9911796707
TMI Blog2014 (4) TMI 816X X X X Extracts X X X X X X X X Extracts X X X X ..... eddy. 3. Briefly stated, Assessee company is a wholly owned subsidiary of Tecumseh Products Company, USA (in short 'TPC USA') and collectively with its affiliates referred to as "Tecumseh Group" or "AEs"). Assessee is primarily engaged in the manufacture, marketing, service and repair of hermetically sealed compressors in domestic as well as international market. Assessee has two manufacturing facilities at Balanagar (AP) and Ballabgarh (Haryana). The Balanagar facility predominantly manufactures compressors for air conditioning equipments whereas the Ballabgarh facility makes compressors meant for refrigeration equipments. In addition, Assessee manufactures sub-assembly and components (pump kits, crankshafts etc.) from its Export Oriented Manufacturing Unit (EOU Unit) in Balanagar and exports them to TPC USA. All the compressor sub-assembly & components produced from EOU Unit is exported only to TPC USA, in order to manufacture compressor for sale in USA market. The annual requirements and the specifications of the components are provided by TPC USA. Assessee does not sell similar components to any other customer in India or outside India and therefore acts as a contract manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the DRP and the DRP, however, rejected the objections and accordingly, the AO passed consequential order making the adjustments to the income returned. 5. The learned counsel referring to the orders of the authorities and the paper books filed submitted that orders of the TPO/DRP suffers certain factual errors as well as the issues on comparability. Referring to the adjustments made with reference to sales made to AE of Compressor sub-assembly and components, it was submitted that Assessee operates 100% EOU and exports to TPC USA. Assessee arrived at the cost, which is identifiable from the separate books of account maintained for the EOU at 18,84,61,988/-.This amount of Rs. 18.84 crores was also accepted by the AO in the show cause notice issued wherein he has arrived at the ALP of operating cost at 110.16% and arrived at the shortfall of Rs. 3.66 crores. However, the AO without any show cause notice to Assessee, re-worked out the proportionate operating cost, ignoring the separate details furnished in this regard, at operating cost at a higher figure of Rs. 22.82 crores. Referring to page 22 of the TPO's order, the learned counsel submitted that on a total cost of Rs. 441.27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, Assessee is objecting to the comparables of 1.Atlas Cap India Pvt. Ltd., 2.KSP Ltd, 3.Mother and Plott Ltd, 4. Shakti Pumps (India) Ltd., which have a different accounting period and therefore, these are to be excluded. The other filter, which the assessee raised is 'functionality' of the companies selected itself. It was submitted that Assessee is not only manufacturing compressors but also components for compressors and the adjustments made are with reference to sale of parts of compressors, therefore, selection of companies, which are in the 'compressor' manufacturing is not correct. Referring to various copies of products placed on record, it was submitted that Assessee is not selling compressors to the AE but only components pertaining to the compressor for which separate 100% EOU is established. Therefore, selecting companies, which are dealing in compressors is not correct. In that regard, learned counsel objected to the inclusion of 1.Kirloskar Brothers Ltd. where there is no segmental data with reference to the sales of compressor and compressor parts. With reference to 2. Emerson Gilmate Technologies (India) Ltd., the said company was both in manufacturing and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; (in USD) Invoice No. Fair Market Value Moving and Other cost Invoice Value Classification of Fixed Assets 183978 753,000 299,003 1,052,003 Second hand machinery 184094 1,407,000 325,623 1,732,623 -do- 184095 98,850 60,375 159,225 -do- 184096 20,500 8,550 29,050 -do- 184158 476,895 24,070 500,965 New Machinery 247032 Data not available 11,216 Second hand machinery Total 3,485,082 It was the submission of learned counsel that AO/TPO has not even examined the facts and rejected valuation certificate and DRP simply confirmed the opinion without taking detailed objections raised by Assessee before them. 9. The learned DR, however, referred various facts and submitted that TPO is correct in arriving at the operating cost on proportionate basis and correct in rejecting revised return, which was filed after f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her value of international transaction by making suo-moto adjustment under the provisions of the Act cannot be rejected as the same was a valid return, even though, stated to be filed u/s 139(5) of the Act. In fact, to the extent of declaration of international transaction and adjustments, it can be certainly be stated as omission on the part of Assessee or in a worse situation a wrong statement in the original return, as provided u/s 139(5). The provisions of section 139(5) are as under: "139(5): If any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier." As can be seen from the above provision of the Act, we are of the opinion that the return filed subsequently on 29-11-2006 is a valid return, which is to be considered as correct. In fact, as submitted this return was only processed by the AO and was reported to TPO under the TP provisions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant base. Here it is not prescribed that the value of 'international transaction' should be considered as such. What is required to be done is 'net profit margin realized' by the enterprise from an international transaction, if Assessee makes suo-moto adjustments to the net profit margin as realized by the enterprise, the same has to be considered under (e)(i) of section 10B. In this connection, we refer to the findings of the coordinate bench of ITAT, Delhi in the case of Haworth (India) (P.) Ltd. (supra), which are as under: "66. It can be seen from the above table that the major component of receipt of International transaction of the assessee is commission income as it constitute Rs. 15,39,33,769/- of the total operating income of Rs. 17,73,98,197/-. Therefore, it cannot be said that commission expenses which have been suomoto disallowed by the assessee were not claimed as operating expenses while computing the arm length price. If they are subsequently disallowed suomoto by the assessee in the revise return, they are required to be excluded from the operating cost and the calculation of the assessee should have been accepted that its profit margin sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3,66,78,663/-. Without considering the objections of Assessee, TPO, surprisingly, determined the operating cost at Rs. 22.82 crores based on the proportionate cost on the ratio of sales in various segments. This action of the TPO was not justified at all when Assessee has maintained separate books of account, which was also accepted under the provisions of the Act and, therefore, there is no reason for rejecting the same and estimating the operating cost on the basis of the proportionate turnover. In fact, Assessee has incurred loss in these transactions, where as there was profit in other activity, which constitute 95% of Assessee's turnover. Taking sales as basis and arriving at the OP cost does not result in correct appreciation of Assessee's transactions. Therefore, since segmental working is available on the basis of separate books of account maintained for EOU unit, we are of the opinion that operating cost has to be taken at Rs. 18,84,61,988/- and the TPO/AO is directed to take operating cost with the above figure. Accordingly, this contention of Assessee is allowed. (D) Whether (+)/(-) 5% threshold limit available under the Act can be invoked in this case. & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed : Provided that where more than one price is determined by the most ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile examining the threshold limit of (+)/(-) 5%, we are of the opinion that the actual transaction undertaken by Assessee should be the base and not revised transaction reported by making suo-moto adjustment. (vi) There is one more aspect to the contention made. As briefly stated, Assessee incurred loss in International transaction and suo-moto adjustment of Rs. 2,82,69,298 on the basis of transfer pricing documentation. This indicates that the Assessee exercised option provided u/s 92C particularly of proviso of (+) or (-) 5% threshold and did not treat the actual sale transaction as ALP. Having exercised the option and treating the different (enhanced) amount as ALP, in our view, Assessee cannot contend that the threshold of (-) or (+) 5% is available again, if TPO action results in further addition. On this reason also the claim fails. This contention of Assessee is considered as rejected. (E) Whether the comparables selected by the TPO is correct ? As mentioned above in the submissions, there are two sets of objections on the comparables selected by TPO; one being data p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout doing so, the TPO or the DRP has no base to determine the value at Nil and consequently denying the depreciation claim of the assessee while at the same time, the payment of custom duty and countervailing duty are considered as value of cost. Not only that, as submitted by Assessee and as seen from the Table furnished, new machinery worth US$ 500,965 was also treated as old machinery and valuation was determined at Nil. This shows non-application of mind by TPO as well as by DRP. (ii) When Assessee raised specific objections on all issues running to 67 pages, the DRP simply rejected them without even commenting about factual issues also. The purpose for which DRP is constituted gets defeated if DRP does not apply its mind and endorse the orders of the TPO without even examining the factual aspects of the submissions and judicial principles relied upon. In these circumstances, we cannot approve the action of the TPO/DRP as there is no other report by any valuation officer that can be taken as external CUP and the value as paid by Assessee can be accepted as such. further the price paid being lesser than valuation officer's value available, the same can ..... X X X X Extracts X X X X X X X X Extracts X X X X
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