9911796707
TMI Blog2014 (11) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed by the learned AO under Section 143(3) read with Section 144C of the Act is bad, both in the eyes of law and on facts. 2. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in assessing the income of the assessee at Rs. 25,30,50,980/- as against loss of Rs. 133,85,69,659/- declared by the assessee. 3. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in rejecting the books of accounts of the assessee despite the same being maintained properly and duly audited. 4.i. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in making an addition to the profits of the assessee at an amount of Rs. 86,58,81,600/-. ii. That the above said amount has been arrived at most arbitrarily taking an ad-hoc profit of Rs. 3,200/- per bike, without there being any basis for the same, indulging in conjecture & surmises. iii. That without prejudice to the above and in the alternative, the learned AO has erred both on facts and in law in making various additions and disallowances in addition to the adhoc addition made on account of profits as above. Once such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the TPO having failed to determine the ALP for different nature of transaction is bad and liable to be ignored. 9. Without prejudice to the above and in the alternative the comparables used by the TPO are wrong and unreasonable. 10. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in not allowing set off of the brought forward losses pertaining to the assessment years 2001-02 to 2006-07 and unabsorbed depreciation pertaining to assessment years 1997-98 to 2006-07. 11. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in charge interest under Section 234B of the Act. 12. The appellant craves leave to add, amend or alter any of the grounds of appeal." 2. Grounds No. 1, 2 and 12 are general in nature and do not require any adjudication. 3. It was submitted by the learned AR that grounds no. 3, 4, 5 and 10 are covered in favour of the assessee by the decision of ITAT in assessee's own case for assessment year 2006-07 which has been followed also by the ITAT in assessment year 2003-04 and 2004-05. 3.1 The learned DR was not having any contrary view and agreed with the contention o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer rejected the books of account of the assessee and estimated the profit per bike at Rs. 3,200/-. He multiplied it by no. of bike sold (2,70,588) and thus added a sum of Rs. 86,88,81,600/-. 7. The profit on sale of a bike was taken at Rs. 3,200/- because it was the average profit per bike of Hero Honda Motors. Books of account were rejected because the similar rejection was made in AY 2006-07. In nutshell, the AO followed the order of his predecessor in this respect. 8. CIT(A) has deleted the addition under this head for the AY 2006-07, which is contested before the ITAT. The appeal before ITAT is pending. Under these circumstances, we prefer not to interfere with the order of the AO." 3.5 Thereafter the AO passed the final assessment order dated 31.10.2011 reiterating the same observation in Para 4 which he made earlier in the draft assessment order in Para 3.4. 3.6 We find that in assessment year 2006-07, the Revenue aggrieved with the order of the CIT(A) had filed the appeal. However, the ITAT approved the order of the CIT(A). The relevant finding of the ITAT reads as under :- "10. Thus, it is seen that apropos the first ground for rejection of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld.CIT(A) held and, in our considered opinion, for the aforegoing discussions, correctly so, that the Assessing Officer had erred in concluding that there had been a difference in the sales and quantitative details of the assessee. 11. Coming to the second ground for rejection of the books of account, the Assessing Officer had observed that the average sales of motorcycles by the assessee during the year was low, as compared to the preceding assessment year. The Assessing Officer, on figures discussed, had computed a suppression of sale value by Rs. 1,461 per motorcycle. This amounted to a total alleged suppression of Rs. 33,77,32,063/-. The ld.CIT(A) noticed that in response to this query by the Assessing Officer, the assessee had replied vide letter dated 23.11.2009, whereafter, no further query was raised by the Assessing Officer in the show cause notice dated 11.12.2009, but in the assessment order, the said reply of the assessee had been totally ignored and the Assessing Officer had, referring to other nonrelevant replies of the assessee company, drawn an adverse inference against the assessee. This fact of reference to a wrong reply of the assessee was nowhere rebutted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it at Rs. 470 per motorcycle, where, on applying a rate of Rs. 4,000/- to 2,65,212 motorcycles sold by the assessee during the year, estimated a profit of Rs. 106,08,48,000/-. The reasons for the loss suffered by the assessee company, as contended, were low market share, low capacity utilization, very high debtors' turnover ratio, high inventory ratio, shift in technology, higher personnel cost due to VRS and labour unions problem, advertisement and publicity cost, high material cost due to low volumes and high overhead cost because of dealer network and after sales service, etc. The Assessing Officer, it was taken note of by the ld.CIT(A), had totally ignored all these contentions of the assessee and in the remand reports, he had not been able to rebut any of such contentions. These contentions were dubbed by the Assessing Officer as being general in nature. No other comment was made. The ld.CIT(A) held such an approach to be no correct. Before us, nothing has been brought to support this action of the Assessing Officer. Obviously, profit can only be made when there is ability to do so. The factors pointed out by the assessee for not being able to make sales, have not been refuted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted by the assessee had also not been found by the Assessing Officer to contain any discrepancy. In the remand report dated 22.09.2010 also, the Assessing Officer was not found to have entered any rebuttal to the assessee's contentions. After rejoinder to the remand report even in the second remand report, the Assessing Officer was found to have passed only peripheral orders of estimation of profit without answering the assessee's submission. It was on this that the ld.CIT(A) correctly held that in absence of material, the Assessing Officer could not tinker with the price determined by the TPO. 15. It has gone unrebutted before us also, that if the contention of the Assessing Officer were to be accepted, the whole purpose of determination of arm's length price by the TPO would get defeated. To reiterate, the TPO has accepted, vide order dated 13.11.2009 (supra), the prices of export shown by the assessee to be at arm's length. 16. In view of the above, even on this score, the rejection of books of account of the assessee by the Assessing Officer does not hold good and such action of the Assessing Officer has correctly been cancelled by the ld.CIT(A). 17. For the above disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bservation in paragraph 5.1 as he has made in paragraph 4.1 of the assessment order. The relevant para of Assessing Officer's order on this issue are 5.1 to 5.4. 4.4 Thus it is evident from the above that the addition has been made relying upon the finding in the assessment order for the assessment year 2006-07. The Revenue's appeal for assessment year 2006-07 on this ground was rejected by the ITAT with the following observations :- "24. We do not find any error, as seen above, in the order of the ld.CIT(A) in this regard. It cannot be gainsaid that any expenditure incurred wholly and exclusively for the purposes of business is an allowable expenditure, even though, as in the present case, the payment is made to a 100% shareholding company of the payer. That apart, u/s 40A(2) of the Act, it is only the fair value of such expenditure, which is allowable. Besides, the arm's length price provisions take care of the payment in such transactions being at arm's length, as has been done in the present case by the TPO. The Assessing Officer proceeded merely on assumptions, surmises and conjectures which, undeniably, can never substitute hard evidence, which is entirely absent here. Neit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary verification in this regard with suitable direction. The question which looms large before me is as to whether the contention of the assessee about YMC holding 74% shares on 26.5.2000 should be accepted without any further verification or the matter should be sent back to the Assessing Officer for a de novo examination. In this regard, it is relevant to note that when the A.O raised query as to why brought forward loss should not be disallowed, the assessee submitted its reply, the relevant part of which is on page 536 of the paper book. The following is the extract of the reply advanced by the assessee before the Assessing Officer: "In this regard, we would like to mention that initially the Assessee Company was incorporated as a 50:50 joint venture between Escorts Ltd. and Yamaha Motor Co., Ltd, Japan (YMC) in 1995. On may 26, 2000, 64,80,000 equity shares of the Assessee Company representing 24% of its total issued and paid up equity share capital were transferred by Escorts Ltd. in favour of YMC. Accordingly, with effect from May 26, 2000, the equity shares of the Assessee Company were held by 70,20,000 equity shares representing balance 26% of the total issued and pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation (Ground No. 11) No further comments is required on this issue, as the assessee has only reiterated its earlier contentions, which has been duly answered to in the Assessment Order." 2.8. There is no dispute on the legal position that on YMC holding 74% shares of the assessee company on 31.3.2001 and continuing to hold so up to 31.3.2006, there can be no bar on the claim of set off of brought forward loss for the assessment year 2001-02 against the income for the assessment year 2006-07. From the above narration of facts, it is palpable that the Assessing Officer got three opportunities to examine the assessee's contention about YMC acquiring further 24% shares on 26.5.2000 apart from its original holding of 50%., firstly during the course of assessment proceedings and then during two remand proceedings. The assessee's pointed submission in this regard came to be rejected by the Assessing Officer during the original assessment proceedings without any reason worth the name and the same position continued during the two remand proceedings as well. It is trite that when an assessee furnishes an explanation on a specific query, the same is treated as accepted unless some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1997-98 to 2006-07. Accordingly this ground no.10 is allowed. 6. Ground no.6 to 9 are regarding adjustment of Rs. 51,58,00,000/- made by the AO by adjustment to arm's length price in respect of the motor bike exported by the assessee company to its associated enterprises. During the year under consideration the assessee has entered into following international transactions with its associated enterprises:- S.No. International Transaction Method used by the assessee Amount (in Rs.) 1. Import of components/ spare parts from AEs CPM 21,80,38,285 2. Import of capital goods from AEs CPM 4,92,82,900 3. Export of spare parts CPM 5,86,41,575 4. Export Motorcycles RPM 147,11,88,466 5. Royalty to AEs CUP 20,99,39,042 6. Payment of interest on advance received for financing exports CUP 81,60,357 7. Reimbursement of warranty claims to AEs 44,56,259 8. Reimbursement from AEs 9,32,71,033 Total 208,71,97,173/- 6.1 The Assessing Officer referred the matter to the TPO for determination of the arm's length price. The TPO proposed an addition of Rs. 51,58,00,000/- as adjustment in respect of international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m its AEs for manufacturing and sale of motorcycles on proportionate basis. The Assessing Officer shall enhance the income of the assessee by an amount of Rs. 51.58 crs while computing its total income." 6.3 Aggrieved by the order of the TPO assessee filed objection before the DRP. The order of the TPO was confirmed by the DRP by making the following observations:- "4. We have carefully considered the facts of the case and the objections of the taxpayer. We are in agreement with the TPO that the TP study done by the taxpayer has to be rejected. We agree with the reasoning of the TPO that the taxpayer has not followed proper method(s)while benchmarking different international transactions. The TPO has rightly observed that for applying CPM/RPM accurate and reliable information is needed while working out the gross profit. The details of direct and indirect expenses related to manufacturing / provision of services/ selling of goods are required. Moreover, taking the AEs as tested party is also not correct in the absence of reliable and complete data about the foreign comparables. This has also been held in ITAT, Delhi's decision in the case of Ranbaxy Laboratories. The TPO thus rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated 22nd February, 2010 placed at paper book page 320 whereby it was pointed out that assessee company has earned overall gross margin of negative 9%. However, the company has earned a gross profit margin of positive 15.22% from export of motorcycles. Attention was also invited to the annexures attached in support thereof placed at paper book pages 328 to 330. As per these annexures, on the total international transactions assessee company has earned a profit of Rs. 23,28,18,613 giving a margin of 15.83%. It was also submitted that as per Annexure A-2 the assessee has made export of motorcycles to unrelated parties and the profit margin earned in respect of export to unrelated parties was 10.75%. Since the profit margin earned on international transaction of 15.83% was better than 10.75% in relation to unrelated parties, there was no justification for the TPO to make a further adjustment. 6.6 It was further submitted that the assessee company has submitted necessary details in respect of resale of the motorcycles exported by it to its associated enterprises. In this regard attention was invited to paper book pages 369 to 383 which give billwise details of export of motorcycle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it cannot be expected to make a sale to an associated enterprise at a price much higher than the price of that product in the market simply because it is in losses. Our attention was drawn to the fact that the company has incurred cost of Rs. 1001.96 Crores as against operating revenue of Rs. 808.10 Crores. Thus there have been losses in the operation of the company and such losses cannot be recovered by enhancing the selling price to the AE by applying TNMM. The TNMM presupposes margin in sales and is not an appropriate method in a loss making company like the assessee company. The TPO in the present case has worked out the margin of highly successful companies and applied the same to the assessee company ignoring the fact that this company is not successful and that is why making persistent losses in respect of transactions with non-AE's as well. 6.9 It was further submitted that assessee company had submitted necessary data regarding the resale of the motorcycles export by it to unrelated parties and also have given data of average prices of the motorcycles being realized by the other companies in the same field. Therefore, there was no reason for the TPO to embark upon an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing TNMM method. This has resulted into adding further value to cost which is otherwise very high due to inefficient working of the assessee company. In this regard the assessee has made detailed submissions before the TPO vide letter dated 22nd February, 2010 placed at Paper Book Page 320 onwards. 6.11 As regards to the taking of the Bajaj Auto Ltd. as a comparable it was submitted that it is one of the leaders in the market having a very huge production capacity as compared to the assessee company. Further the capacity utilization by the assessee company was too low and that is why there was overall losses. Low capacity utilization cannot lead to enhanced price to be charged from its associated enterprise. In any case it was further submitted that the related party transactions in the case of Bajaj Auto Ltd. exceeds 25% and as such the same cannot be compared. It was also pointed out an ideal of the variation in the margin can be had from the fact of the comparable used by the TPO itself where TVS Motor Co. Ltd. is having a margin of 3.21%and the other comparable Bajaj Auto Ltd. 17.15% i.e. more than 7 times the margin earned by TVS Motor Co. Ltd. On the basis of the above it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this regard is that principle of res judicata is not applicable in the tax laws and assessee cannot take the help of this principle for setting any benefit. We are in full agreement with Ld. DR for the proposition that principle of res judicata is not applicable in tax laws. However, on the facts of the case, we are of the view that in this case, the rejection of the resale price method by the TPO was not justified. There has to be continuity and uniformity in the approach of the Revenue towards an issue and particularly in the case of the same assessee. From the facts it is evident that for similar transaction on the same set of facts the arm's length determined by the assessee company in the preceding years applying this method, has been accepted and without there being any change of facts and circumstances this method has been rejected in the year under consideration. When the facts and circumstances are same it will not be appropriate to take a different approach in two different assessment years. 8.1 Further we note that the approach and the reasoning adopted by the TPO for rejecting the arm's length price determined by the assessee company is not justified. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereof. The calculation of the gross profit margin by Yamaha Motor Co. Ltd., Japan was submitted along with item-wise breakup of the gross profit margin. 8.2 In our considered view, assessee company submitted all relevant details to the TPO and he had simply made an observation in para 6.6 to the effect that after considering the reply of the assessee it is found that assessee has nothing substantial to corroborate its analysis made in the TP report. In the same paragraph it has also been further stated that the economic analysis carried out by the assessee are not reliable and it is therefore liable to be rejected and thereafter TNMM method has been invoked by the TPO. From the above analysis of the documents filed by the assessee company, we find that the TPO was not correct in recording this finding that the assessee has not been able to corroborate its analysis. It is evident from the various letters and the evidences placed in the paper book that the assessee company has submitted all relevant details in support of its analysis. The TPO has not been able to point out any error or defect in this analysis except saying that it is not reliable or not accepted. There is no basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 10B(1)(b) and provisions of section 92C. It may be relevant to refer to the provisions of section 92C which reads as under:- "92C.(1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed : Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices:" As per this above section arm's length price is to be determined by any of these methods prescribed therein. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words 'enterprise' and 'associated enterprise' have been used interchangeably. Thus the argument that enterprise will mean 'the assessee' and associated enterprise will mean' the other party' to whom the assessee has sold or purchased the goods is incorrect. The above interpretation gets supported by the definition of 'enterprise' given in section 92F(iii) which reads as under :- "92F(iii) "enterprise" means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights, or the provision of services of any kind, or in carrying out any work in pursuance of a contract, or in investment, or providing loan or in the business of acquiring, holding, underwr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of application of the resale price method stated in the OECD guidelines also shows that the Resale Price method can be applied when sales are made to the AE which in turn sells the same to an uncontrolled party and thus support the contention of the assessee. 8.7 According to the provisions of section 92C and Rule 10B, the arm's length price in relation to an international transaction has to be determined by following any of the appropriate method. The resale price method and the cost plus method operate at gross profit margin level requiring functional rather than product comparability. The profit split method and the TNMM operate at operating margin level used for a complex and integrated enterprise. The method which provides most reliable way of arriving at arm's length price is considered as most appropriate method. A comparative analysis is done for comparison of the controlled transaction with an uncontrolled transaction and controlled and uncontrolled transactions are comparable if none of the difference between the transactions can materially affect the factor being examined by adopting any of the methodology as mentioned in Section 92C. 8.8 We are of the view that whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate to apply a transactional profit method merely because data concerning uncontrolled transaction are difficult to obtain or incomplete in one or more respects. The OECD guidelines further provides that in no case should transaction profit method be used on enterprises that are less successful than average or conversely more successful than average, when the reason for their success or lack thereof is attributable to commercial factors. In the present case, as emerges from the facts, the assessee company is less successful than average and the reasons thereof is the commercial factors. 8.10 As regards the case law relied upon by the learned DR, we note that in none of these case laws it has been held that the resale price method cannot be applied on the reasoning as being put forth by the learned DR. In the case of Global Vantage Pvt. Ltd. (Supra) it has been held that it is the least complex party which needs to be selected as the tested party for the purpose of carrying out Arm's Length analysis. The reasons for testing the margins of a less complex party is that the simpler party requires a fewer and more reliable adjustments to be made to its operating profit margins. Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough to hold that the margin earned by the assessee company from an associated enterprise was better than the margin earned from the nonassociated enterprises. No reasons have been given by the TPO for ignoring the same and applying the TNMM method. 8.15 As regards TNMM, we further note that the margin has been computed of the two entities i.e. Bajaj Auto Ltd. and TVS Motor Co. Ltd. operating in India on an enterprise level and not in respect of the export of motorcycles. If the comparison has to be made on the basis of the enterprise level as has been done by the TPO, then the assessee company has also entered into transactions with non-associated enterprises which as per TPO's report itself were 81.07% (100 - 18.93 of associated enterprise) of the total value of the transactions. TPO in its report has taken the cost at Rs. 1001.96 crores for the total operating revenue of Rs. 808.10 crores. He has appropriated cost of Rs. 189.67 crores to the sale of Rs. 152.98 crores to AE on proportionate basis. Thus the balance cost of Rs. 812.29 crores (Rs.1001.96 - Rs. 189.67 crores) is toward sale of Rs. 655.12 crores (808.10 - Rs. 152.98 crores) to non-AE. These being transactions with no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nction and it has to take into consideration all the facts and circumstances. 8.17 In view of the above analysis and the findings we hold that addition made by TPO and as confirmed by the DRP are unjustified and the same is directed to be deleted. 8.18 As we have deleted the addition on the issue of the applicability of the method, we do not adjudicate the other issues raised by the assessee company in respect of this addition. This would be an academic exercise. Therefore these grounds are allowed 9. Ground no.11 is regarding charging of interest under section 234B which is consequential in nature and hence need no adjudication. 10. In the result, the appeal filed by the assessee (ITA No.5748/Del/2011) is allowed. ITA No. 6434/Del/2012 Assessment Year 2008-09 11. In this appeal the assessee company has raised the following grounds:- "1. On the facts and circumstances of the case, the order passed by the learned Assessing Officer (AO) under Section 143(3) read with Section 144C of the Act is bad, both in the eyes of law and on facts. 2. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in assessing the income of the assessee at R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jecting the Resale Price Method (RPM) for determination of Arm's Length Price and substituting the same with Transaction Net Margin Method (TNMM) ignoring the fact that associated enterprise having further sold the product to an uncontrolled entity, the Resale Price Method is the best and most suited method. 8(i) On the facts and circumstances of the case, the DRP has erred, both on facts and in law in rejecting the comparable selected by assessee in its detailed Transfer Pricing Study and substituting with its own comparables. (ii) On the facts and circumstances of the case, the DRP has erred both on facts and in law in ignoring the contention of the appellant that the selection of Bajaj Auto Ltd. as comparable is wrong in view of the fact that the Bajaj Auto Ltd. is a market leader for 3 wheelers and the related party transactions in the case of Bajaj Auto Ltd. exceed 25%. 9(i) On the facts and circumstances of the case, the DRP has erred, both on facts and in law, in ignoring the various objections raised by the appellant regarding the computation of the Arm's Length Price and the errors committed in determination of the same by the learned TPO. (ii) On the facts and circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, 2 and 14 are general in nature and need no adjudication. 13. Grounds no.3 and 4 are identical to the grounds no.3 and 4 for assessment year 2007-08 and for the detailed discussion in paragraphs no.3.2 to 3.8, these grounds are allowed. 14. Ground no.5 is identical to the ground no.5 for assessment year 2007-08 and for the detailed discussion in paragraphs no.4 to 4.5 above, this ground of appeal is allowed. 15. The issue involved in grounds no.6 to 11 is similar to the issue involved in ground no.6 to 9 of assessment year 2007-08. The facts and reasoning for making the addition being the same and for the detailed discussion paragraph No.6 to 8.18, the addition made of Rs. 35,21,93,888/- by way of adjustment to arm's length price is hereby directed to be deleted. 16. Ground no.12 is regarding disallowance of stamp duty of Rs. 30,00,000/- paid on issue of share certificates to the shareholders. It was submitted by the learned AR that the same needs to be allowed as per the provisions of section 35D of the Act. The learned DR, however, relied upon the order of the DRP. On going through the order of the DRP we notice that this disallowance has been upheld by giving a detailed re ..... 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