TMI Blog2012 (11) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... ate with sufficient evidence the adjustments that are reasonably required to be made for rendering the prices comparable - ground taken by the assessee relating to determination of arm's length price, is allowed for statistical purposes. - IT APPEAL NO. 2163 (MDS.) OF 2010 - - - Dated:- 23-2-2012 - ABRAHAM P. GEORGE, AND GEORGE MATHAN, JJ. Vikram Vijayaraghavan for the Appellant. K. Gopalakrishna for the Respondent. ORDER Abraham P. George, Accountant Member - In this appeal filed by the assessee, it is aggrieved first on account of the addition made to the arm's length price on the international transaction entered by it and secondly, on account of disallowance of expenses relatable to earning of dividend income claimed exempt. The addition on account of former came to ₹ 55,93,380/- and the addition on account of latter came to ₹ 13,93,025/-. 2. Short facts apropos are that assessee company, engaged in manufacturing of fuel injection equipment used in vehicles, had filed its return for the impugned assessment year declaring a total income of ₹ 64,60,00,616/-. During the course of assessment proceedings, it was noted by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- ( i ) There were approximately 250 components in the products manufactured by the company, out of which certain components were imported and certain components were procured locally. The Components imported from unrelated entities had to undergo further operations to be used in the finished product. It was therefore not possible to compute the net profit ratios for each and every component imported. ( ii ) The nature class of the international transaction with AEs. ( iii ) Functions performed, Assets employed and risks assumed by the assessee and AEs. ( iv ) Availability, coverage reliability of data necessary for the application of the method. ( v ) The degree of comparability that exists between the international transactions and uncontrolled transactions. ( vi ) The extent to which reliable and accurate adjustment could be made to account for differences, between international transactions and comparable uncontrolled prices. ( vii ) The nature, extent and reliability of assumptions required to be made in application of method. For application of TNM method, assessee took as compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e widely used. As per the assessee, there were a large number of items on which prices at which AE had supplied was much less than the prices at which non-AES had supplied and these also had to be considered. 5. However, TPO was not impressed. According to him, assessee could make adjustment in accordance with Rule 10B(1)(a) of Income-tax Rules, 1962. Further, according to him, there were cases where components were purchased in smaller quantities from non-AEs, price paid by the assessee-company was lower and therefore, the price of products did not depend upon the quantity of purchase. TPO cited examples like shake proof washer (par No.5339-235 D), delivery valve rings (9003-420B) and metering valve arm (part No.9003-452). As for the development cost for the parts, TPO noted that these were applicable both for non-AEs as well as AEs. He, therefore, concluded that assessee had paid an excess ₹ 68,75,255.51 for imports to the AEs when compared to the price at which non-AEs supplied such items to it and recommended upward adjustment of international transaction prices as stipulated in Section 92C of the Act. TPO later revised the said rum to ₹ 55,93,380/-. Assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge adjusting screw (Part No.9003-745C), Adjusting Screw (Part no.9101-416), Linkage Hook (Part No.9101-326) and O Ring (Part no.9007-497L), learned A.R. submitted that such parts procured from non-AEs had to undergo heat treatment and phosphating and eslock coating had to be done through sub-contracts, for making it fit for use. Therefore, according to him, the items were not readily comparable and without making any adjustment, the TPO had adopted the same prices as charged by non-AEs. Insofar as rejection of TNM method was concerned, submission of learned A.R. was that this was incorrectly done. Related party transactions in the case of companies MICO Bosch and SKF India Ltd. were much less than 15% of the total turnover and this by itself could not effect comparability. As for the view of the TPO that CUP method had to be adopted whenever items were comparable and an indirect method like TNM should not be adopted, learned A.R. submitted that OECD guidelines did not, in any way, suggest such a procedure for preferring one method over another for determining arm's length price. According to him, even presuming that CUP method was the only appropriate method in the assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them out of being possible tested party for making a TNM analysis. As per the assessee, product differences did not effect the selection of TNM method and for this it relied on OECD guidelines. The said OECD guidelines is reproduced hereunder:- 3.27 One strength of the transactional net margin method is that net margins (e.g. return on assets, operating income to sales, and possibly other measures of net profit) are less affected by transactional differences than is the case with price, as used in the CUP Method. The net margins also may be more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margins. Differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently, enterprises may have a wide range of gross profit margins but still earn broadly similar levels of net profits. The above guidelines do not say that even where there were substantial differences between the items manufactured, a candidate for TNM method could be selected. In such circumstances, the TPO was perfectly justified in rejecting the TNM method having found that the compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son. In our opinion, in such circumstances, assessee has to be given an opportunity to explain what adjustments it would like to carry out to the prices determined under CUP method so as to adjust such differences and make it fit for comparison as stipulated in sub-rule (2) of rule 10B. In our opinion, the matter requires re-visit by the TPO for correctly assessing the prices that could be adopted under CUP method for comparison after carrying out the adjustment required. Therefore, while accepting the view of the lower authorities that TNM method could not have been adopted in the circumstances of the case, we remit the matter back to TPO and Assessing Officer for determining the arm's length price under CUP method after making required adjustment stipulated in law. Assessee has to substantiate with sufficient evidence the adjustments that are reasonably required to be made for rendering the prices comparable. 10. In the result, ground taken by the assessee relating to determination of arm's length price, is allowed for statistical purposes. 11. This leaves us with the ground relating to disallowance of expenses of ₹ 13,93,025/- for earning dividend inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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