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TMI Blog2015 (5) TMI 858X X X X Extracts X X X X X X X X Extracts X X X X ..... ial or evidence before us to dissuade us from affirming the stand of the CIT(A). The CIT(A) has categorically noted that assessee had exported components and parts whose profit margins should be compared with the margins derived from sale of parts/components and not sale of manufactured products. Going further, the CIT(A) held that volume of domestic sale of components/parts was quite insignificant to constitute a valid comparable with the export transactions. For all the aforesaid reasons, CIT(A) has differed with the approach of the TPO in benchmarking the impugned transaction of export of components and parts with the profit margin of domestic sales which primarily consist of manufactured products i.e. carburettors. Thus no reason to interfere with the ultimate conclusion of the CIT(A) to delete the addition on the ground that the TPO wrongly compared the tested transactions with an incomparable transaction. Disallowance of engineering services fee - Held that:- No fault can be found in the manner in which the CIT(A) has come to conclude that the expenditure in question is to be allowed as a revenue expenditure. It is also not disputed before us that similar expenditure in as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, Japan (holding 74% shareholding) and Fuel Instruments Engineers Private Limited, India (holding 26% shareholding). For the assessment year under consideration, it filed a return of income declaring a total income of ₹ 80,54,89,846/-, which was subject to a scrutiny assessment. The Assessing Officer noted that assessee had entered into certain international transactions with its associated enterprises, and income arising from such transactions was liable to be computed having regard to their arm's length price as per section 92(1) of the Act. The Assessing Officer referred the matter for computation of arm's length price of the international transactions to the Transfer Pricing Officer (in short TPO ) u/s 92CA(1) of the Act. The TPO after allowing the assessee appropriate opportunities of being heard, passed an order u/s 92CA(3) of the Act dated 28.03.2008 determining the arm's length price at a figure higher than the stated value of the international transactions by a sum of ₹ 62,72,857/-. The Assessing Officer proceeded to compute the total income of the assessee u/s 92CA(4) of the Act in conformity with the arm's length price so determined by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round 258 cr. The substantial difference in turnover between export sales and domestic sales make both incomparable applying the ratio of Genisys integrating system Ltd of Bangalore ITAT. 2.1.18 The learned TPO has mentioned that the Appellant in the Transfer Pricing Report and in the Form 3CEB had described export transaction as of 'export of finished goods'. This was later changed and it was stated that the Appellant exported components and parts. The learned TPO apparently has accepted the change in the position of the Appellant because he sought to compare profitability of the export transactions with the profitability of the domestic sales of components and parts. 2.1.19 The Appellant has also stated that the learned TPO did not make reasonably accurate adjustments for the transactional differences. I do not consider this argument relevant, as according to me, the learned TPO has compared otherwise incomparable, that is, manufacturing and distribution with trading. 2.1.20 In view of the above discussion, I delete the adjustment made by the learned TPO of ₹ 62,72,857. 5. The sum and substance of the above discussion in the order of the CIT(A) shows th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TOTAL 56,08,86,974/- 8. In its Transfer Pricing Study, assessee benchmarked the aforesaid transactions except the transaction on import of capital goods by selecting the Transactional Net Margin (TNM) Method as the most appropriate method. While applying the TNM Method, assessee aggregated the transactions mentioned above at Item Nos.1, 2, 4, 5, 6 7. For the remaining transaction of Import of capital goods, assessee adopted the Comparable Uncontrolled Price (CUP) Method. In so far as the application of CUP Method for determining the arm's length price of the transaction of Import of capital goods is concerned, the TPO accepted the same and there is no dispute and therefore we do not deal any further on this aspect. 9. With regard to the other transactions enumerated above, which were aggregated by the assessee, it was contended that the same were at an arm's length price. Assessee computed its Operating margin i.e. Operating Profits/sales at 24.82%. Similarly, the Operating Profits/sales of the comparables selected by the assessee were determined at 9.25% and therefore it was contended that the international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there existed significant differences between the export transactions with associated enterprises and the activity of sale of carburettors in the domestic market. Firstly, it was pointed out that there is no value addition done to the components and parts which are exported to the associated enterprises because they are procured from third party vendors and re-sold whereas the carburettors manufactured and sold domestically involved a technologically advanced manufacturing process. The export of components and parts was more of a trading activity. Further, as far as the assumption of risks was concerned, it was asserted that assessee faces the product failure risk in case of products manufactured by it whereas it does not have any product risk, market risk, bad debt risk and capacity utilization risk with regard to the transaction of export of components and parts to the associated enterprises. It was emphasized that the value of the impugned export transactions vis- -vis total sales was quite insignificant and therefore it was only appropriate to benchmark such transactions after aggregating the same with the domestic business. All these submissions were considered by the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which contained the description of the products exported and the domestic sales. At this point, the Ld. Representative also asserted that before the TPO, it was clarified that the nomenclature of the transaction stated to be Export of finished goods was a misnomer whereas the exports in question comprised of only components and parts, which are used in the manufacture of carburettors. The aforesaid aspect was also clarified by the assessee by pointing out the difference in the type of customers in the domestic market vis- -vis the impugned Export of components and parts. In sum and substance, the Ld. Representative for the assessee has defended the ultimate conclusion of the CIT(A) by pointing out that there are significant differences between the impugned export activity and the domestic manufacturing business of the assessee and the project margin of the two cannot be compared. Therefore, according to him, the order of the CIT(A) be affirmed. 15. We have carefully considered the rival submissions. The crux of the controversy is with regard to the determination of arm's length price of the transaction of Export of components and parts made by the assessee to its assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he authorities below, it is quite evident that assessee succeeded in pointing out that there was a difference in the nature of items exported to associated enterprises vis- -vis sales in the domestic market. The fundamental point made out by the assessee was that the components and parts exported to associated enterprises were procured from local third party vendors whereas the domestic sales which comprised of almost 97% of the total sales consist primarily of manufactured carburettors/ASVs. The plea setup by the assessee was that the impugned activity of export to associated enterprises was a trading activity and therefore net margin from such export activity cannot be compared with the profit margin of domestic business which primarily consist of manufactured carburettors. In our considered opinion, this fact-situation is amply borne out of the material on the record and the finding of the CIT(A) in this regard is unimpeachable. 18. Apart therefrom, the assessee also demonstrated before the lower authorities that there was a difference in the nature of customers in the domestic market and the impugned export market. In the domestic market assessee was supplying carburettors a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vate Limited (supra). In our considered opinion, it would suffice to observe that the aforesaid stand of the Revenue is quite misplaced because in the present case, it is not merely the difference in volume of the two category of transactions but the very nature of the transactions has been found to be incomparable. Notably, the transaction of export of components and parts is a trading activity whereas the domestic business consists of sales primarily of the manufactured carburettors. Therefore, on this ground itself, we find that the reference to the decision of the Tribunal in the case of Capgemini India Private Limited (supra) in the present case is erroneous. 21. At this point, it was pointed that the assessee had undertaken transactions by way of export of components and parts to associated enterprises in the same manner for assessment years 2002-03, 2003-04 and 2004-05 also. At the time of hearing, the Ld. Representative for the assessee made a statement at bar that in the Transfer Pricing Study undertaken by the assessee for such assessment years, it had adopted the aggregation approach and applied the TNM Method for benchmarking its international transactions. It was as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the services rendered by the engineers of the parent company. The Assessing Officer treated the entire expenditure incurred on account of the engineering services fee as capital in nature. 27. The CIT(A), however, accepted the claim of the assessee that expenditure to the extent of ₹ 1,21,87,328/- was a revenue expenditure since the services rendered by the engineers of the parent company were for day to day running of the business. The CIT(A) also considered para 5.02 of the technical collaboration agreement which was relied upon by the Assessing Officer. The CIT(A) also took note of assessee s submission that in assessment year 2006-07 the Assessing Officer has himself allowed such expenditure after being directed by the DRP to do so. With regard to the disallowance accepted by the assessee in the earlier assessment year of 2004-05, it was noted that the same related to payment of fee for technical assistance at the pre-installation stage of the imported machinery and for the improvement and improvisation in manufacturing process, which was indeed an enduring benefit to the assessee. The CIT(A) found the facts in the current assessment year as quite different from those ..... X X X X Extracts X X X X X X X X Extracts X X X X
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