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2013 (1) TMI 86 - AT - Income TaxTransfer Pricing Adjustment - assessee-company is an Indian company engaged in the manufacture and trading of automobiles - operating expense adjustment - assessee contested against violation of natural justice - Held that:- No evidence has been brought on record by the assessee to establish the violation of the principles of natural justice by the AO as claimed and therefore rejecting this ground raised by the assessee as infructuous. Reference to TPO - Held that:- As decided in Tally Solutions Pvt. Ltd. (2011 (9) TMI 196 - ITAT BANGALORE) there is nothing in section 92CA to suggest that the AO should hear the assessee or record reasons before making a reference to the TPO and therefore in the instant case there is no infirmity in the action of the Assessing Officer in referring this case to the TPO. The Explanation to section 92(1) clarifies that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the ALP. As these are anti-avoidance provisions of the Act, and also special provisions to protect the tax base of the country from being eroded, they will over-ride all other provisions of the Act. Therefore, see no merit in this ground raised by the assessee that the definition of 'income' under the Act is not amended to include the T.P. adjustments as income and accordingly dismiss this ground TP adjustment without demonstration - Held that:- As in Coca Cola India Inc. v. Asstt. CIT [2008 (12) TMI 67 - PUNJAB AND HARYANA HIGH COURT] it is not necessary for the AO/TPO to demonstrate that profits are shifted out of India in order to determine the arm's length nature of any international transaction - thus no merit in the ground raised that no T.P. adjustment could be made in the assessee's case without there being any material against assessee. Use Of Multiple Year Data - Held that:- TPO is both empowered and also duty bound to determine the ALP using such contemporaneous data for this purpose even if it is not available to the assessee in the public data bases at the time of preparation of its report on the T.P. study - as mandated by rule 10B(4) of IT Rules, 1962, the TPO used data pertaining to the current year i.e. FY 2002-03 rightly rejecting the assessee use of multiple year data as the assessee failed to demonstrate as how such data pertaining to the prior years had an influence or bearing on prices in the current financial year. Methodology and process in arriving at ALP - segregation of trading and manufacturing segments - Held that:- The sale of spare parts is triggered as a result of the manufacturing activities, including warranty commitments. Therefore, it would not be in the fitness of things for the sale of spare parts and components to be considered in isolation from the sale of manufactured vehicles. This view is supported by the OECD T.P. Guidelines, 2010. As the comparable companies are also trading in spare parts and components it can be concluded that trading in spare parts is closely inter-linked with the manufacturing segment of the assessee. No meaningful purpose would be served in segregating the trading and manufacturing segments when the assessee and the comparable companies are at par with regard to the nature and scale of combined activities - direct the AO/TPO to compute the ALP at the entity/enterprise level by combining the trading and manufacturing segments. Operating Efficiency Adjustment - bringing the operating expenditure of the comparables at par with that of the assessee - Held that:- TPO has concluded that the assessee is very efficient as its operating expenses are lesser when compared to that of the comparable companies. Briefly, the TPO has equated operating efficiency to operating expenditure. Before the CIT (Appeals) detailed submissions were made on this issue and a remand report was called for thereon, CIT (Appeals) however was of the view that since these submissions were not filed before the TPO during the assessment proceedings they could not be entertained at the appellate stage. Before us apart from the submissions made, expert opinion has been filed on this issue by the assessee which was not available before the TPO. In these circumstances, this matter of operating efficiency adjustment be remanded back to the file of the TPO for re-examination. Admission of Additional Evidence - Held that:- As decided in CIT v. Salig Ram Prem Nath [1989 (2) TMI 51 - PUNJAB AND HARYANA HIGH COURT] that in order to do substantial justice, the ITAT is vested with the requisite authority to admit additional evidence. As found that the assessee had made submissions on the said matter on which the experts opinion is now filed the experts opinion for being considered in the disposal of this ground of appeal admitted. Excise Duty Adjustment - Held that:- Assessee's ground on excise duty adjustment needs to be allowed as assessee collects excise duty as levied by the Central Government and there is no profit element involved in collecting the same and remitting it to the Government. TP regulations are based on the actual margins and 'pass through' items like excise duty are not to be considered while computing margins as is also the case with the comparable companies. DR too did not appear to have serious objections to the exclusion of excise duty in arriving at the margins. Customs duty adjustment - Held that:- Remand the matter, of examining the necessity of whether customs duty adjustment is to be allowed, as claimed by the assessee, to the file of the TPO. The TPO directed to examine the contentions keeping in mind the observations made in the light of the decision in the case of Skoda Auto (P.) Ltd.'s case (2009 (3) TMI 249 - ITAT PUNE-A) relied on by the assessee and the case of Sony India Pvt. Ltd.'s case (2008 (9) TMI 420 - ITAT DELHI-H) relied on by revenue. Cash PLI (Profit Level Indicator) or PBDIT (Profit Before Depreciation, Interest and Tax) to sales - profit margin for determining ALP - Held that:- The assessee is in the asset intensive automobile industry thus cash PLI or PBDIT to sales is not the appropriate PLI and also note that the TPO has given depreciation adjustment for differences in relative level of depreciation cost with reference to sales. Commission Income - Held that:- In agreement with the TPO's action in excluding commission income for the reason that the commission income earned by the assessee is not derived from out of the assessee's business operations of manufacture and sale of passenger vehicles or the sale of spare parts and components. Provision for Warranty Costs - Held that:- The one time special warranty provision, arising out of an extra-ordinary viz. manufacturing defect in exhaust of passenger vehicle in the relevant period should be considered as non-operating expenditure. Marketing Expenses - Held that:- Marketing expenses incurred for launch of a new passenger vehicle in the relevant period, is incurred in the normal course of its business operations and forms part of its operating expenditure, hence disallowed. Benefit +/- 5% Safe Harbour - Held that:- +/- 5% variation is allowed only to justify the price charged in the international transactions and not for adjustment purposes. The amendment to 92C(2A) has settled the issue, thus the 5% benefit is not allowable in the assessee's case. CIT(A)exceeded his jurisdiction u/s 251 - Held that:- ALP adjustment is to be restricted to the extent of purchase of components from its AE's & CIT(A) has only directed the TPO to compute the ALP adjustment, in accordance with his finding and for this purpose to make necessary verification. No reason to hold that the CIT(A)in directing the TPO to recompute the ALP adjustment has exceeded his jurisdiction u/s 251.
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