TMI Blog2016 (8) TMI 1182X X X X Extracts X X X X X X X X Extracts X X X X ..... taking a different view on a fundamental issue i.e. choice of the transfer pricing method when there are similar facts and hence, in line with the earlier year, internal CUP should be accepted as the most appropriate method for the current financial year. The above contention is in addition to the detailed objections filed by the assessee in the original proceedings before your goodself and learned DRP. Clearly, even in this round of proceedings, the assessee did not have much to say on the external comparable given by the TPO. Once an assessee is given a comparable instance an opportunity to explain as to why such a comparable should not adopted, and yet assessee remains quiet on the issue, it should not be open to him to be aggrieved of the same external comparable being adopted. No other material is on record to show that the assessee made any efforts to demonstrate that the said external comparable for CUP is not comparable with the facts of this case. Undoubtedly, a particular stand was taken in the assessment year 2005-06 but that was a stage in which no external comparable was available to the TPO. Now that an external comparable as CUP input is available, and the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liminary objection regarding maintainability of these appeals. It was submitted that since the appeals are against the appeal effect order passed by the Assessing Officer, based on fresh inputs from the Transfer Pricing Officer, the appeal can only be filed before the Dispute Resolution Panel or the CIT(A). It is submitted that this Tribunal is not the forum for the first appeal, that the assessment was done de novo in terms of the directions of the Tribunal and that it was not case of mere arithmetical exercise having been done at the assessment stage. He urged us to reject the appeals as non maintainable, with the liberty, maybe, to the assessee to file the fresh appeals before the CIT(A) along with a petition seeking condonation of delay, if so advised. He submits that the order not having been appealed before the right forum, the matter has now achieved finality. As for condonation of delay, that is the prerogative of the forum which the assessee ought to have approached anyway. 3. Learned senior counsel opposes these submissions on two grounds. His first plea is that if the stand is taken that this order is to be taken on the same footing as an assessment order passed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties before us, and in the light of the stand so taken by the coordinate bench, we procced to adjudicate upon the grievances of the assessee against the appeal effect order. 6. Learned Departmental Representative, however, has one more preliminary objection. He submits that the core issue in this appeal is whether a foreign entity can be tested party or not, and since there are conflicting opinions by the coordinate benches, on this issue, the matter should be referred to a special bench. When it was pointed out to the learned Departmental Representative that right now we are in the second round of proceedings, and that issue has already been decided in favour of the assessee in the first round of proceedings before us, and the appeal against the Tribunal decision is pending before Hon ble High Court on that issue, he submits that even in the impugned order the Transfer Pricing Officer has not accepted the stand of the Tribunal, and the issue is thus open for adjudication. He submits that since the same issue is coming up in the other years, which are in the first round and at least one of which is also being heard along-with these appeal, this issue should be referred at le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urities Limited [(2011) 132 ITD SB 1 (Bom)], in support of the proposition that mere pendency of an appeal before the Hon ble High Court cannot be a reason enough to decline reference to the special bench, in a situation in which admittedly there is a cleavage of opinion by the division benches. We are urged to recommend constitution of a special bench, to Hon ble President, for adjudication on this issue. 8. Learned counsel for the assessee vehemently opposes these submissions. His stand is that the matter that this specific issue, i.e. a foreign party being taken as tested party, is now before Hon ble jurisdictional High Court in assessee s own case in the first round of assessment, and no useful purpose will, therefore, be served by recommending constitution of special bench on the same issue. It is pointed out that Their Lordships have admitted, in assessee s own case for the assessment years 2006-07 and 2007-08 and on Commissioner s appeal, the question Whether Income Tax Appellate Tribunal was justified in directing the Transfer Pricing Officer to accept GMDAT as the tested party for adjudication on merits. Our attention is then invited to several decisions of successive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns decision (supra), these decisions, according to the learned counsel, were contrary to the law laid down by the other division benches, and, therefore, per incurium. Learned counsel for the assessee then took us through the order of the coordinate bench, in the first round of proceedings, holding that, on the facts of this case, GMDA, which is a non-resident entity, should be treated as a tested party, and justified the stand so taken by the coordinate bench. Learned counsel submits that referring a matter to a special bench cannot be a matter of course particularly when a well-considered view is taken on that issue in assessee s own case, just because in some other case a contrary view is taken on an altogether different set of facts. It is only when the bench has doubts on correctness of the earlier decision that there can be occasion for making a reference to the special bench. There is no good reason, according to the learned counsel, to doubt the correctness of the view so taken by the coordinate bench in assessee s own case. Learned counsel then made elaborate submissions on merits of the proposition as well. On the strength of these arguments, we are urged to follow the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been framed. Copies of the order of the Hon ble High Court passed on 2.12.2004 have been placed on record. I have also gone through carefully the earlier communication dated 23.6.2009 written by the Members who at that time constituted the Special Bench to the then Hon ble President, ITAT containing a similar suggestion. On the communication, the President had passed the following note: Let S.B. consider whether case it is necessary to adjourn hearing of the case till the matter is disposed by the Hon ble H/C . (Date: 28-7-2009) The Special Bench need to be reconstituted thereafter due to transfer of two of the Members. The Members of the Special Bench as constituted thereafter reiterated the earlier suggestion in their note dated 6-9-2010. They have held that the same reasons given in the earlier communication dated 23.6.2009 continue to hold good. The situation as of now is that the earlier orders of the Tribunal for the AY s 90-91 91-92, which are against the assessee, are pending in appeal before the Hon ble High Court awaiting adjudication of the substantial question of law. For the AYs 92-93 93-94, a Special Bench has been constituted to decide the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause no matter how may Members sit on such a special bench, the views expressed by the Tribunal remain, and shall always remain, subject to the approval of Their Lordships. When the matter is awaiting adjudication by Hon ble High Court, the special bench decision, irrespective of the numeral strength of such a special bench, is nothing more than writing on the sand which is bound to get washed away by a wave, of binding judicial precedent, approaching the sand. Having said that, we must take note of the fact that another special bench of this Tribunal, in the case of Summit Securities (supra), has touched a different chord. Presenting an antithesis of the views expressed by the special bench in the case of Tivoli (supra), this special bench, inter alia, states as follows: 13. The learned counsel for the assessee has raised objection to the continuation of the Special Bench on the ground that similar question of law has been admitted by the Hon ble Bombay High Court in the case of Zuari Industries Ltd. (supra). The only reason advanced by the learned Authorised Representative for the deconstitution of the Special Bench is the admission of the question of law by the Hon ble High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch an earlier Bench decides an issue in favour of one party, be it the Revenue or the assessee and the aggrieved party appeals against the said Tribunal order which is admitted by the Hon ble High Court. Suppose similar issue comes up before a subsequent Bench which finds itself unable to endorse the view taken by the earlier Bench. The only course open to the subsequent Bench, as per the aforestated three judgments, is to make a reference to the President for the constitution of a Special Bench instead of recording a contrary decision at its own. On the constitution of the Special Bench if an argument is taken that since the substantial question of law has been admitted by the Hon ble High Court against the earlier order of the Tribunal and hence such reference be withdrawn, there would be a deadlock. The subsequent Bench would land itself in a quagmire, being neither in a position to swallow the earlier view nor spit it out. Following the earlier decision of the Coordinate Bench would be difficult because of its non-concurrence with it. In the like manner it would find its hands tied to directly record a contrary conclusion because of the prevalence of the aforestated legal posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Bench helps in providing consistency qua different Benches of the Tribunal until the matter receives consideration of the higher judicial forums. It is further pertinent to note that the practice, similar to the constitution of Special Bench by the Tribunal to resolve a possible conflict in the views amongst various Benches of the Tribunal and not waiting till the matter is finally decided by the High Court, is also uniformly followed by the High Courts as well. Whenever a view is taken on a point by a Bench of a High Court and the subsequent Bench of the same High Court finds it difficult to accept the same, the practice is to refer the matter to the Chief Justice of the concerned High Court for constitution of a Larger Bench. Notwithstanding the fact that SLP against the judgment of its earlier Bench has been admitted by the Hon ble Supreme Court, the Hon ble High Court does not stop its functioning to wait for the outcome before the Hon ble Supreme Court for an indefinite time. The Larger Bench so constituted hears the matter and gives its conclusion, which becomes final qua various Benches of that High Court until the final judgment is rendered by the Hon ble Supreme Court. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before it, an earlier judgment in the case of Dilip N. Shroff vs. Jt. CIT (2007) 210 CTR (SC) 228 : (2007) 291 ITR 519 (SC) was cited in which the view was taken in assessee s favour. Finding it difficult to approve the earlier view in Dilip N. Shroff (supra), the matter was placed before the Larger Bench to take a final decision, which has since been decided in Union of India Ors. vs. Dharamendra Textile Processors Ors. (2008) 219 CTR (SC) 617 : (2008) 14 DTR (SC) 114 : (2008) 306 ITR 277 (SC). 21. In the name of precedents, the learned senior Authorised Representative in support of his objection, apart from relying on certain administrative orders passed by the Hon ble President, has relied on the solitary case of Harsha Achyut Bhogle (supra). That case rested on the facts in which the Tribunal decided the issue against the assessee in his own case in the earlier year. When the subsequent year came up for hearing, the assessee came out with a request that a Special Bench be formulated on the subject because the Tribunal in another case had taken a different view. The Division Bench dealing with the assessee s case for the subsequent year observed that the facts of the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Special Bench order in the case of Daks Copy Services (P) Ltd. vs. ITO (1989) 34 TTJ (Mumbai)(SB) 604 : (1989) 30 ITD 223 (Mumbai)(SB). In that case the point in question was decided against the assessee in an earlier year. When the subsequent year of that assessee came up before the next Bench, it was noticed that a contrary view was also available. In order to resolve this conflict a Larger Bench of three Members was formed. In that case also a preliminary objection was raised on behalf of the Revenue that since the point in controversy was already decided against the assessee by the Tribunal in an earlier year and such matter was pending before the Hon ble High Court, the same view should be followed in the subsequent assessment years as well and as such there was no need for a Special Bench. Repelling this contention, the Special Bench held that when the subsequent Bench was not convinced with the earlier view, the constitution of the Larger Bench for resolving the conflicting decisions of the Benches of the Tribunal was in order. 24. Adverting to the facts of the instant case we find that situation is identical apart from the change of parties. Whereas in that case the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustries Ltd. (supra) may be pressed into service once again. We are unable to find a solution to the likely problem to arise if the assessee s contention is accepted and the Special Bench is deconstituted and again the Division Bench finds itself unable to agree with the earlier view. Will the assessee in that case again request the Division Bench to make a reference for the constitution of Special Bench and on such constitution will again request to dismantle it? Law does not permit a person to both approbate and reprobate. When the Special Bench has actually been constituted at the plea of the assessee, now the assessee cannot turn around and argue that the Special Bench be deconstituted. We do not approve such a vacillating stand of the assessee. 26. It is beyond our comprehension as to what difference it makes to the assessee when his case is heard by the Division Bench or the Special Bench. The hearing by the Special Bench inter alia, is only to regularize the working of the Tribunal aimed at achieving a uniform view by different Benches on the point. The assessee s interest is not affected in any manner whether the case is heard by the Division Bench or the Special Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een decided against the assessee by the Tribunal in the appeal for earlier years and the matter was pending before the High Court in Reference under s.256(1) of the Act, the same view should be adopted for the assessment years with which we are concerned and that no departure from that view should be made on the ground that a different view had been taken in the case of another assessee by another Bench of the Tribunal . This plea was rejected by the special bench on the ground that we are bound to consider all the aspects of the points in controversy afresh and come to independent conclusion and the fact that in the earlier years the point had been decided against the assessee would not by itself preclude the special Bench from talking a contrary view . The issue whether constitution of a special bench would be justified in a situation in which the matter is pending before Hon ble High Court in assessee s own case was neither raised by the parties nor decided by the special bench. It is only elementary that a judicial precedent is binding for what is actually decides and not for what may even logically follow from this. As held by Hon ble Bombay High Court in the case of CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of some other assessee, not the assessee himself. We must also bear in mind the fact that, placed in a lower tier of judicial hierarchy, we, being a division bench, have to harmonise these binding precedents. Viewed in this perspective, and with analysing the legal position with this objective, we find that the sum total of these discussion is that (a) Summit Securities decision was in a situation in which the appeal admitted, and pending for final adjudication, by Hon ble High Court was in the case of a person other than the assessee concerned, and would not, therefore, apply to the fact situation before us; (b) Dak Copy Centre decision did only deal with the limited plea of the assessee that special bench should follow earlier division bench in assessee s own case, even if a contrary view is take by a division bench in some other case; and, therefore, (c) Tivoli decision holding that when the matter is admitted, and pending for final adjudication, by Hon ble jurisdictional High Court in assessee s own case, there is no need for constitution of special bench on the same issue, holds good law and there is no contrary judicial precedent to the same. Respectfully following the este ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imports were effected, as the tested party. In the course of proceedings before the Transfer Pricing Officer, the assessee s claim of DM-DAT as tested party, as also the transfer pricing study in support of this stand, was noted but rejected. The Transfer Pricing Officer was of the view that in the absence of reliability of data, it is not possible to treat GM-DAT as tested party as further analysis of transfer pricing is based on reliability of these data . The Transfer Pricing Officer was further of the view that selection of GMDAT as tested party because the tested party should be least complex entity which does not own valuable intangible property or unique assets, while GMDAT owns unique intangibles and carries out large number of related party transactions with its subsidiaries. He also noted that the GMDAT is receiving royalty/ technical knowhow fees from large number of its subsidiaries in different parts of Europe and Asia. It was also noted that there is no dispute about ownership and development of manufacturing intangibles by GMDAT. The assessee s plea about availability of sub-segmental data, which does not reflect impact of intangibles, was also rejected because, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mports of CKD and ₹ 19.66 crores for the Tech Centre operations. On the similar lines, though with some variations in comparables selected for Tech Centre Operations, the Assessing Officer also made ALP adjustments for the assessment year 2007-08 which were quantified at ₹ 237.73 crores the CKD imports and ₹ 18.98 crores for Tech Centre operations. Aggrieved, the assessee carried the matter in appeal before a coordinate bench of this Tribunal. 16. The coordinate bench, vide order dated 2nd August 2013 in the first round of proceedings, remitted both of these issues to the file of the Transfer Pricing Officer. The operative portion of the order of the coordinate bench was as follows: (A) On the issue of ALP adjustment for CKD Kit imports 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 the comparable companies selected by the assessee doesn t fall within the ambit of TPO s jurisdiction and, thus, he can neither call for any additional information nor scrutinize their books of accounts. The Revenue can get all the relevant particulars around the globe by using the latest te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 strategy (including identificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould 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. 17. That s how the Transfer Pricing Officer came to be in seisin of the matter again so far determination of the arm s length price of CKD Kits and Tech Centre revenues are concerned. 18. In the remanded proceedings, the Transfer Pricing Officer noted that the facts have been wrongly represented by the appellant before the ITAT and these wrong set of averments before the ITAT have formed the basis of decision by the ITAT and then he gave the detailed analysis of how, according to him, decision of the Tribunal was fallacious and incorrect. He also noted that during the course of set aside proceedings before this office, the assessee has not complied with the directions of the ITAT contained in the above order , and specifically pointed out that in the present case, inspite of specific requests made by the TPO to the assessee to produce suitable data in respect of non-resident tested party and also to produce person well conversant with the such accounts as to demonstrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Appeal No. 495 of 2014 and 500 of 2014 of department have been admitted by Hon ble Gujarat High Court, vide oral order dated 16/09/2014, wherein following questions of law were raised: (A) Whether the Income Tax Appellate Tribunal was justified in directing the Transfer Pricing Officer (TPO) to accept GMDAT as tested party? (B) Whether the findings recorded by the Income Tax Appellate Tribunal are perverse to the records of the case? 8.4.2 In view of the above, and in view of the failure on the part of the assessee to cooperate with the TPO in executing the directions of the ITAT, it is impossible to determine ALP by taking AE as tested party. Therefore, with due respect to the directions of the Hon ble ITAT, the ALP determined by the TPO as per original order taking assessee as tested party is retained as it is. Thus, the adjustment of ₹ 33.49 crores made to the international transaction of import of CKD kits and other raw materials, recovery of costs and purchase of capital assets is proposed as per original order. 19. As regards the ALP adjustment in respect of Tech Centre operations, the TPO noted that the assessee, vide letter dated 7th October 2014, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee for AY 2006-07 and 2007-08. The issue of benchmarking of various transactions has been set aside for fresh determination. The case has been referred to this office by the AO for compliance with the order of the Hon ble ITAT and necessary action. 2. In light of the various directions given by the Hon'ble Bench, you are requested to furnish further information as detailed below; A: Purchase of CKD Kits - 8. Detailed annual accounts of GMDAT with reference to the components included in the CKD along with cost allocation details. Individual cost centre ledger accounts in respect of components of the kits, the basis of costing of the component with reference to the total cost of the centre where it was produced, the final pricing of these components, details relating to other expenses incurred by GMDAT related to their manufacturing and the proportion in which they have been integrated in CKD costs may also be furnished. 9. Kindly ensure that a competent person aware of finances of the tested party who can demonstrate as to how the GMDAT's turnover and other financial data has been arrived at from its annual financial data of 2005/2006 using the PLP submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its transaction of manufacturing and export of completely knocked down kits from Korea to India. To this extent, your comparables should have dealt in CKDs, located in South Korea and should have exported to similar geographical locations. Kindly furnish an analysis of each of your comparables with regards to their comparability with your tested party with reference to their functions, assets and risks. 13. As regards your contention relating to use of multiple year data, it is now a settled principle that data for the relevant year is to be used. To this extent, your study does not conform to the settled principles of law and is, therefore, liable to be rejected. Kindly explain why the TP study should not be rejected to exclude the multiple year working. 14. It has been your contention that the TPO has adopted GMDAT as tested party while benchmarking royalty payment while assessee's selection of GMDAT has been rejected by him. This has been one of the major grounds on which the ITAT has directed adoption of GMDAT as tested party in transaction relating to purchase of CKD Kits. The relevant para is reproduced below: 11.6.2. As rightly highlighted by the assessee, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected by you should not be rejected on this ground. C: With regards to benchmarking of royalty: 4. The observations of the ITAT are reproduced below; 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 where 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 put-forth by the assessee with that of the TPO in rejecting the assessee s comparable, sustained the TPO s stand without assigning any plausible reason whatsoever. Moreover the relevant agreements which contained terms and conditions on the basis of which, they were to be selected as comparables. Obviously, thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iliation of the back up excel files with the annual standalone financial statement of GM Korea. It was also, inter alia, explained that only single year data is being used in the present case and that it is not a case of use of multiple year data. The assessee also filed segmental data of GMDAT, along with certificate dated 8th January 2013 issued by Deloitte Anjin LLC Korea, and complete financial statements of the GMDAT. The copies of these detailed replies, as also the documents furnished before the Transfer Pricing Officer, have been placed before us in the paperbooks and examined by us. It is, therefore, clearly incorrect statement of the Transfer Pricing Officer that the requisite information has not been furnished by the assessee. We have noted that the assessee has produced Certified PLP data from the statutory auditors of GM Korea, Consolidated annual report of GM Korea, Allocation keys, Reconciliation of the certified segmental report prepared by the Auditor vis- -vis the PLP data submitted by the assessee, Back-up excel files referred by the auditor while preparing the certified report for AYs 2006-07 and 2007- 08. The TPO is, therefore, in error in taking a stand that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egmental PLI working made by the assessee. Accordingly, Ms. Shweta Kashyap, CA/AR attended this office along with Shri Kunal Keshani, CA/AR on 06/11.2015 and explained the segmental PLI working of the tested party for AY 2006-07 AY 2007-08. They demonstrated the process of selection of comparables through OneSource database by using the similar keywords to find out the comparable companies functionally similar to the tested party. Since the tested party is located in South Korea, the region was restricted to Korea only to avoid geographical differences. The soft copy of screen shots of search process is enclosed in CD. 3. As a result of search, 74 comparable companies located in Korea are found. On further examination the search result, it is found that only 33 companies are functionally similar. Since the assessee has selected TNM method for benchmarking, the above 33 companies are found broadly engaged in similar functions that are carried out by the tested party. It is noticed from the copies of financial statements of the comparables submitted by the assessee that the financial statements of only 17 companies are submitted. Therefore, an attempt was made to obtain the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrect figure of segmental revenue as above, the revised profit comes to 5.32 Million USD (Seg. Revenue 63.44 Mn USD (-) Seg. Cost 58.12 Mn USD) and the OP/OC% comes to 9.15% as against (-) 6.23% shown by the assessee in respect: of tested party. (iii) For AY 2007-08. the segmental revenue (for sale of CKD kits, components, spare parts, accessories and capital goods) i.e. revenue from related parties is shown at 81.73 Million USD whereas payments made by the assessee to GMDAT during AY 2007-08 alone comes to 81.30 Million USD (Total value of above transactions in INR 353,15,40,392 divided by 43.44 i.e. prevailing rate of one dollar and further converted into Million). The figure of 81.30 Million USD is revenue from Indian AE only. The details of revenue earned by tested party from above mentioned international transactions from other AEs are not available. However on the basis of available figures, the segmental revenue of the tested party should have minimum 81.30 Million USD whereas in the segmental accounts, the same is shown at 81.73 Million USD. Therefore it is presumed that the difference figure of 0. 43 Mn USD pertains to segmental revenue earned from other AEs and as such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lions USD. Thus the adjustment of 3.59 Millions USD equivalent to ₹ 16,01,49,900/- (35,90,000 USD X 44.61 prevailing USD rate in INR) needs to be made. 5. In respect of AY 2007-08. it is seen from PLI computation of the comparables that the average PLI margin single year data comes to 2.20% (NCP i.e. profit/cost) whereas the PLI margin of the tested party (AE) is 10.50%. This shows that the AE has earned extra profit by 8.30% than the arm's length price from the transaction with Indian AE. In other words, the assessee has paid more price to the AE than the arm's length price. Since the difference ALP margin and actual margin earned falls beyond the benefit of +/-5%, adjustment is required to be made in this year. The ALP profit for AY 2007-08 comes to 1.63 USD Million whereas, the profit worked out by the assessee is 7.77 USD Million. This shows that 6.14 USD Millions is paid more than the ALP. The value of payments made by the Indian party is 81.73 USD Million. However, after reducing the extra profit of 6.14 USD Million, the ALP price of International transaction comes to 75.59 USD Millions. Thus the adjustment of 6.14 USD Million equivalent to ₹ 26,67,21. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omponents by selecting General Motors Korea Company ( GM Korea ) as the tested party. The Appellant appeared before the learned TPO and explained in detailed search strategy, margin computation of tested party and comparable companies. Appellant also provided all back-up financial data in hard and soft copies for both tested party and comparable companies vide submission dated November 6, 2015. Para 3 of the submission Extract from the learned TPO s submission is reproduced below for Your Honours kind consideration: 3. As a result of search, 74 comparable companies located in Korea are found. On further examination the search result, it is found that only 33 companies are functionally similar. Since the assessee has selected TNM method for benchmarking, the above 33 companies are found broadly engaged in similar functions that are carried out by the tested party. lt is noticed from the copies of financial statements of the comparables submitted by the assessee that the financial statements of only 17 companies are submitted. Therefore, an attempt was made to obtain the financial statements of remaining '16 comparables from the Orbis database for which the access is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalysis undertaken in accordance with the law The Appellant has complied with all requirements as prescribed under the Act read with Rule 10D of the Rules. The transfer pricing analysis was undertaken as per the procedures outlined and in good faith, to comply with all the provisions of law and to provide a true and fair analysis. No reasons to believe that the transactions were not at the arm s length with providing any cogent reasons As provided in section 92C(3) of the Act, the TPO can proceed to determine the arm s length price only in circumstances enumerated under clause (a) to (d) provided therein. Section 92C(3) of the Act provides as under: Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material information or document in his possession, of the opinion that a) the price charged or paid in an international transaction has not been determined in accordance with sub-section (1) and (2); b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in subsection (1) of section 92D a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary for the assessment. As already mentioned, this cannot be said in the present case. The appeal is consequently allowed, the judgment of the High Court is set aside and the impugned notices are quashed. The parties in the circumstances shall bear their own costs throughout. The Gujrat High Court in the case of CIT vs Harikishan Jethalal Patel [1987] 168 ITR 472 (Guj) has held that when there is no dispute as to the facts of the case or the material available on record then remanding back of the proceedings is no warranted. The High Court held as under: 13. In the present case also, as pointed out earlier, the Income Tax Officer never doubted the genuineness of the firm and/or the transaction. On the record, there is no material whatsoever to doubt either. What the Revenue desires is a remand so that it may, on introduction of fresh facts, if any, examine the genuineness of the firm and/or the transaction. Even at present, it is not the case of the Revenue that it has come into possession of fresh facts which cast a doubt on the genuineness of the firm and/or the transaction. The Revenue wants to take a shot in the dark hoping that it may on remand be able to dig out fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ack-up even after excluding Other Revenue . Para 3 (i) of the submission Extract from the learned TPO s submission is reproduced below for your Honours kind consideration: (i) The segmental PLI computation submitted by the assessee, which was prepared on the basis of report of independent auditor, is for the period from 01/04/2005 to 31/03/2006 for AY 2006-07 and for the period from 01/06/2006 to 31/03/2007 for AY 2007-08. However, the data of all the comparables is for Jan. to Dec. period. Though the financial statements of tested party (GMDAT) are also for the period Jan. to Dec., the assessee has prepared segmental accounts for the period from l April to 31 March and no justification is given in the TP study report. However, since the Hon'ble Bench has directed to adopt the segmental PLI after verification, the same is accepted for ALP computation subject to correction of arithmetical errors discussed in point No. (ii) (iii) below At the very outset, it is highlighted that the learned TPO erred in stating that the data for AY 2007-08 was for period from 01/06/2006 to 31/03/2007. However, the data for AY 2007-08 has been considered for period from 01/04/2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assesee is not reliable However, as per the directions of the Hon'ble ITAT, segmental PLI of the assessee is accepted subject to above mentioned arithmetical correction. Thus after adopting the correct figure of segmental revenue as above, the revised profit comes to 5.32 Million USD (seg. Revenue 63.44 Mn USD (-) Seg Cost 58.12 Mn USD) and the OP/OC % comes to 9.15% as against (-)6 23 % shown by the assessee in respect of tested party. (iii) For AY 2007-08, the segmental revenue (for sale of CKD kits, components, spare parts, accessories and capital goods) i.e. revenue from related parties is shown at B'1.73 Million USD whereas payments made by the assessee to GMDAT during AY 2007-08 alone comes to 81.30 Million USD (Total value of above transactions in INR 353,15,40,392 divided by 43.44 i.e. prevailing rate of one dollar and further converted into Million). The figure of 81.30 Million USD is revenue from Indian AE only. The details of revenue earned by tested party from above mentioned international transactions from other AEs are not available. However, on the basis of available figures, the segmental revenue of the tested party should have minimum 8'1.30 Millio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 600/- (61,40,000 USD X 43.44 prevailing USD rate in INR) needs to be made. The Appellant would like to state that the learned TPO has erred in computing the margins of the tested party i.e. GM Korea for assessment years 2006-07 and 2007- 08. The learned TPO has erred in adding the value of import of parts and components and spare parts of other associated entities as well which resulted in a higher value. The total value of import of parts and components and spare parts from GM Korea as per Form 3CEB is provided below for Your Honours consideration: Particulars Amount (INR) AY 2006-07 Amount (INR) AY 2007-08 Import of parts and components from GM Korea 2,269,447,566 3,275,793,039 Import of spare parts 64,307,683 147,226,276 Capital goods 162,088,948 56,852,642 Total Amount (INR) A 2,495,844,197 3,479,871,957 Total Amount (INR) Considered by the TPO B 2,830,072,189 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utomobile parts segment and pipe fitting connector segment) Arithmetic mean (in percent) 7.33 9.04 Considering the above, it is reasonable to conclude that GMIPL s international transactions relating to import of parts and components is at arm s length and no adjustment should be carried out in relation to the same. Para 3 (iv) and 3 (v) of the submission Extract from the learned TPO s submission is reproduced below for Your Honours kind consideration: (iv) In the TP study report, the assessee has used filter of sales more than zero and no upper limit is applied. The same approach is adopted while selecting the comparables under report. (v) For computation of PLI of the comparables, the assessee, in its TP study report has excluded the interest income, dividend income and non-recurring income. The assessee has considered the other income as operating, however, TPO has not the same as operating income in absence of details of such other income. In respect of expenses, the assessee has excluded nonrecurring expenses-interest and financial charges The TPO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue is excluded from the operating margin of the comparable companies, the Appellant s international transaction of import of parts and component will comply with the arm s length principle based on the comparable set submitted by the Appellant during the present course of hearings before Your Honours: Company Name AY 2006-07 (NCP in percent) AY 2007-08 (NCP in percent) Country Name Financials Dae Jin Industrial Company 5.16 6.97 South Korea Standalone Profit and Loss account Jico Co., Ltd. 3.38 2.71 South Korea Standalone Profit and Loss account Pusan Cast Iron Company Limited 7.38 7.69 South Korea Standalone Profit and Loss account Saeron Automotive Corporation 14.79 17.68 South Korea Standalone Profit and Loss account WOOSU AMS CO., LTD. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the hearing as he was stated to be preoccupied with urgent work, which he specified in great detail in the letter, but he did submit that the fresh search of comparables was necessary as the assessee was not able to demonstrate the search process carried out at the time of preparing the transfer pricing study. He also submitted that the TPO has not conducted a fresh search (of comparables) on his own but verified the search process demonstrated by the assessee as per directions of Hon ble ITAT and the results thereof have been submitted before the ITAT As regards the use of financial statements of new comparables, it was clarified by the TPO that since the information was stated to be not readily available with the assessee and since the report was to be furnished to the ITAT in a time bound manner, he had no choice but to access whatever database is available to him. As regards corrections in segmental PLI working of the tested party, and allegedly erroneous inclusion of imports of spare parts and component of other AEs, it was submitted that the assessee itself has done so and that the TPO has not, therefore, changed the method of computation. According to the TPO, while comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee are found to be functionally comparable as he now has 33 comparables as a result of his new search- which include 16 comparables selected by the assessee. In the light of this stand of the assessee, his earlier observation was clearly incorrect. It is also important to bear in mind the fact that detailed functional analysis and margin computations were provided in the transfer pricing computations, and the TPO has not rejected the same. As for the observation that the selection should be of the companies dealing only in engine and transmission parts, that the assessee has furnished a detailed list of imports from AE which includes seat cushion, rear panel, door, side panel, window frame, brake part, security locks, windshields, and other parts. His earlier stand was that in absence of any data being supplied by the assessee with respect to GMDAT, it is not possible to conduct the transfer pricing study adopting the GMDAT as tested party , but once his attention is drawn to the information already furnished by the assessee, and the certification of such information by public accountants, he no longer has a grievance on that issue. As regards the TPO s observation to the effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring, when TPO was confronted with voluminous information furnished to him in the remanded proceedings and the fact that he did not find any fault in the information so furnished, learned TPO sought an opportunity to once again examine the details. It was in response to this prayer that the assessee was directed to appear before the TPO, assist him by explaining all the information etc, and the TPO was directed to bring it our notice in case there were any patent infirmities or inconsistencies in the material so furnished by the assessee and already on record. The exercise was to essentially remain confined to the material already on record during the remanded proceedings; our scope of adjudication cannot go beyond that aspect of the matter. The issues that the TPO are raising now are the issues that ought to have been examined when the TPO was given an opportunity to re-examine the matter. In any case, the assessee has, as we have noted earlier, met these issues now being raised by the TPO. There are clear and blatant errors in the report filed by the TPO, inasmuch as even interest, dividends and nonrecurring incomes are included in the operational income, but nonrecurring expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee cannot be faulted with. Once the Tribunal directs GMAT to be taken as tested party- a direction which remains intact as on now, and unless there are any legally sustainable defects pointed out in the transfer pricing analysis by the assessee, there cannot be any good reason to hold that the imports of CKD kits by the AEs is not at an arm s length price. The material on record does not justify rejection of the assessee s TP analysis. We have noted that, in the transfer pricing study reports filed before us, the assessee had shown the detailed process whereby the comparables were selected, and the TPO did not even look at this aspect of the matter. For the assessment year 2006-07, for example, TP study shows, at page 1346 of the paper-book (internal page 24), the US SIC code applied, and then accept-reject matrix for 442 comparables, alongwith a brief reason of rejectionwhere applicable, in Annexure 2. The business description of the comparables has also been set out at page 1417 onwards. The TPO has no issues with the same, no comments on these inputs and yet he proceeds to draw the fresh comparables on the basis of new search. It is only elementary that unless the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, along with supporting evidences, and the TPO has simply brushed the material aside. That is an approach which cannot meet any judicial approval. 34. Even on merits, the assessee deserves to succeed. Having gone through the material on record, and having heard the rival contentions, we see merits in the plea of the assessee. We find that as far ACE Software Exports is concerned, the DRP itself has selected the said comparable and the TPO has also included this comparable in the assessment year 2007-08. This is an assessee engaged in rendering CAD/CAM services and GIS services which are quite similar to engineering services. There is no good reason for the TPO to exclude the same. We, therefore, direct that this comparable be included. So far as Powersoft Global Solutions Ltd, as a comparable, is concerned, during the relevant previous year CADGIS Consultants merged with Powersoft and the claim of the assessee is that due to this extraordinary event, this comparable should be excluded. A large number of judicial precedents are also cited in support of this argument, including the coordinate bench decisions in the cases of Behr India Ltd [(2014) 52 taxmann.com 447], Capital IQ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat aspect of the matter, however, needs to be verified by the TPO. The matter is restored to the file of the TPO for this limited purposes. The plea of the assessee is thus upheld in principle but remitted to the file of the TPO for limited verification. 36. So far as transfer pricing issues are concerned, that leaves us with only one item i.e. ALP adjustment of ₹ 4,89,60,504 in respect of royalty paid by the assessee to its Korean AE. This adjustment is only with respect to the assessment year 2007-08. 37. As far as payment of royalty to the AE is concerned, we have noted that the TPO himself has accepted this to be at an arm s length in the earlier assessment years. However, in the present case, he has sought to discard this approach on the basis of an external comparable which is used as an input for determining the ALP on the basis of CUP method. The DRP confirmed this adjustment, as noted by the coordinate bench in the first round of proceedings, in a rather mechanical manner. When the matter reached coordinate bench for adjudication, it was remitted to the file of the TPO by observing as follows: 19.11. We have carefully considered the lengthy submission mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme Court has clearly laid down that though strictly speaking, the principle of res judicata does not apply to the income tax proceedings, but where a fundamental aspect permeating through the different assessment years have been found as a fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it is not allowed change the position in any subsequent year. However, it noticed from the original TP order for AY 2007-08 that during original TP proceedings, the search of ADGAR online database (which is based on SEC filings) was carried out to search for royalty agreement for independent parties related to assemblies for automobiles, and accordingly two agreements were found and one of these agreements were related to GMDAT's, M-150 and M-200 project itself i.e. the project for which assessee has paid royalty to M/s. GMDAT. This agreement was exactly the same on account of product royalty with the assessee's product royalty agreement. Accordingly a show cause notice issued to the assessee proposing to use the above agreement as CUP to benchmark the ALP of royalty payment. In its reply dated 30.9.2010 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is pertinent to note that your goodself has held the payment of royalty at arm's length in the financial year 05-06. Hence, it is submitted that a consistent approach should be adopted to benchmark the payment of royalty. It is pertinent to note that vis-a-vis the prior year there has been no fundamental change at all in the facts and circumstances, functions, assets and risk profile of the assessee or the nature of international transaction of payment of royalty during the captioned financial year. Hence, all other things being the same, the Transfer pricing approach (based on internal CUP) should be upheld for the current financial year and cannot be arbitrarily changed in the current year without any reasonable basis. In this connection, it is respectfully submitted that the Hon'ble Supreme Court has clearly laid down that though strictly speaking, the principle of res judicata does not apply to income tax proceedings, but where a fundamental aspect permeating through the different assessment years have been found as a fact one way or the other, and the parties have allowed the position to be sustained by not challenging the order, it is not allowed to change t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me reiterated by the High Court in its recent decision rendered in the case of Li and Fung India Pvt. Ltd. Vs CIT [(2013) 40 taxmann.com 300 (Delhi)], wherein the following observations were made: It is also pleaded that the assessee has received 80-O deduction in the earlier years in respect of providing these professional and technical services. In this regard, we hold that every assessment year is a separate assessment year for income tax purposes and the principle of res judicata is not applicable. Further during this year, the assessee has not claimed or entitled for 80-O deduction. Therefore, it cannot be a plea to justify the transaction at the arm's length The law was again reiterated by the Supreme Court in its decision rendered in Berger Paints India Ltd. vs. CIT (266 ITR 99), wherein the following observations were made: In view of the judgments of this court in Union of India vs. Kaumudini Narayan Dalal [2001] 249 ITR 219; CIT vs. Narendra Doshi [2002] 254 ITR 606 and CIT Vs. Shivasagar Estate [2002] 257 ITR 59, the principle established is that if the Revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition laid down by the Supreme Court, has dismissed an appeal by the Department by holding that earlier decisions on the same question should not be reopened unless some fresh facts are found in the subsequent year. The High Court observed as follows: We find substance in the contention urged by learned counsel for the appellant True that each assessment year being independent of the other, as a general rule, the principal of res judicata or estoppel by record, which applies to civil courts, does not apply to income tax proceedings but, yet for the sake of consistency and for the purpose of finality in all litigations, including litigation arising out of fiscal statutes, earlier decisions on the same question should not be reopened unless some fresh facts are found in the subsequent year The Supreme Court in Radhasoami Satsang Vs. CIT [1992] 193 ITR 321 observed that where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. The Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h to say on the external comparable given by the TPO. Once an assessee is given a comparable instance an opportunity to explain as to why such a comparable should not adopted, and yet assessee remains quiet on the issue, it should not be open to him to be aggrieved of the same external comparable being adopted. No other material is on record to show that the assessee made any efforts to demonstrate that the said external comparable for CUP is not comparable with the facts of this case. Undoubtedly, a particular stand was taken in the assessment year 2005-06 but that was a stage in which no external comparable was available to the TPO. Now that an external comparable as CUP input is available, and the assessee has not made any efforts to show as to this CUP input in different in respect to the royalty transaction undertaken by the assessee, such an external comparable can indeed be accepted. We see no infirmity in the same and we, therefore, confirm the action of the TPO on this count. 43. To the extent above, the ALP adjustment of ₹ 4.89 crores is confirmed. 44. Let us now take up issues, other than transfer pricing issues, raised in these appeals. 45. So far as t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
