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TMI Blog2014 (12) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of category ‘B’ and ‘C’, which is in the realm of sourcing of components, quite clearly the same is in the nature of industrial supplies, which are in-turn, used by the buyer in manufacturing of vehicles and the services being rendered by assessee is merely logistic service equivalent. The assessee which manufactures vehicles and sells the same, also undertakes supply of spares and components required for servicing of such vehicles sold by it - the supplies so undertaken are from already firmed-up sources, inasmuch as the assessee is the manufacturer of vehicles in which such components are used, and at the time of procurement for manufacturing the assessee has mandated the dies, design, quality, warranties, etc. - supply of spare-parts and components as purely after-sales distribution results in higher margins - the sourcing of products for overseas AE entailing category ‘B’ and ‘C’ transactions, the assessee has very limited role to play, which is akin to logistics support service provider - even according to the internal TNMM mechanism sought to be applied, the comparison of margin of transactions of category ‘B’ and ‘C’ undertaken with the AEs is incomparable with the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rounds of Appeal relating to the said addition read as under :- Ground No. 1 - Erred in making2 t ransfer pricing adjustment amounting to ₹ 2,15,95,600/- to the value of international transaction by rejecting the analysis undertaken by the Appellant to determine arm's length price for its international transaction pertaining to export of spare parts and components to the associated enterprise. Ground No. 2 - Erred in rejecting the external TNMM approach adopted by the Assessee and inappropriately applying internal TNMM for determining the arm's length price for the international transaction of export of services spares and components. Ground No. 3 - Without prejudice to the other grounds of appeal, erred in inappropriately rejecting the iterations suggested by the Appellant in respect of determining the arm's length price for the international transaction of export of services spares and components. 3. At the time of hearing, it was a common ground between the parties that the aforestated dispute stands on identical footing to that considered by the Tribunal in the assessee s own case for assessment year 2006-07 vide ITA No.1480/PN/2010 dated 23.07.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Primarily, assessee is engaged in the manufacture and sale of three wheeled motor vehicles for transportation of goods and passengers and also sale of spares and components of three wheeled motor vehicles manufactured by it to support its after sale market both in India and abroad. Further, assessee is also engaged in sourcing of components which are required by its associated enterprises abroad for manufacture of two/three/four wheeled motor vehicles is the activity in dispute. The total export of spares and components to the associated enterprises amounting to ₹ 10,01,45,619/, which according to the TPO is not an arm's length price. 5. The assessee company benchmarked its international transaction of export of spares and components to the associated enterprises by applying the Transactional Net Margin (TNM) method. The assessee company asserted that its international transaction relating to export of spares and components to the associated enterprises was at an arm's length price because the average of margins of th4e comparables selected by it came to 3.22%, which was favourable in comparison to operating margin of 14.49% earned by the assessee. So however, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing an appeal against the order of the Tribunal before the Hon ble Bombay High Court, the DRP did not consider it fit to give directions to modify the order of the TPO in line with the order of the Tribunal dated 23.07.2012 (supra) for the reason that the directions of the DRP are binding upon the Assessing Officer and if the DRP gave directions by following the order of the Tribunal, the Assessing Officer is bound to follow it and therefore the Assessing Officer may lose the opportunity to agitate the matter in appeal in this year while the Department was in the process of filing an appeal before the Hon ble High Court on the same issue for the earlier assessment year. Be that as it may, the Assessing Officer has determined the arm's length price of the impugned international transactions by making an adjustment of ₹ 2,15,95,600/- to the stated value in conformity with the order of the TPO. 8. The stand of the assessee has been that the TPO erred in rejecting the external TNM method adopted by it. According to the assessee, the application of internal TNM mechanism for determining the arm's length price of impugned international transactions was not justified. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 2186000 138934000 141120000 Net Profit (Rs) 75591000 5583000 81174000 877000 13832000 14709000 Total cost (Rs) 453870000 9868000 463738000 1309000 125102000 126411000 Profit margin (on sales) 14.27% 36.13% 14.90% 40.12% 9.96% 10.40% Profit margin (on cost) 16.65% 56.58% 17.50% 67% 11.05% 11.63% the assessee has pointed out that in relation to Category A transactions, the operating margin on exports to AEs is 67% as against 56.58% with respect to the export to third parties (non-AEs) and therefore on this count itself the adjustment in question is untenable. 8. On the other hand, the learned CIT-Departmental Representative, appearing for the Revenue has defended th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulate, the same are as follows: Category A transaction represents sale of spares by the assessee to third party distributors as well as to the AEs of such spares/components which are required for the purpose of servicing the vehicles sold by the assessee company. Category B transactions represent sourcing of components required by the overseas AEs for manufacture of 2/3 wheelers, and category C transactions represent sourcing of components required by the overseas AEs for manufacture of 4 wheelers, namely, New Quadracycle Poker. On the basis of submissions and material put-forth, it is sought to be explained that the category B and category C transactions involve supply to AEs (situated in Italy) of such parts and components which are used by the AE in the manufacture of vehicles abroad. It is sought to be made out that the source evaluation, pricing and procurement tests are the prerogative of the AE and that the assessee company based in India merely assists in logistic, co-ordination and facilitation/support services in respect of sourcing of such components. On the other hand, with regard to the category A transactions, it involves supplies to third parties as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken are from already firmed-up sources, inasmuch as the assessee is the manufacturer of vehicles in which such components are used, and at the time of procurement for manufacturing the assessee has mandated the dies, design, quality, warranties, etc. Thus, supply of spare-parts and components as purely after-sales distribution results in higher margins. In contrast, the sourcing of products for overseas AE entailing category B and C transactions, the assessee has very limited role to play, which is akin to logistics support service provider. 11. In this background, we therefore deem it proper to conclude that even according to the internal TNMM mechanism sought to be applied, the comparison of margin of transactions of category B and C undertaken with the AEs is incomparable with the transactions undertaken with the third parties (i.e. non-AEs) which are purely in the nature of category A . Ostensibly, the transactions of Category B and C are not undertaken with third parties (i.e. Non-AEs). 12. So, however, in so far as the transactions of category A representing export of spares and components which are required for the purpose of servicing of vehicles sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd C which have been undertaken by the assessee with its AE. In so far as such transactions are concerned, there is no internal comparable transaction, inasmuch as such like transactions have not been carried out with non-AEs. The transactions of such nature involving sourcing of spares and components used in the manufacture of vehicles undertaken by the AE abroad have not been undertaken by the assessee with non-AEs. Therefore, in the absence of any internal transactions with third parties with similar functions and economic scenario, benchmarking of transactions of category B and C undertaken with AEs, cannot be done appropriately by invoking the internal TNMM mechanism. In this context, the assessee pointed out that for benchmarking the transactions between the assessee and the AEs in respect of such activities, the assessee has undertaken comparison with operating margins earned by third party support service providers in India and tabulation in this regard has been placed in page 223 of the Paper Book No. II. It is sought to be made out that the margins declared by the assessee on such activity at 11.05% compare favourably with the average operating margins earned by thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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