TMI Blog2010 (11) TMI 730X X X X Extracts X X X X X X X X Extracts X X X X ..... Following grounds are raised:- "(1) On the facts and the circumstances of the case and in law, the learned CIT(A) has erred in confirming the following actions of the learned AO:- (a) Making an addition of Rs. 3,18,89,975 on account of difference in "average net operating margin" of the comparable companies as against the assessee's "net operating margin", using the TNMM for determining the ALP, and (b) In applying such difference to make an adjustment on the total sales of the assessee, including non-international transactions, whereas s. 92 is applicable only to international transactions, as given in s. 92B of the IT Act, 1961, while completely ignoring the submissions repeatedly made by the assessee in this regard. (2) On the facts and the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in holding that the amount paid to the assessee for royalty and technical know-how should be nil. (3) On the facts and the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in applying the TNMM, whereas the cost plus method was the most appropriate method fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from any other source. The company had fixed its sale prices after taking into consideration the cost of materials and the higher rate of gross profit in comparison to the other types of seat belts. 2.3 The TPO however, did not agree with the assessee's working and made the additions by adopting net operating margin of 9.21 per cent by holding that comparable enterprises performing broadly similar functions, operations and risks by following average working:- Sl. No. Name of the company Net sales during financial year 2003-04 (in crores) Net operating profit financial year 2O03-04 (in crores) Net operating profit margin (%) 1. Clutch Auto Ltd. 75.30 7.13 9.46 2. NRB Headings Ltd. 210.95 31.95 15.14 3. Rane (Madras) Ltd. 201.66 23.39 11.58 4. Sona Koya Steering Systems Ltd. 281.47 20.20 7.17 5. Talbros Engineering Ltd. 22.95 1.51 6.57 6. Bharat Gears Ltd. (automotive segment) 92.69 4.95 5.34 Average ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be included in the overall adjustment of Rs. 4,24,11,209 determined above. Accordingly, the total taxable income of the assessee needs to be enhanced by this amount." 4. Aggrieved, the assessee is in appeal before us. An additional ground of appeal has been filed requesting that the figure of Rs. 3,18,89,975 is actually Rs. 4,24,11,209 as the CIT(A) has made enhancement to the addition made by the AO. Assessee took the figure of Rs. 3,18,89,975 inadvertently as against Rs. 4,24,11,209 as finally retained by CIT(A). The learned Departmental Representative has no objection to the same consequently we permit to amend this figure at Rs. 4,24,11,209. 5. Learned counsel for assessee, Shri Dinodia adverted to the transfer pricing reports filed by assessee and TPO and contends that assessee's working of ALP was based on following disclosures:- "1.1 The assessee Abhishek Auto Industries Ltd. (AAIL) is engaged in manufacturing safety seat belts for automobiles and is supplying to OEM's like Maruti Udyog Ltd., Honda Siel Cars India Ltd., Tata Motors Ltd., Swaraj Mazda and Hindustan Motors Ltd. AAIL has a technical and financial collaboration with Takata Asia Pte Ltd., Singapo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount are being paid by the company as per agreement only. Hence, the question of determining ALP does not arise.' Interest on loan:- "The amount of US$ 218,000 was borrowed in 2002. The balance 70 per cent was contributed by Indian promoters. This project was very important for the growth of the company and has resulted in doubling the turnover of the company. To fund this project, the company explored bank finance also, but the cost of bank borrowing was 14 per cent Therefore, the company opted for 8 per cent rate charged by Takata." 5.1 The TPO however proceeded to determine the ALP on an assumption that assessee has failed to do so, although the assessee in response to his queries submitted the comparative GP ratio of AE and non-AE segment during the course of hearing. 5.2 TPO with respect to royalty has failed to consider assessee's categorical submissions that:- (a) The assessee has paid the technical fee and royalty amount as per agreement only, hence the question of determining ALP does not arise. During the course of proceedings, the assessee has filed photocopy of collaboration agreement, copy of profile of Takata, its AE. (b) A note on determinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been discussed above:- (i) No transfer of technology or know-how has taken place. (ii) The price of know-how and royalty is bundled in the price charged for supply of material. (iii) Expenses have been incurred on expatriates, which the assessee was under no obligation to incur." 5.5 The TPO thereafter held that the most appropriate method was the Transaction Net Margin Method (TNMM) in accordance with r. 10B(1)(e), the Profit Level Indicator (PLI) would be the ratio of net margin computed in relation to sales. He treated the appellant company as a tested party. The TPO used the prowess database to identify potential comparable companies. After completing what he considered the appropriate screening process, in para 5.7 he identified six companies to be comparable companies and based on the data worked out their net operating margins at 9.21 per cent on the average. 5.6 The appellant's margins have been calculated by TPO in para 5.8 of his order as under:- "Computation of net operating margin of the assessee:- 5.8 From the balance sheet and P and L a/c filed by the assessee the following emerges:- Net sales Rs. 68,76,63,661 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating income Sales 68,76,63,661 12,74,65,091 56,01,98,570 Total 68,76,63,661 12,74,65,091 56,01,98,570 B Operating expenses Raw material consumed 55,97,32,341 9,52,74,997 46,44,57,344 Actual Personnel expenses 91,40,467 8,81,520 82,58,947 Actual Freight outward 41,94,340 1,96,743 39,97,597 Actual Exchange difference 38,78,089 20,28,519 18,49,570 Actual Bad debts written off 39,62,923 - 39,62,923 Actual Loss on sale/discarded fixed assets 43,925 - 43,925 Royalty 16,89,980 16,89,980 - Actual Testing expenses 28,86,620 5,63,871 23,22,749 Actual Other expenses 4,42,87,717 82,09,155 3,60,78,562 Proportionate Total 62,98,16,402 10,88,44,785 52,09,71,617 C Operating profit 5,78, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,42,441 2,30,40,105 Total expenses 66,90,98,948 12,50,87,226 54,40,11,722 Sales 68,76,63,661 12,74,65,091 56,01,98,570 Operating profit 1,85,64,713 23,77,865 1,61,86,848 OP/Sales 1.86% 2.88% If the above segmental computation is to be considered for the purpose of benchmarking the international transaction of the appellant then the margin earned by the appellant from the AE business is lower than the margin earned by the appellant in the domestic business, hence if the appellant's submission is to be considered then the transactions of the appellant would not adhere to the arm's length standard." 5.11 Learned counsel contends that in para 8.6 CIT(A) has found comparison of financials with internal comparable in para 8.5, a difference of Rs. 4.03 crores was noted on account of which this difference had arisen, i.e.:- (a) Technical know-how fee Rs. 1.10 crores (b) Depreciation Rs. 2.64 crores (c) Financial expenses Rs. 1.39 crores This becomes Rs. 5.13 crores 5.12 It is pleade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint venture agreement with Takata Japan. This duly executed and approved agreement lays the foundation stone of the business and whether the appellant should conduct his business at all and whether it should enter into a joint venture agreement at all is the decision of the businessman. The TPO cannot step into intricacies of business expediency and hold that assessee need not have entered into this agreement at all and, therefore, not paid any technical know-how fee or royalty to Takata i.e. the AE. B. Findings that royalty was being paid in the purchase price of the raw material were incorrect as the formula for payment of royalty was net of imported raw material purchased and for this reference is made to the calculations for payment of royalty which are contained in paper book at p. 69 demonstrating that out of the sale amount total landed cost of material has been reduced and on the net selling price royalty has been calculated at 5 per cent of the net selling price. Therefore, the TPO's action to completely disregard the royalty paid is not incorrect. C. OECD Guidelines and US case law are based on the domestic law of the countries they represent whereas as far as In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,09,71,617 Detailed allocation of expenses not done by the appellant:- Depreciation 2,64,03,411 48,94,126 2,15,09,285 Bank charges 18,73,136 3,48,315 15,30,820 Payment of transfer Nil Nil Nil Total (B) 2,82,76,547 52,42,441 2,30,40,105 Total expenses (C = A + B) 65,80,92,949 11,40,87,226 54,40,11,722 Sales (D) 68,76,63,661 12,74,65,091 56,01,98,570 Operating profit (E = D - C) 2,95,70,712 1,33,77,865 1,61,86,848 OP/Sales 10.495% 2.88% 5.17 Learned counsel canvassed third proposition that in accordance with the transfer pricing regulations 5 per cent should be allowed as per proviso to s. 92C of the IT Act and for this proposition he has relied upon the following authorities:- (i) Electrobug Technologies Ltd. vs. Asstt. CIT (2010) 37 SOT 270 (Del); (ii) Development Consultants (P) Ltd. vs. Dy. CIT (2008) 115 TTJ (Kol) 577 : (2008) 6 DTR (Kol)(Trib) 74 : (2008) 23 SOT 455 (Kol) (relevant para on p. 457); (iii) Sony India (P) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back to the file of the TPO to rework the margins of the comparables as per data collected from the RoC and filed by the appellant during the course of hearing. 7. In rejoinder Mr. Dinodia submitted that on the same set of comparables, the TPO and the AO have accepted both the royalty as well as purchase of raw materials to be at ALP for asst. yr. 2005-06 and asst. yr. 2006-07. Copies of TPO's orders as well as the assessment orders have been filed in the paper book. There is no point of sending the matter back because even if revised data is not considered and the error committed by CIT(A) in working out the margins on AE segment and non-AE segment is corrected by removing the amount of Rs. 1.10 crores of technical know-how fee, the results show that the assessee's transactions are at an arm's length and no additions are required to be made because AE segment gives margin of 10.495 per cent and non-AE segment gives margin of only 2.88 per cent. An appeal should not be set aside in routine manner as it results in multiplicity of proceedings and in this case the mistakes being manifest can be corrected without taking the efforts of further set aside. 8. We have carefully pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve no international cross-border element at all. Therefore, the basis of making the adjustments on the enterprise level by taking Rs. 68.76 crores as the base is not correct. What should have been taken is the sale to domestic parties using Takata technology and Takata raw material amounting to Rs. 12.74 crores. The segment that was to be looked at was the international segment, that is, domestic sale using foreign technology and foreign raw material. As given by the appellant, the operating profit margin on AE sales is 10.49 per cent whereas in the domestic sales segment it is only 2.88 per cent. Proposition that only international transactions have to be looked at has also been approved by various Benches of the Tribunal which have been cited by the appellant and are not disputed by the learned CIT-Departmental Representative and no contrary judgment has been cited before us on this proposition. We, therefore, accept this second proposition also that only international transactions are to be taken into account while calculating the ALP. 8.3 Similarly, the next proposition i.e. as per proviso to s. 92C to adjust net margin with 5 per cent is also well-settled by various Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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