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TMI Blog2014 (12) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... addition read as under :- "Ground No. 1 - Erred in making2 t ransfer pricing adjustment amounting to Rs. 2,15,95,600/- to the value of international transaction by rejecting the analysis undertaken by the Appellant to determine arm's length price for its international transaction pertaining to export of spare parts and components to the associated enterprise. Ground No. 2 - Erred in rejecting the external TNMM approach adopted by the Assessee and inappropriately applying internal TNMM for determining the arm's length price for the international transaction of export of services spares and components. Ground No. 3 - Without prejudice to the other grounds of appeal, erred in inappropriately rejecting the iterations suggested by the Appellant in respect of determining the arm's length price for the international transaction of export of services spares and components." 3. At the time of hearing, it was a common ground between the parties that the aforestated dispute stands on identical footing to that considered by the Tribunal in the assessee's own case for assessment year 2006-07 vide ITA No.1480/PN/2010 dated 23.07.2012, which has thereafter been followed by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of three wheeled motor vehicles for transportation of goods and passengers and also sale of spares and components of three wheeled motor vehicles manufactured by it to support its after sale market both in India and abroad. Further, assessee is also engaged in sourcing of components which are required by its associated enterprises abroad for manufacture of two/three/four wheeled motor vehicles is the activity in dispute. The total export of spares and components to the associated enterprises amounting to Rs. 10,01,45,619/, which according to the TPO is not an arm's length price. 5. The assessee company benchmarked its international transaction of export of spares and components to the associated enterprises by applying the Transactional Net Margin (TNM) method. The assessee company asserted that its international transaction relating to export of spares and components to the associated enterprises was at an arm's length price because the average of margins of th4e comparables selected by it came to 3.22%, which was favourable in comparison to operating margin of 14.49% earned by the assessee. So however, the TPO rejected the application of external TNM method adopted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt, the DRP did not consider it fit to give directions to modify the order of the TPO in line with the order of the Tribunal dated 23.07.2012 (supra) for the reason that the directions of the DRP are binding upon the Assessing Officer and if the DRP gave directions by following the order of the Tribunal, the Assessing Officer is bound to follow it and therefore the Assessing Officer may lose the opportunity to agitate the matter in appeal in this year while the Department was in the process of filing an appeal before the Hon'ble High Court on the same issue for the earlier assessment year. Be that as it may, the Assessing Officer has determined the arm's length price of the impugned international transactions by making an adjustment of Rs. 2,15,95,600/- to the stated value in conformity with the order of the TPO. 8. The stand of the assessee has been that the TPO erred in rejecting the external TNM method adopted by it. According to the assessee, the application of internal TNM mechanism for determining the arm's length price of impugned international transactions was not justified. According to the assessee, having regard to the nature of transactions with its associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has pointed out that in relation to Category 'A' transactions, the operating margin on exports to AEs is 67% as against 56.58% with respect to the export to third parties (non-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 s7p ares remain spares. Therefore, the subsegmentation 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 prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sought to be made out that the source evaluation, pricing and procurement tests are the prerogative of the AE and that the assessee company based in India merely assists in logistic, co-ordination 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions undertaken with the third parties (i.e. non-AEs) which are purely in the nature of category 'A'. Ostensibly, the transactions of Category 'B' and 'C' are not undertaken with third parties (i.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." 9. The aforesaid discussion would reveal that in relation to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch activities, the assessee has undertaken comparison with operating margins earned by third party support service providers in India and tabulation in this regard has been placed in page 223 of the Paper Book No. II. It is sought to be made out that the margins declared by the assessee on such activity at 11.05% compare favourably with the average operating margins earned by third party support service provider companies in India which worked out to 5.1%. In our considered opinion, the aforesaid plea of the assessee is liable to be examined with respect to its factual aspects. For the stated purpose, we therefore remand the issue back t1o0 the file of the Assessing Officer who shall carry out the requisite verification exercise and after being satisfied, he shall pass an appropriate order in accordance with law on this aspect." 11. In the present year also, following the aforesaid precedent we remand the issue back to the file of the Assessing Officer who shall carry out the requisite verification exercise and after being satisfied, he shall pass an appropriate order on this aspect in accordance with law. 12. In conclusion, we therefore, direct the Assessing Officer to re-determ ..... 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