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TMI Blog2018 (10) TMI 1586X X X X Extracts X X X X X X X X Extracts X X X X ..... 76 to the value of international transactions of MB India and not considering the analysis provided in the transfer pricing study report for benchmarking of the Appellant's international transactions. The Appellant prays that the approach followed in the transfer pricing study report be accepted and accordingly, the arm's length price of the international transactions be accepted. 2. The learned CIT(A) erred in rejecting the combined transaction approach followed by the Appellant at the company level for benchmarking various international transactions of the Appellant for AY 2005-06. The Appellant prays that the combined transaction approach followed by the Appellant at the company level for benchmarking various international transactions for AY 2005-06 should be accepted. 3. The learned CIT(A) erred in rejecting certain companies identified by the Appellant as comparable in its transfer pricing study report for benchmarking its international transactions. The Appellant prays that all the companies identified by the Appellant in the transfer pricing study report of AY 2005-06 be accepted as comparable companies. 4. The learned CIT(A) erred by comparing the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 92C(2) of the Income-tax Act, 1961 be allowed to the Appellant while carrying out transfer pricing adjustments in AY 2005-06. 9. In computing the book profits under section 115JB of the Act, the learned CIT(A) erred in considering the provision for compensation payable to module suppliers of Rs. 2.53,03,903 as not an ascertained liability and thereby upholding the addition made by the learned Assessing Officer for computation of the book profit under section 115JB of the Act. The Appellant prays that the above addition made in computation of the book profit of the Appellant be deleted for AY 2005-06. 10. The learned CIT(A) erred in upholding levy of interest under section 234B of the Act. The Appellant prays that the levy of interest under section 234B of the Act be deleted for AY 2005-06. 4. The assessee has also raised additional ground of appeal which reads as under:- "The learned CIT(A) has erred on the facts and in law in computing the transfer pricing adjustment on the entire cost of sales of CBU Unit of the Appellant instead of limiting it to the international transactions with Associated Enterprises in respect of purchase cost of CBU‟s" 5. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er when the Hon'ble DRP while deciding the case for A.Y. 2007-08 has also upheld this treatment given to royalty payment i.e. has held that royalty payment is of Capital nature. 5. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in directing the A.O. to allow Project Assistance Technical charges as deductible expenditure u/s.37(1) of the Act, when the assessee has not been able to prove the basis of such payment, the nature of service rendered by the expatriates and also when the payment were not made in accordance with the project assistance agreement dated 11/12/1994. 6. The assessee in CO No.60/PUN/2014 has raised the following grounds of objections:- On the facts and in circumstances of the case, the learned Commissioner of Income -Tax IT/TP ('the learned CIT(A)'): 1. has erred in not considering the facts submitted by the Respondent while adjudicating the Ground No 1 of the appeal filed and further, erred in adjudicating the said Ground on the basis of direction issued in Ground No 6 of AY 2002-03 on the basis of assumption that both these grounds are identical in facts. The learned CIT(A) thereby erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth. The first point which was noted by TPO was that benchmarking of transactions at entity level using TNNM method was not acceptable. He was of the view that the assessee should have benchmarked its transactions undertaken under various categories separately. The transaction-wise analysis should have been adopted by assessee, as per the TPO. Since the assessee had not benchmarked its transactions separately, the TPO noted that there were issues relating to payment of royalty on cars, import and sale of CBUs. Accordingly, the assessee was show caused in this regard. He was of the view that since the assessee had entered into international transactions with its associated enterprises under variety of heads, which had been benchmarked under the umbrella of TNNM at the entity level but as per him, the said transactions why should not be benchmarked separately. The assessee claimed that transactions were closely inter-related and inter-linked to the main activity of manufacturing and selling of passenger cars and hence, they need not be benchmarked separately. With regard to import of raw materials, spare parts, payment of royalty, etc., the TPO also enquired as to whether there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of assessee. The next head was 'payment of royalty'. The TPO noted that royalty had been paid @ 5% of value addition done. He noted that in the past, arm's length rate for the royalty payment on cars was taken at 3% by taking comparables of royalty payment by Maruti Udyog Ltd. Since the facts of present case were similar, the TPO show caused the assessee to explain as to why corresponding adjustment in royalty be not made in the hands of assessee taking arm's length rate of royalty payment at 3%. 9. In reply, the assessee filed written submissions. The assessee pointed out that information with regard to group pricing policy, common price list for import of raw materials, spare parts, payment of royalty were submitted during assessment year 2002-03 and the same submissions were filed before the TPO. It was further pointed out that spare parts were imported with a view to provide after sales service and any consideration with General Distributor Agreement between the assessee and its parent company, which provided the original spare parts to assessee. It was also pointed out that different percentages of discounts on the declared price were provided to D.C. Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of royalty and rate to be charged and pointed out that payment of royalty was approved by RBI and Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Govt. of India and hence, the rate as agreed upon should be adopted. 11. The TPO analyzed the submissions of assessee and was of the view that from the perusal of international transactions undertaken by assessee, it is seen that these were variety of transactions and were different in their nature and scope. In case of any manufacturing company, most of the transactions would be present but in case the assessee's contention of benchmarking all of them together at the entity level was accepted, it would clearly lead to mean that there would be no necessity to do analysis of international transactions separately. The TPO in this regard pointed out that both the Indian Transfer Pricing Regulations as well as OECD guidelines provided for benchmarking and separate analysis for each transaction. However, where such transactions were closely inter-linked, then such class of transactions or group of transactions could be taken together for benchmarking but the same would not lead to the conclusion that all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that contention of assessee in this regard do not affect the gross profitability on account of trading activities done by assessee. Therefore, characteristics of business of import and sale of spare parts and import and sale of CBUs were found to be similar. The TPO also held that in respect of analysis by functions performed, asset employed and risk undertaken, the two were also same and in any case they would not affect assessee's gross margin. 13. Then, he took up the set of comparables totaling 19 and noted that the companies selected were in group trading activity where the source of such vehicles was from India only, whereas in the case of assessee, cars were imported from outside India and sold to dealers in India. The TPO noted that one of the comparables Hindustan Motors Exports Ltd. dealt with export of vehicles outside India and was 100% subsidiary of Hindustan Motors Ltd. and the said concern was held to be comparable. The TPO rejected the other comparables on the ground that PLI of comparables taken by assessee was not at all comparable with that of assessee and the same were rejected. The TPO held that assessee's business of import and sale of CBUs was comparable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith by assessee were for manufactured as well as imported cars. Therefore, the functions performed could not be same or similar for the said products merely because the products were resold to third parties in India. It was stressed that both the products were different and were not comparable and this was the fundamental fact. The assessee also pointed out that functions performed, assets employed and risk assumed in the activities of resale of spares and import of CBUs were different. Further, reliance was placed on Rule 10B(1)(b)(ii) of the Income Tax Rules, 1961 (in short 'the Rules') to state that application of RPM method requires that only same or similar products were to be compared since the products were not similar, RPM method could not be applied. On without prejudice basis, it was pointed out that even if both the business activities were to be compared, then adjustment on account of difference in FAR should be made. The CIT(A) observed that the said issue was raised before Dispute Resolution Panel (DRP) in assessment years 2007-08 and 2008-09 and since no new facts have emerged during the year and as the CIT(A) was signatory of DRP order for assessment year 2008-09, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34B of the Act. He also referred to additional ground of appeal No.11 i.e. TP adjustment on entire cost of CBUs sale and additional ground of appeal No.12 would become academic if ground of appeal No.4 is allowed. The learned Authorized Representative for the assessee pointed out that the assessee initially starts its operation of sale of any model or car with CBUs and in case there is demand in the market, then it starts manufacturing. It points out that in assessment year 2005-06, it was importing CBUs of model S, SLK, ML (now known as GLE), CLS, GL (now known as GLS). However, if you compare the scenario in 2018, then the import of CBUs was of A200D, B200D, GTRoadSTer, AMG models, C300 CAB, etc. models. As far as SKD are concerns, there was nothing being imported in 2005 and even in 2018, as far as CKD models are concerned in assessment year 2005-06, model S 350L class was imported and in 2018, S Maybach class was being imported. Then going to Part level, C and E were manufactured in assessment year 2005-06, whereas in 2018 models C, E, S, GL class and CLA class were being manufactured. The assessee explained that import of CBUs was carried out with a view to cater and maintain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o include transactions of similar nature which were closely linked to each other, as a single transaction. He further referred to provisions of section 92B of the Act, which deals with meaning of expression 'international transaction'. He then placed reliance on the following decisions:- a) Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT & Ors. in ITA No.16/2014 & Ors., judgment dated 16.03.2015 (Hon‟ble Delhi High Court); b) Bobst India Pvt. Ltd. Vs. DCIT in ITA No.1295/PN/2011, relating to assessment year 2007-08, order dated 28.02.2013; c) Toyota Kirloskar Motors Pvt. Ltd. Vs. ACIT in ITA No.828/Bang/2010, relating to assessment year 2003-04, order dated 22.11.2012; d) Cummins India Ltd. Vs. DCIT (2017) 80 taxmann.com 62 (Pune Trib.) 19. The learned Authorized Representative for the assessee thus, stressed that combined transactions approach applied by assessee at company level for benchmarking various international transactions should be accepted. Taking up next issue raised vide ground of appeal No.3, the learned Authorized Representative for the assessee then pointed out that TPO had without any basis rejected certain companies identified by assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 2011-12. He also pointed out that the said ground would become academic in case grounds of appeal No.2 and 4 are allowed. The ground of appeal No.12 was argued to be academic in nature. 21. The learned Departmental Representative for the Revenue on the other hand, pointed out that the assessee was engaged in manufacturing and trading activities of passenger cars under the brand name Mercedes Benz. He further pointed out that assessee was importing CBUs and spares, wherein the total revenue was to the tune of Rs. 465 crores with operating margins of 8.74%. While rejecting aggregation approach, he pointed out that TPO had issued show cause notice which is reproduced under para 4 of TPO's order and also referred to Rule 10B(2) of the Rules and considered FAR analysis of import of CBUs and spare parts, for sale of CBUs, where there was no value addition. Coming to ground of appeal No.4, he relied on the orders of TPO and CIT(A) and pointed out that the assessee has not gone into the business modules of comparables. 22. The learned Authorized Representative for the assessee in rejoinder stressed that in view of closely linked transactions, aggregation approach needs to be app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed order under section 143(3) of the Act, against which the assessee filed appeal before the CIT(A). The CIT(A) deleted adjustment made in relation to international transactions pertaining to payment of royalty. The CIT(A) observed that transfer pricing adjustment determined by benchmarking controlled transaction with another controlled transaction could not be considered to be at arm's length price. The CIT(A) thus, deleted adjustment of Rs. 2.20 crores, against which the Revenue is in appeal. In respect of addition to the adjustment for import of CBUs, the CIT(A) confirmed the said adjustment in order to maintain consistency approach as the same was upheld by DRP for assessment year 2008-09. The assessee is in appeal against the findings of CIT(A) in this regard. 24. First, we shall take up grounds of appeal raised by assessee, wherein ground of appeal No.1 raised by assessee is general and the same is dismissed. The assessee by way of ground of appeal No.2 has raised the issue against rejection of combined transactions approach applied by assessee. The plea of assessee before us is two-fold; first one is for aggregation approach to be applied in respect of import of raw mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in new products available with associated enterprises, to India but which otherwise would take time to establish manufacturing facility in India. The assessee has explained that it was importing cars in the form of Semi Knocked Down (SKD), Complete Knock Down (CKD) and then eventually operating at Parts level. In the year under consideration, the assessee was manufacturing C and E class of vehicles but had imported CBUs of class S, SLK, ML (now known as GLE), CLS and GL. The assessee had also furnished current position i.e. in 2018, wherein at Parts level the assessee was manufacturing models C, E, S, GL class and CLA class. It may be seen that C and E class were at Part level in the year under appeal and continues in current scenario also. Further, class S and GL were imported as CBUs in the year under appeal and were now at Parts level in 2018. The assessee thus was engaged in manufacturing operations and in the year under consideration, as pointed out above was manufacturing C and E models of passenger cars and in addition, it had imported certain models of Mercedes Benz, which were resold in the Indian market. The assessee had benchmarked international transactions undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prices, which in turn, was compensated from the premium pricing on sale of spares. The assessee thus, argues that sale of spares being part of warranty commitments was attached to sale of manufactured cars and resale of imported CBUs. The assessee thus, had aggregated three transactions i.e. manufacture of cars with resale of imported CBUs and also import of spare parts and benchmarked its international transactions to be at arm's length price when compared with similar transactions undertaken by selected comparables. 28. The issue which is raised before us is against aggregation of transactions which were closely linked. Section 92(1) of the Act states 'any income arising from an international transaction shall be computed having regard to arm's length price'. Under section 92B of the Act, meaning of expression 'international transaction' is provided as 'transaction between two or more associated enterprises'. Further, section 92F(v) of the Act defines transaction to include 'an arrangement, understanding or action in concert....'. Rule 10A(d) of the Rules explains the meaning of expression 'transaction' as 'transaction includes number of closely linked transactions'. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 92B of the Act, meaning of expression „international transaction‟ is provided i.e. a transaction between two or more associate enterprises. Rule 10A(d) of the Income Tax Rules, 1962 (in short „the Rules‟) explains the meaning of expression "transaction" for computing the arm's length price to include number of closely linked transactions. Rule 10B of the Rules prescribed the manner in which the arm's length price is to be determined by following any of the method prescribed. The combined reading of Rule 10A(d) and 10B of the Rules reflect that number of transactions can be grouped and constituted as single transactions for the purpose of determining arm's length price, provided that such transactions are closely inter-linked. Further, even under the OECD Guidelines under the Chapter III, the proposition of aggregation of individual transactions is taken note of. In such background, it emerges that in appropriate circumstances, where there is existence of closely linked transactions, the same could be considered as one composite transaction and for this, common transfer pricing analysis needs to be carried out by adopting most appropriate met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of passenger cars. Hence, the same has to be aggregated with import of raw materials and cannot be benchmarked independently. 33. The third segment was import of spare parts which were being imported from associated enterprises in order to fulfill warranty commitments of passenger cars sold by assessee i.e. both manufactured and imported CBUs and also in order to meet other requirements of customers. Undoubtedly, warranty commitments were being fulfilled by dealers but under a dealership agreement, wherein the dealer was to use only spare parts which were made available by assessee. Such imports were being made of spare parts in order to keep the standard of products sold and also to maintain efficiency of passenger cars. The assessee had fairly admitted that it was covering cost of such spares, which were to be provided free of cost to customers under warranty commitments, from the cost of cars sold by it. In such scenario, the import of spare parts was an activity which was also closely connected with sale of manufactured and imported passenger cars and the same could not be benchmarked independently. Accordingly, we hold that transactions of import of CBUs and import of spare p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts with the margins earned by assessee on import of CBUs and found that the assessee had earned margins of 24.42% on import of CBUs as against gross margins earned from resale of CBUs at 11.33% and proposed an upward adjustment of Rs. 2.56 crores. There is no merit in the stand of TPO in this regard. In support, first of all, we refer to the observations of CIT(A) while benchmarking international transactions of payment of royalty, wherein he had held that controlled transaction was to be compared with uncontrolled transaction. Further, the Tribunal in assessee's own case while deciding appeal for assessment year 2002-03 in ITA No.1080/PN/2013, order dated 06.06.2016 had observed that the TPO had compared royalty paid by Maruti Udyog Ltd., which was a controlled transaction. It was further observed by the Tribunal that transfer price determined while benchmarking controlled transaction with another controlled transaction could not be considered at arm's length price because arm's length price signifies transfer price without possibility of being influenced by associated enterprises. The Tribunal further held that for the application of CUP method, it was necessary that tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no merit in the adjustment made by the Assessing Officer / TPO in respect of international transactions relating to receipt of commission from associate enterprises." 42. Following the above said principles, we hold that approach adopted by TPO in comparing margins of controlled transaction i.e. import of spare parts and import of CBUs from associated enterprises and proposing adjustment on account of arm's length price of international transactions does not stand and the same is cancelled. Hence, the TPO had erred in applying RPM method. In any case, under the garb of RPM method, TPO has compared sale of spares with sale of passenger cars. Further, it may be pointed out that TPO compared margins of fully developed vehicles with margins of spare parts, but the two items cannot be said to be functionally comparable and hence, there is no merit in the stand of Assessing Officer / TPO in this regard. 43 The next step is the application of most appropriate method in order to benchmark international transactions undertaken by assessee. In this regard, we find that assessee had applied TNNM method by selecting certain concerns as comparables. Though the TPO in show cause not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at for the assessment year 2002-03. The assessee has also raised cross objection No.1 in this regard i.e. against non consideration of facts in respect of disallowance of expenses in relation to capitalized cars on the conclusion arrived at for assessment year 2002-03 when the facts for the year under consideration were different. 51. The learned Departmental Representative for the Revenue fairly admitted that the said disallowance was also made in assessment years 2002-03 to 2004-05 and the matter has been remitted to Assessing Officer for fresh consideration. 52. The assessee on the other hand, has pointed out that this disallowance has not been made in any of the subsequent years. 53. We have heard the rival contentions and perused the record. The assessee while carrying out its business of manufacturing and selling of passenger cars, in order to promote sale of cars, was required to keep cars for the purpose of display in various events, photo shoots, road shows, tournaments and advertisement campaigns. The assessee also provided its cars to top management employees of India as well as for the official use. The perquisite value of cars was brought to tax in the hands of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in remitting the issue back to the file of Assessing Officer to decide admissibility of claim of expenditure of capitalized cars and had held that there is no error in the said findings of CIT(A). The assessee had furnished additional evidence in this regard and the Assessing Officer was directed to decide the same in accordance with law. In order to maintain consistency of approach on similar issue raised in earlier year and also in the present year, though there are no additional evidence filed during the year but we deem it fit to restore the issue back to the file of Assessing Officer, who shall decide the same in accordance with issue being decided in earlier year. Accordingly, directions of CIT(A) are amended to that effect and the ground of appeal No.1 raised by Revenue and cross objection No.1 filed by assessee are dismissed. 55. The issue in grounds of appeal No.2 and 3 raised by Revenue is against transfer pricing adjustment made to royalty payment by taking the rate @ 3% as against rate of 5% paid by assessee and also disallowing balance royalty expenditure, post TP adjustment considering the same to be capital in nature. 56. Brief facts relating to the issue are that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no merit in the orders of Assessing Officer / TPO in applying CUP method and comparing the rate of royalty paid by assessee with the rate of royalty paid by Maruti Udyog Ltd. to Suzuki Motors Corporation, Japan, which was controlled transaction. Consequently, grounds of appeal No.2 and 3 raised by Revenue are dismissed. However, the benchmarking of said transactions along with other transactions needs to be computed by Assessing Officer / TPO by applying TNNM method as directed in earlier grounds of appeal. The Assessing Officer shall also include the payment of royalty while applying transfer pricing provisions in order to benchmark international transactions with its associated enterprises. 61. The next issue raised vide ground of appeal No.4 is whether the CIT(A) was justified in treating royalty payment of Rs. 3.30 crores as revenue expenditure, where the assessee had acquired enduring benefit. 62. Both the learned Authorized Representatives fairly pointed out that the issue raised vide ground of appeal No.4 is covered by orders of Tribunal in assessment years 2002-03 to 2004-05. The Tribunal vide para 98 in assessment year 2002-03 and vide paras 23 and 24 at pages 30 to 32 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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