2009 (3) TMI 249 - AT - Income Tax

Appeal u/s 254 - TP Adjustment - determination of ALP - CPU or TNMM Method - Whether or not the assessee can indeed be faulted for not being able to supply the information which he has not supplied or which the assessee claims to be incapable of supplying - taxpayer is an Indian company engaged in the business of manufacturing and selling passenger cars - assessee entered into international transactions with two associated enterprises (AEs) - main transactions are of purchase of materials from assessee's parent company and of payment of royalty and technical know-how fees to assessee's parent company i.e., Skoda a/s - reference made to the TPO u/s. 92CA - CIT(A) noted that the assessee has not submitted entire data and information which was supplied to the AO and the TPO and dismissed - preliminary objection taken by the Revenue that we should not deal with the matter on merits as the assessee has not co-operated in the first appellate proceedings -

HELD THAT:- The CIT(A) has brushed aside fundamental questions, and proceeded to reject the appeal for want of details in general terms. The relevant details or at least a part of relevant details, as we have noted, were furnished by the assessee and in any case all those details were in the assessment records. It is not, therefore, wholly correct to say that the assessee did not at all co-operate before the CIT(A) or that the assessee failed to furnish the necessary details to the CIT(A) and that, for this reason alone, we are denuded of powers to deal with the matter on merits and simply remit the matter to the file of the CIT(A). We therefore decline to sustain the preliminary objection raised by the assessee (sic-Revenue). We will consider the matter in entirety, and, we see no need to restrict the options available to us for doing justice in the matter.

We have noted that there are references to the determination of arm's length price on the basis of CUP (comparable uncontrolled price) method, but, in the course of hearing before us, ld counsel for the assessee admitted that the transactions which were relied upon were transactions that the parent company had with other AEs and the price of Euro 680 thus given is not the price at which transactions have been entered into between independent persons. This is the price that the assessee had adopted as internal CUP.

The assessee also submitted that external CUP is not available because the product is unique. To our understanding, this argument is totally devoid of any merits. To be considered as internal CUP also, the transaction has to be an independent transaction i.e., between two entities, which are independent of each other. The sale of car kit has admittedly taken place only between the associated concerns. Therefore, the price at which such transaction has taken place is irrelevant for CUP analysis; what is referred to as CUP (comparable uncontrolled price) is price of a comparable but controlled transaction, since to be termed as an uncontrolled transaction, the transaction has to be between two entities which cannot influence or control each other's decision. The transactions between AEs obviously do not satisfy such a criterion. There is thus no internal CUP, as claimed by the assessee before the authorities below and as stated in the information filed along with the IT return. The assessee also accepts that there are no external comparables available.

Under these circumstances, in our considered view, the authorities below rightly rejected the assessee's case that even as per CUP method, the transactions that the assessee entered into with its parent company were at an arm's length price.

Ld counsel submits that rejection of CUP method does not make a material difference to the outcome of the appeal. It is stated that, without prejudice to the assessee's reliance on CUP method, the assessee agrees with the TPO that the most suitable method of determining ALP in the present case in TNMM method and that when TNMM method is correctly applied to the facts of this case, no ALP adjustment is warranted on the facts of the case.

It was thus contended before us that the computation of TNMM was vitiated inasmuch as the comparison was without taking into account (a) multiple year data; (b) the results of Ford India Ltd. and General Motors Ltd.; (c) adjustments on account of high level of import content of raw material; and (d) adjustments on account of lower capacity utilization. In any event, according to the learned counsel, ALP adjustments can be done in the profits relatable to the international transactions alone and not to the profits as a whole. Finally, learned counsel submitted that even when TNMM method is to be adopted, adjustment of 5 per cent variation from the arm's length price is permitted to the appellant under the provisions of s. 92C(2) of the Act. Our attention was also invited to some judicial precedents by the Co-ordinate Benches which cover this issue in favour of the assessee.

The crisil report which has been repeatedly referred before us was apparently not available to the TPO. In these circumstances and bearing in mind the fact the year before us was only second year of implementation of transfer pricing regime and it was a new area of taxation laws in which law had not developed, we think that it will meet the ends of justice that the assessee has liberty to raise all these arguments before the TPO so that the TPO can examine all the relevant contentions and decide the same by way of a speaking order in accordance with the law.

As we are remitting these issues to the file of the TPO, and as these issues are somewhat academic at this stage which will be relevant only when the assessee's plea regarding adjustment on account of higher import duties being warranted by peculiarities of operations in this year, we refrain from making any observations on the merits of the case. With the above observations, we hereby remit the matter to the file of the TPO so far as question of determination of ALP under the TNMM method is concerned.

This issue is now covered in favour of the assessee by a series of Tribunal decisions including decision in the case of Sony India (P) Ltd.[2008 (9) TMI 420 - ITAT DELHI-H] even as ld Departmental Representative vehemently supported the stand of the authorities and justified the same. We, therefore, uphold assessee's grievance in this respect and direct the AO to bear in mind the same while deciding the matter afresh.

To summarise, (i) the applicability of CUP method is rejected on the facts of this case; (ii) on the question of determination of ALP as per TNMM method, the matter is remitted to the file of the TPO with specific directions; and (iii) the grievance against denial of 5 per cent adjustment is upheld in principle in accordance with the Co-ordinate Bench decisions.

In the result, the appeal is partly allowed in the terms indicated above.