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2018 (10) TMI 1586 - AT - Income TaxTransfer 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 - MAM - Held 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. Application of most appropriate method in order to benchmark international transactions undertaken by assessee - Held that:- We find that assessee had applied TNNM method by selecting certain concerns as comparables. Though the TPO in show cause notice had proposed to reject five companies out of total 12 companies identified by assessee in its TP study report, but there are no final observations of TPO / TO in this regard. The same also was not necessitated because the TPO had applied RPM method. In such scenario, where the TPO has failed to look into the comparability aspect of margins of assessee with mean margins of comparables, we remit this issue back to the file of Assessing Officer / TPO to consider submissions of assessee in this regard and after applying aggregation approach, compute the margins of assessee company and compare it with mean margins of concerns which are functionally comparable to the assessee. The assessee shall cooperate and furnish the details and Assessing Officer shall decide the limited issue after affording reasonable opportunity of hearing to the assessee. Transfer pricing adjustment made to royalty payment by taking the rate @ 3% as against rate of 5% paid by assessee - disallowing balance royalty expenditure, post TP adjustment considering the same to be capital in nature - Held that:- We hold that payment of royalty is to be aggregated with production and sales activity and could not be benchmarked separately. Further, we also hold that there was 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. Treating royalty payment as revenue expenditure, where the assessee had acquired enduring benefit - Held that:- We are referring to the findings of Tribunal in assessment years 2003-04 and 2004-05, wherein vide paras 23 and 24, the said issue has been decided in favour of assessee and the grounds of appeal raised by Revenue were dismissed, but for the sake of brevity, we are not reproducing the same. Accordingly, the ground of appeal raised by Revenue is dismissed.
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