TMI Blog2012 (11) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... which are required for the purpose of servicing of vehicles sold by the assessee company, the transactions undertaken with third party distributors (i.e. non-AEs) are comparable to the transaction with the AEs. The profit margin (on cost) in relation to export to AEs is 67% and on transactions of exports to third party distributors (i.e. non-AEs) is 56.58% and the same clearly depicts that the transaction undertaken by the assessee. Therefore, same have been undertaken at an arms length price and the same does not require any transfer pricing adjustment as done by the income-tax authorities. Issue decides in favour of assessee Category B & C B is in relation to Sourcing of components required by the overseas AEs for manufacture of two and three-wheelers C is in relation to Sourcing of components required by the overseas AEs for manufacture of four-wheelers Assessee contended that for benchmarking the transactions between the assessee and the AEs in respect of such activities, comparison has to be consider with operating margins earned by third party support service providers in India - Held that:- As the margins declared by the assessee on such activity at 11.05% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23-7-2012 - SHRI I C SUDHIR AND SHRI G.S. PANNU, JJ. Appellant by : S/Shri R.R. Vora, Mahesh Mandelcha Rajendra Agiwal Respondent by : S/Shri Hareshwar Sharma Mukesh Verma ORDER PER G.S. PANNU, A.M.: This appeal by the assessee is directed against the order of the Dy. Commissioner of Income-tax, Cir. 4, Pune dated 28.10.2010 under section 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 (in short the Act), pertaining to the assessment year 2006-07. 2. In this case, the substantive dispute is with regard to Ground Nos. (1) to (3) which relate to an addition of Rs 5,68,14,644/- made by the Assessing Officer on account of Transfer Pricing Adjustment to the value of international transaction undertaken by the assessee with its Associated Enterprise (AE) pertaining to the export of spare-parts and components. On this aspect, Ground Nos 1 to 3 raised by the assessee read as under: On the facts and in the circumstances of the case and in law, the Hon ble DRP and consequentially the ld AO have: Ground No. 1 - erred in making transfer pricing adjustment amounting to Rs 5,68,14,344/- to the value of international transaction by rejecting the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying the Transactional Net Margin Method (i.e. TNMM) based on a search conducted to identify comparable companies as per the Prowess and Capitaline plus databases. On selection of 10 external comparable companies, assessee used Earning Before Tax (EBT) to sales to determine the relevant Profit Level Indicator (i.e. PLI) and average operating margin of comparable companies worked out to 1.83% as against assessee s operating margin of 10.40% in its segment of export of spares and components to AEs. As the operating margin of the assessee was higher than the average of margins declared by the external comparable companies, assessee asserted that the international transaction of activity of export of spares and components carried out during the year with its AE was at an arm s length from the perspective of transfer pricing analysis. So, however, in the proceedings carried out by the Transfer Pricing Officer (in short the TPO ) under section 92CA(2) of the Act, the assessee s assertion was rejected. The TPO rejected the application of external TNMM adopted by the assessee and instead applied internal TNMM mechanism in order to benchmark the international transaction relating to ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE export Sales (Rs) 52,94,61,000 1,54,51,000 14,11,20,000 Net Profit (Rs) 7,55,91,000 55,83,000 1,47,09,000 Total cost (Rs) 45,38,70,000 98,68,000 12,64,11,000 Net Profit margin (on cost) 16.65% 56.58% 11.63% It is explained that on the above basis, the TPO has arrived at an adjustment of Rs 5,68,14,344/- to the transfer price of the impugned transaction by comparing the margin of 11.63% for AE export with the margin of 56.58% for third party exports (non-AEs). It is pointed out that the margin of 11.63% included a sub-segment of the transactions of exports to AE of the spares and components required for servicing of the vehicles sold by the assessee and also the sub-segment of sourcing of components by the overseas AE for manufacture of two/three wheelers, and for manufacture of four wheelers, namely, New Quadracycle Poker . Further, the margin of 56.58% for non-AEs include only the export of spares and components to third party distributors required for servicing of vehicles sold by the assessee. In this manner, it is sought to be pointed out that the aforesaid sub-segments involve incomparable activities and therefore the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -AEs) and therefore on this count itself the adjustment in question is untenable. 8. On the other hand, the learned CIT-Departmental Representative, appearing for the Revenue has defended the action of the authorities below by pointing out that the sub-segmentation of the activity within the transaction of export of spares and components is not called for. According to the Revenue, all the three Categories of transactions, namely, A , B and C constitute a singular activity. The entire activity is of supply of spares by the assessee to third party distributors and its AEs. It is pointed out that the spares being supplied to third parties and to the AEs may differ in their applications as stated, but spares remain spares. Therefore, the sub-segmentation canvassed by the assessee in order to benchmark the transaction is not relevant and has been rightly rejected by the income-tax authorities. 9. On this aspect, we have carefully considered the rival stands. It is a well-settled proposition that while carrying out the transfer pricing study of an international transaction, it is imperative that a comparison is made with the similarly placed transactions, as far as possible. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and facilitation/support services in respect of sourcing of such components. On the other hand, with regard to the category A transactions, it involves supplies to third parties as well as AEs of the spares and components which are required for the purposes of servicing the vehicles manufactured and sold by the assessee company. In this category, the spares and components supplied are manufactured to the specifications prescribed the assessee company and as per the designs, dies, quality, packaging, etc., as mandated by the assessee company. On this basis, the assessee has attempted to point out that the margins in category A transactions cannot be compared with the transactions of category B and C , inasmuch as it involves functional and economic differences. It is sought to be made out that with regard to category B and C transactions, the assessee does not earn the kind of margins as it can earn by undertaking transactions of category A . 10. In our considered opinion, the net profit margin in any particular kind of activity is indeed effected by various factors which are industry-specific and can also be unit-specific having regard to the degree of business ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Non-AEs). 12. So, however, in so far as the transactions of category A representing export of spares and components which are required for the purpose of servicing of vehicles sold by the assessee company, the transactions undertaken with third party distributors (i.e. non-AEs) are comparable to the transaction with the AEs. On this aspect, it is evident on the basis of the tabulation in para 7 that the profit margin (on cost) in relation to export to AEs is 67% and on transactions of exports to third party distributors (i.e. non-AEs) is 56.58% and the same clearly depicts that the transaction undertaken by the assessee of category A with its AEs, namely, export of spares and components which are required for the purpose of servicing of vehicles sold by the assessee have been undertaken at an arm s length price and the same does not require any transfer pricing adjustment as done by the income-tax authorities. 13. Now, we are left with the transactions of category B and C which have been undertaken by the assessee with its AE. In so far as such transactions are concerned, there is no internal comparable transaction, inasmuch as such like transactions have not been ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that in terms of the amended proviso to section 92C(2) with effect from 1.10.2009 the claim of the assessee was not justified as the amendment was also applicable to the assessment year in question. According to the learned Departmental Representative, the benefit of +/-5% intended by the erstwhile proviso to section 92C(2) of the Act was not available to the assessee for the year under consideration. 16. We have carefully considered the rival submissions. One of the issues raised by the assessee in this appeal is with regard to the claim seeking benefit of the option available under the erstwhile proviso to section 92C(2) of the Act, which allows the assessee an option for adjustment of +/-5% variation for the purpose of computing ALP. Such an issue has been a subject-matter of consideration by the Pune Bench of the Tribunal in the case of Starent Networks (India) P. Ltd. in ITA No. 1350/PN/10 dated 03.10.2011, whereby following discussion is relevant: 20. We have carefully considered the rival submissions. In this case, a pertinent issue which has been vehemently agitated by the appellant is with regard to its claim of seeking benefit of the option available under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l mean of such prices: Provided further that if the variation between the arm s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm s length price. The case set up by the Revenue is that the amended Proviso shall govern the determination of ALP in the present case, inasmuch as the amended provisions were on statute when the proceedings were carried on by the Transfer Pricing Officer (TPO). As per the Revenue, the amended Proviso would have a retrospective operation and in any case, would be applicable to the proceedings which are pending before the TPO on insertion of the amended Proviso, which has been inserted by the Finance (No. 2) Act, 2009 with effect from 1.10.2009 and, in this case, the TPO has passed his order on 30.10.2009. The learned Departmental Representative has also referred to the CBDT Circular No 5/2010 (supra) read with Corrigendum dated 30.9.2010 issued by the CBDT in this regard. Per contra, the stand of the assessee is that the amended Proviso would be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v UE Trade Corporation India (P) Ltd. vide ITA No 4405(Del)/2009 dt 24.12.2010 has observed that the proviso inserted by the Finance (No 2) Act, 2009 would not apply to an assessment year prior to its insertion. In this view of the matter, we therefore find no justification to deny the benefit of +/-5% to the assessee in terms of the erstwhile Proviso for the purposes of computing the ALP. 23. However, before parting we may also refer to a Corrigendum dated 30.9.2010 by the CBDT by way of which para 37.5 of the circular No 5/2010 (supra) has been sought to be modified. The Corrigendum reads as under: CORRIGENDUM In partial modification of Circular No. 5/2010 dated 03.6.2010, (i) In para 37.5 of the said Circular, for the lines the above amendment has been made applicable with effect from 1st April, 2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years. the following lines shall be read; the above amendment has been made applicable with effect from 1st October, 2009 and shall accordingly apply in relation to all cases in which proceedings re pending before the Transfer Pricing Officer (TPO) on or after such date. (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases of BASF (India) Ltd. v CIT 280 ITR 136 (Bom); Shakti Raj Films Distributors v CIT 213 ITR 20 (Bom); and, Unit Trust of India Anrs. v ITO 249 ITR 612 (Bom). The Hon ble High Court has opined in the case of BASF (India) Ltd. (supra) that the circulars which are in force during the relevant period are to be applied and the subsequent circulars either withdrawing or modifying the earlier circulars have no application. Moreover, the circulars in the nature of concession can be withdrawn prospectively only as held by the Hon ble Supreme Court in the case of State Bank of Travancore v CIT 50 CTR 102 (SC). Considering all these aspects, we therefore find no justification in the action of the lower authorities in disentitling the assessee from its claim for the benefit of +/- 5% to compute ALP in terms of the erstwhile proviso to section 92C(2) of the Act. We order accordingly. 17. In view of the precedent, the stand of the Revenue in the present case to deny the assessee benefit for adjustment of +/-5% variation while computing ALP is not justified. As per the Tribunal, though the amended proviso to section 92C(2) was applicable with effect from 1.10.2009, so however, for the rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st. The background is that the dispute regarding depreciation on the goodwill arose for the first time in the assessment year 2002-03 wherein the Tribunal has restored the matter back to the file of the Assessing Officer with directions to verify the true nature of the intangible assets acquired by the assessee and thereafter, decide the issue afresh. Subsequently, the Tribunal for the assessment years 2003-04 and 2004-05 vide its order in ITA Nos 965, 966 1203/PN/09 dated 6.4.2011 considered the observations of the Assessing Officer in the remand proceedings of the assessment year 2002-03 and upon noticing the decision of the Vishakhapatnam Bench of the Tribunal in the case of Jeypore Sugar Co Ltd v ACIT 2011 9 Taxman.com.122 (Visakh.), again restored the matter back to the file of the Assessing Officer for examination afresh in the light of such decision. 21. In this background, the learned Counsel for the assessee further supported the claim of the assessee in principle, on the basis of a subsequent decision of the Hyderabad Bench of the Tribunal in the case of A.P. Paper Mills Ltd. v. ACIT 33 DTR 148 (Hyd). 22. On the other hand, the learned Departmental Representative, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d lease hold rights from Greaves India Ltd in respect of assignment of rights by MIDC for a total consideration of Rs 1,57,76,570/- vide assignment deed dated 10.7.1998. Similarly, it had paid balance consideration of Rs 17,42,83,623/- when the Scheme of merger was approved by the Hon ble Bombay High Court on 1.2.2002. It had been explained by the appellant that the assessee had staked its claim of depreciation in respect of the lease hold rights, being intangible assets, by way of Notes to the return of income filed for the stated assessment year and the same was pressed before the Assessing Officer during the course of assessment proceedings. The Assessing Officer declined the claim of the assessee by placing reliance on the judgment of the Hon ble Bombay High Court in the case of CIT v. Techno Shares Stocks Ltd. 323 ITR 69 (Bom). It has been pointed out that subsequently the said decision of Hon ble Bombay High Court has been overruled by the Hon ble Supreme Court in the case of Techno Shares Stocks Ltd. v. CIT reported at 327 ITR 323 (SC). Apart therefrom, it has been pointed out that on similar issue for assessment years 2003-04 and 2004-05 the Tribunal in its order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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