and 98-99 after taking into consideration the realizable value estimated at ₹ 2,38,549/- and ₹ 82,120/- assigned to scrap for AYs 97-98 98-99 respectively which had already been accounted for in the books of account and no further adjustment was made while giving effect to the order of the ITAT for those assessment years etc. [Refer: AR's written submission dated: 19.6.2012 on page 10] This fact has not been disputed by the Revenue. 15.4 Taking into consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the DRP for relief. The DRP had, after due consideration of the assessee's contention as recorded in its direction, confirmed the addition for the reasoning that - 73.3.7....The assessee has not submitted any cogent reason as to why there is such abnormal increase in said expense as compared to last year. Further, the AO has given a finding that the entire expense on this account is not verifiable 16.3 We have carefully considered the submissions made by the rival parties during the course of hearing. 16.3.1 At the outset, we would like to point out the prime reasoning for the AO to resort to make an ad-hoc disallowance of 10% was that he had compared the expenses claimed for the AY under dispute with that of the expenses incurred for the AY 2002-03 and came to a conclusion that there may be a possibility of inclusion of certain expenditure for non-business purposes too. The logic adopted by the AO in making such an ad-hoc disallowance, in our considered view, was not on a sound footing. The assessee had, in fact, attributed the increase in expenditure due to increase in the work force [precisely from 1649 to 1882 employees] during the year under considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81 (Mum.) (b) Capital IQ Information Systems (India) Pvt. Ltd v. DICT ITA No.6961/Hyd/2011 dated 23.11.2012. (ii) Powersoft Global solutions Limited: Since this company is engaged in diversified business operations and all these services apart from engineering services are functionally different from the assessee. Comparables rejected by the TPO: 17.2 The submissions of the assessee are under: (i) Onward Technologies Ltd: The TPO had rejected Onward stating that the company had related party transactions of 65 per cent of sales. In this regard, it was submitted that the TPO erred while not considering the consolidated results; that in preparing the consolidated statements, the profit made on inter-company transactions would be eliminated and, therefore, the margins earned in the inter-company transactions would be totally eliminated in the consolidated financial states. Thus, the result from consolidated P L account of the company has been used for the purpose of benchmarking the engineering services of the assessee. Thus, the TPO had erred in making an erroneous observation and, accordingly, Onward requires to be considered as a comparable. (ii) Pentasoft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in providing life cycle management technology services and that it has more than 7 per cent handling and distribution expenses and also has related party transactions and, therefore, it is functionally different from the business of the assessee. Assessee's submission: 17.4 It was, however, asserted that as per the annual report of the company, the company's business operations is related to engineering services and that its marketing expenses in the FY ending 2007 was only 3.31 percent of total revenue which was a part of business activity like any other company who incurs such expenses to boost their product sales and expand their business operations etc. 17.5 Thus, the TPO had erred in stating that the company is having more than 7 per cent handling and distribution expenses thereby classifying it as in different function segment of carrying out its marketing activities. 17.6 Moreover, the subsidiary companies of Tata Technologies are also engaged in rendering engineering services which is in alignment with the functions performed by the assessee. Since the international transactions are undertaken with a subsidiary engaged in similar operations, consolidat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en that there is functional similarity between the two companies. Hence, the reliance placed on Bindview India (P.) Ltd. [ITA NO.1386/PN/10] by the assessee is liable to be rejected; (d) That the assessee had termed that Rolta is a company with abnormal margins. In the case of SAP Labs India (P.) Ltd. [ITA No.398/Bang/20], the margin was 72% and in the case of Saunay Jewels Pvt. Ltd, the margin was 53.81% and, thus, the margins in those cases were in the range of 54% to 72% which have been found to be high by the Hon'ble Tribunal(s). However, the margin of Rolta India Ltd being 38.79% as adopted by the TPO which doesn't come in the ambit of exceptionally high margin. Moreover, in many cases, the Benches of the Tribunal have held that high profitability of a company cannot be a ground for its exclusion from comparable and, thus, Rolta India Ltd is found to be a comparable one. (ii) Powersoft Global Solutions Limited: (a) That the company is engaged in CAD/CAM/GIS/other design services and offers a proper comparable for the assessee. Hence, the plea of the assessee that the company is not functionally comparable is incorrect and is liable to be rejected. (B) Rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not put forth any arguments with regard to Ace Software Exports and KLG Systel Limited. 17.8.2 The assessee had identified itself as low-end engineering and R D work and a small markup of 7% was given for its work. However, the TPO analyzed the selected parties and rejected for the reasons recorded [which have been cited supra] the following companies: (i) Onward Technologies Limited; (ii) Pentasoft Technologies Limited; (iii) Tata Technologies Limited 17.8.3 However, it was contention of the assessee that the TPO erred while stating that assessee's tech-center is engaged in providing high-end research services. Tech-Center is essentially engaged in provision of engineering design and analysis of automobile parts, assemblies and manufacturing tools. This entails provision of computer-aided design and data translation services. Such services involve product assembly documentation, exterior and interior surfacing / designing, 3D modeling and 2D drawings etc. 17.8.4 It was further submitted that Tech-Center focuses mainly on providing routine services in relation to next generation materials, designs, manufacturing processes. Primary research and development of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tails as to why the companies quoted it should be taken as comparables and also as to why the companies selected by the TPO cannot be as comparables so as to enable the TPO arrive at a conclusion as directed by us supra. It is ordered accordingly. Gr. No.10 Non-providing the assessee the benefit of 5 per cent Gr.No.13. range as provided by the proviso of s. 92C(2) of the Act for the AYS 2006-07 2007-08: 18. Even though the assessee has consistently raised this issue before the DRPs, neither the TPO nor DRPs have dealt with the issue. 18.1 Before us, it was pleaded that the AO/TPO be directed to provide the benefit of 5 per cent range as provided by the proviso to s. 92C(2) of the Act. The learned DR present was heard. 18.2 We have carefully considered the submission of both the parties on the issue and also perused the provisions of s. 92C (2) of the Act. For ready reference, the relevant portion of s.92C (2) is reproduced as under: 92C(1) (2) The most appropriate.... Provided.... Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty payment to gross selling price is not correct way of comparing prices. Accordingly, the adjustment to royalty payment was determined at ₹ 4,89,60,504/-. 19.3 Being aggrieved, the assessee took up the issue, among others, before the DRP and contested the TPO's working. As usual, the DRP sustained the TPO's stand with its inexplicable way that In view of independently comparable agreement which resembles the assessee's agreement for payment of royalty, the order of TPO does not merit any interference. 19.4 Before us, it was contended on behalf of the assessee that in both the agreements, namely Delphi-Jinzhou agreement and Namyang-Henglong agreement, 'the licensed product' is only for a single component/parts of the vehicle and not the entire vehicle which is in contrast to the TLA between GMDAT and GMI. According to the assessee, the agreement between GMI and GMDAT was Automotive agreement for manufacturing of complete vehicle, according to which, GMDAT to provide technology to GMI in relation to manufacture, assemble and market GMDAT's project J200 right-hand 4 door notchback vehicles, accessories and parts in India and other countries. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalysis irrelevant. In conclusion, it was submitted that there were material differences between the third party agreements being compared by the TPO which was only for a single component/parts of the vehicle as compared to the agreement of the assessee with GMDAT which was for the entire vehicle. Therefore, it was inappropriate on the part of the TPO to compare the agreement between GMDAT and the assessee with agreements between third parties. 19.6 On the other hand, the submissions of the Revenue are summarized as under: (a) That there was no change in tested party. The only change was the comparable used. While the assessee had used an internal CUP whereas the TPO had used external CUP; (b) That the assessee had wrongly stated that the royalty rate in the Isuzu agreement which has been adopted as CUP by the assessee at 5%. The royalty rate was JPY 25000 per licensed vehicle or 5% whichever is low and such a rate comes to around 1.2% of net sales value of licensed vehicle. Since the JPY 25000 per licensed vehicle was lower of the two figures, this constitutes the actual royalty payment and not 5% as claimed by the assessee and hence, even by the assessee's own CUP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted at ₹ 7.5 lakhs, the royalty rate would be merely 1.2% which should have been adopted as the CUP rate in the case of the assessee. 19.10 In conclusion, it was submitted that the TPO had rightly selected the two comparables and had rightly rejected the GMI -Isuzu agreement as a proper comparable. 19.11 We have carefully considered the lengthy submission made by the assessee which has been equally refuted by the revenue by its elaborate submission. 19.12 On considering the contentions of the rival parties, it is observed that the tussle between the parties has been narrowed down to the issue of comparing of the agreements. The assessee had taken the agreement entered into between the assessee and Isuzu and treated as CUP whereas the TPO had as CUP the agreements of (i) Namyang-Henglong; and (ii) Delphi-Jingzhou. This has been assailed by the assessee for the reasons narrated above. The agreement entered into by the assessee as well as the agreements of unrelated parties referred to by the TPO contained [terms and conditions] the nature and scope of services involved which required to be examined. The DRP had, without involving itself in analyzing the contentions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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