TMI Blog2021 (9) TMI 1013X X X X Extracts X X X X X X X X Extracts X X X X ..... 1962 - ITAT CHENNAI] and after considering nature of subsidy has allowed claim of the assessee by observing that for earlier years, the CIT(A) has allowed claim of the assessee and the Assessing Officer has accepted decision of the CIT(A) and deleted additions, while passing order giving effect to the order of the CIT(A). Therefore, consistent with the view taken by the coordinate Bench, we direct the Assessing Officer to delete additions made towards disallowance of depreciation on capital subsidy received from SIPCOT. Addition towards VAT incentive received from Government of Tamil Nadu - assessee has treated above incentive as revenue receipt both for its books of account and its tax returns, but during the course of asessment proceedings, the assessee has raised a fresh claim to treat incentive as capital receipts not chargeable to tax - HELD THAT:- We find that the Tribunal had considered an identical issue for assessment year 2011-12 [ 2017 (4) TMI 1193 - ITAT CHENNAI] where the issue has been remanded back to the file of Assessing Officer to consider the issue denovo on merits in accordance with law. Facts being identical for the year under consideration by following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entical and pari materia to the facts already considered by the Tribunal for earlier years. Therefore, consistent with a view taken by the coordinate Bench in assessee s own case for earlier assessment years, we are of the considered view that the learned TPO as well as learned DRP were erred in making transfer pricing adjustments towards brand services by adopting Spearman s Rank Correlation method and concluded that there is positive accretion between brand value and market capitalization of HMC Korea and hence, we direct the Assessing Officer/TPO to delete transfer pricing adjustment made towards brand development services. Characterization of income - Revenue or capital receipt - Focus Market Scheme to be treated as capital in nature and exclude from total income - HELD THAT:- We are of the considered view that duty credit scrips received from Govt. of India under Focus Market scheme is revenue in nature and further, same was given to offset higher cost of freight and other disabilities of exporters to be more competitive in exports to certain regions. Thus, the same cannot at any stretch of imagination be considered as capital in nature. Hence, we reject the ground taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty income received from Mobis, commission / discount income and insurance claim received by the assessee as non-operating. The TPO has given his own reasons for reaching to a conclusion that all these incomes are non-operating in nature. The assessee has received royalty income from Mobis under similar agreement for sharing technology and know-how, but the same has been considered as non-operating by the TPO. When the TPO has considered royalty payment by the assessee to its parent company as operating in nature, then there is no reason for the TPO to consider royalty income received from Mobis as non-operating income. Therefore, we are of the considered view that the ld.TPO was erred in considering royalty received from Mobis as non-operating. Hence, we direct the ld. TPO to consider Royalty income as operating income for computing operating margin. Commission / discount income, incentives and insurance claim income - We find that all these incomes are generated from main business activity of the assessee of manufacturing and sales of cars. The assessee has received commission / discount on procurement of raw materials and insurance claim is received towards damaged cars manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas the ld.DRP has enhanced said adjustment by adjusting the margins to entire transactions of the assessee, which predominantly consist of third party cost. We find that as per the provisions of Section 92 of the Act and Rule 10B(1)(e) of the Rules, it is very clear that any income arising from an international transaction shall be computed having regard to arm s length price, that means, very purpose of said provisions is to establish arm s length nature of the international transactions only. The transactions with non AE s has to be presumed to be at arm s length, because there is no relationship which is likely to influence pricing..DRP is erred in making TP adjustment at entity level and hence, we direct the TPO to restrict TP adjustment only to international transactions pertain to domestic car sales segment. We are of the considered view that the whole issue of transfer pricing adjustment in respect of import of goods pertains to domestic car sales segment needs to go back to the file of the TPO to reconsider the issue in light of our discussions given herein above in preceding paragraphs. Appeal filed by the assessee is treated as partly allowed for statistical pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vy of interest under section 234C 6.1 The Ld. AO erred in levying excess interest under section 234C of the Act amounting to INR 14,605 without appreciating the fact that levy of section 234C interest should be computed only on the returned income and not on the assessed income. 7. Adjustment for Brand development services 7.1 The Ld. Transfer Pricing Officer ( Ld. TPO ) and Hon ble DRP have exceeded their jurisdiction and erred in making the adjustment towards a fees for a purported brand development service alleged to be provided by the Appellant to its AE, without first establishing that there was any international transaction in this regard between the Appellant and its AE, which can be subject to section 92 of the Act and without appreciating that there is no intention to shift the profits outside India. 7.2 The Ld. TPO and Hon ble DRP failed in not following the order of this Hon ble Tribunal in the Appellant s own case from AY 2007-08 to AY 2011-12 wherein similar adjustment towards brand adjustment has been deleted by this Tribunal. 7.3 The Ld. TPO erred in making the adjustment and the Hon ble DRP erred in upholding the adjustment towards bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense/losses, which are not operating in nature while computing the operating costs and operating profits. 8.5 The Ld. TPO erred in not considering the royalty income received by the Appellant in consideration for the license of the trademarks and know-how transferred to MOBIS in relation to the distribution of after sales products, as operating income while computing the operating margins of the tested party. 8.6 The Ld. TPO erred in not considering the incentives received from the Government of Tamil Nadu for its Phase II investments under Ultra Mega Integrated Automobile Projects within Tamil Nadu, as operating while computing the operating margins of the tested party. 8.7 The Ld. TPO erred in not considering the insurance income, discount received from suppliers towards early payment of bills, and commission received towards car finance referrals and car insurance referrals as operating while computing the operating margins of the tested party. 8.8 The Ld. TPO erred in considering foreign exchange loss suffered by the appellant as operating while computing the operating margins of the tested party. 8.9 The Hon ble DRP erred in upholding the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions were duly reported in Form 3CEB filed in accordance with provisions of Indian Transfer Pricing Regulations contained in section 92, 92A to 92F of the Income Tax Act, 1961. The case was taken up for scrutiny and during the course of assessment proceedings, a reference was made to JCIT (Transfer Pricing) for determination of arm s length price of international transactions of the assessee with its AEs. The learned TPO vide its order dated 31.10.2016 has suggested certain transfer pricing adjustments towards downward adjustment to the value of imports and upward adjustment for brand development services. 5. The Assessing Officer, in pursuant to directions of the ld. TPO, has passed draft assessment order u/s.143(3) r.w.s 144C(1) of the Income Tax Act, 1961 on 30.12.2016 and made transfer pricing adjustments as suggested by the TPO at ₹ 179,07,77,331/-. The Assessing Officer had also proposed certain corporate tax adjustments including disallowances u/s.14A, r.w.r 8D of IT Rules, 1962, disallowance of subsidy received towards capital expenditure, disallowance of focus marketing scheme expenses, and disallowance of bonus / performance reward u/s.43B(c) of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w. It is well settled principles of law that disallowances u/s.14A cannot exceed amount of exempt income. The Hon ble Supreme Court in the case of Pr.CIT Vs State Bank of Patiala (supra), while dismissing SLP filed by the Revenue against order of the Hon ble Punjab Haryana High Court in the case of Pr.CIT Vs State Bank of Patiala, held that disallowance u/s.14A could be restricted to amount of exempt income only. The Hon ble Jurisdictional High Court of Madras in the case of Marg Ltd Vs.CIT (2020) 120 Taxmann.com 84, has taken a similar view and held that disallowances under Rule 8D r.w.s 14A can never exceed exempt income earned by the assessee during particular assessment year. In this case, admittedly, exempt income for impugned assessment year was ₹ 57,826/, whereas the Assessing Officer has determined disallowance u/s.14A at ₹ 86,54,491/- contrary to settled principle of law. Therefore, considering facts and circumstances of this case and also by following the decisions of Hon ble Supreme Court and Hon ble Madras High Court, we direct the Assessing Officer to restrict disallowances u/s.14A to the extent of exempt income earned for the impugned assessment year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration, the assessee has received refund of output VAT amounting to ₹ 32,75,60,000/- from Govt. of Tamil Nadu and credited to profit and loss account under the head income from other sources. The assessee has treated above incentive as revenue receipt both for its books of account and its tax returns. However, during the course of assessment proceedings, the assessee has raised a fresh claim to treat incentive as capital receipts not chargeable to tax. The Assessing Officer has not adjudicated fresh claim made by the assessee. The learned DRP has rejected objections filed by the assessee without giving any specific direction. 16. The learned AR for the assessee submitted that this issue is also covered in favor of the assessee by the decision of ITAT., Chennai in assessee s own case for assessment year 2011-12, where under identical circumstances, the Tribunal has remanded the matter to the file of the Assessing Officer to consider issue in accordance with law. 17. The learned DR, on the other hand, fairly agreed that this issue has been set aside to the file of Assessing Officer for earlier years and hence, this year also the issue may be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions dated 16.09.2017 has rejected objections filed by the assessee and confirmed additions made by the Assessing Officer. The relevant findings of the ld. DRP is as under:- 7. Ground of objection 6 contentions against Disallowance of Bonus/Performance reward U/S 43B The learned AO erred in disallowing Performance reward amounting to INR 13,01,51,983/- u/s.43B of the Act. The Ld. AO ought to have appreciated that the expenditure incurred towards performance reward is not in the nature of bonus and therefore the provisions of Section 43B(c) of the Act is not applicable. Without prejudice to the above, the Ld. AO ought to have appreciated that the Assessee is not covered by the provisions of Payment of Bonus Act, 1965 and as such the said expenditure cannot bedisallowed under Section 43B r.w.s. 36(1) (ii) of the Act. Without prejudice to the claim that the same should not be disallowed, it is submitted that the Ld. AO has disallowed the entire expenditure of performance reward accrued during year instead of the amount paid after due date of filing return of income. Panel: The AO found that the amount of ₹ 13,01,51,983 has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the provision of section 36(1)(ii) is squarely applicable in case of the assessee and consequently the mischief of section 43B will kick in to disallow the claim of deduction by the assessee It may also be mentioned that the objection of the assessee on identical issue for AY 201112 and 2012-13 has not been accepted by the DRP In view of above the objection of the assesset. is rejected. 21. The learned A.R for the assessee submitted that the learned DRP erred in sustaining additions made by the Assessing Officer towards disallowance of performance incentive paid to employees u/s.43B(c) of the Act, without appreciating fact that said payment is neither bonus nor commission and thus, same cannot be brought within the ambit of provisions of section 36(1)(ii) r.w.s.43B(c) of the Income Tax Act, 1961. In this regard, he relied upon decision of the Hon ble Madras High Court in the case of M/s.Shanmugavel Mills Ltd Vs CIT 202 taxmann.com 640 and the Hon ble Delhi High Court in the case of Sriram Pistons Rings Ltd. Vs. CIT 307 ITR 363. 22. The learned DR, on the other hand, strongly supporting orders of Assessing Officer as well as learned DRP submitted that merely for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have given our thoughtful consideration to facts brought out by the ld. AO in light of arguments of the ld. AR for the assessee and we do not ourselves subscribe to the arguments of ld. AR for the assessee, for simple reason that once performance incentive is paid for rendering services, then such payment is in the nature of bonus or commission which comes under the provisions of section 36(1(ii) of the Act. It is immaterial whether the assessee terms it as performance reward or bonus. But, what is relevant is nature of payment and purpose of payment. In this case, it is in the nature of bonus or commission and such payment is for services rendered by employees. Just because nomenclature was changed to some other name, a particular expenditure would not change its original character. In this case, sum was paid to employees for services rendered and further, this sum would not have been paid as profits or dividend had it not been paid as commission or performance reward. Therefore, we are of the considered view that provisions of section 36(1)(ii) of the Act is squarely applicable and consequently, mischief of section 43B(c) would come into play, if such payment is not made on or b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brand value of M/s. Hyundai Motor Corporation, South Korea is substantially enhanced, which is evident from facts brought out by the TPO that M/s. Hyundai Motor Corporation has benefitted a lot from the assessee and hence, the learned TPO has rightly used Spearman s Rank Correlation method to conclude that there is a positive correlation between the brand value and market capitalization of HMC, Korea. Therefore, he has attributed portion of the same to the assessee in proportionate to its sales and made transfer pricing adjustment towards brand fees receivable from its AE enterprises. The learned DR further referring to some article published in website submitted that the assessee has rendered various services to enhance brand value of M/s. Hyundai Motor Corporation throughout the world. Although, there is no direct agreement between the assessee and its parent company for development of brand, but there is indirect arrangement between the assessee and its AEs which resulted in enhancement of global brand value of Hyundai Motor Corporation, which is clearly evident from data published by Interbrand, a private agency on its website, as per which market capitalization of Hyundai has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apitalization of HMC Korea and hence, we direct the Assessing Officer/TPO to delete transfer pricing adjustment made towards brand development services. 29. The next issue that came up for our consideration from additional ground no.3 of assessee appeal is amount received from Focus Market Scheme to be treated as capital in nature and exclude from total income. Facts with regard to impugned dispute are that Government of India with an intention to promote exports to certain regions / countries introduced Focus Market Scheme which provides incentive of 2.5% of FOB value for each licensing year commencing from 1st April, 2006. The export of products to those countries which are covered under list of countries in Schedule 37C would be entitled for duty credit scrip equivalent to 2.5% of FOB value of exports. During the year under consideration, the assessee was eligible for above scheme, as it makes export to specified markets. Accordingly, the assessee has received an amount of ₹ 150.57 crores as incentive from Govt. of India. The license under the scheme was given only for exports to potential new markets / specified products and not for all exports or all products to al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e out with Foreign Trade Policy for the period 1st September, 2004 to 31.03.2009 and as per the said policy, it has announced a scheme for exporters of certain goods to certain regions called Focus Market Scheme . As per said scheme, export of products to those countries which are covered under list of countries in Schedule 37C would be entitled for duty credit scrip equivalent to 2.5% of FOB value of exports. The assessee being eligible exporter had received licenses/duty credit scrip/ market linked focus scrips amounting to ₹ 150.57 crores for the year under consideration. The assessee has considered amount received under focus market scheme as revenue receipt and offered to tax. However, based on some subsequent decisions of appellate authorities has filed an additional claim seeking exclusion of said receipt from taxation on the ground that it is in the nature of capital receipt and not exigible for tax. Therefore, in order to understand whether amount received from Focus Market Scheme is revenue in nature or capital receipt, which is exempt from tax, one has to understand objectives of Focus Market Scheme announced by Govt. of India. As per Foreign Trade Policy document, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given year after year only after setting up of industry and only after commencement of production and therefore, such subsidy could only be treated as assistance given for the purpose of carrying on business of the assessee. It is well settled principles of law that any subsidy given for the purpose of offsetting part of cost of setting up of new industry, as per industrial policy of various State Governments or Govt. of India is considered as part of capital contribution and capital in nature, whereas subsidy given after commencement of production of products and further for enhancing profitability of the assessee is certainly in the nature of assistance given for running of business of the assessee more profitable and hence, it is definitely revenue in nature. 34. In this case, on perusal of facts available on record including foreign trade policy of Government of India, it is very clear from documents that main objective of Focus Market Scheme is to offset high freight cost and other disabilities of exporter to select international market with a view to enhance our export competitiveness to these countries. The expenditure incurred by the assessee under this scheme for ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and circumstances of the case, we are of the considered view that duty credit scrips received from Govt. of India under Focus Market scheme is revenue in nature and further, same was given to offset higher cost of freight and other disabilities of exporters to be more competitive in exports to certain regions. Thus, the same cannot at any stretch of imagination be considered as capital in nature. Hence, we reject the ground taken by the assessee. 36. The next issue that came up for our consideration from additional ground no.4 of the assessee is deduction towards education and secondary education cess u/s.37(1) of the Act. The learned A.R for the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of the Hon ble Bombay High Court in the case of Sesa Goa Ltd. Vs JCIT (2020) 423 ITR 426, where the Hon ble Bombay High Court after considering various facts including Select Committee of Parliament report on exclusion of word cess from the word tax has held that education cess and secondary education cess is an expenditure deductible u/s.37(1) of the Act. 37. The learned DR, on the other hand, strongly opposing additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the process up to the stage of trial run and predelivery inspection is common for both export and domestic sales. Further, the inputs for manufacture, such as import of raw materials, domestic purchase of raw materials, spares, etc., are also common for domestic and export sales. Based on the functional analysis of process, in the TP documentation, the assessee has tested its international transactions with its AE at entity level by applying Transaction Net Margin Method (TNMM) as the most appropriate method. The assessee has selected 5 companies as comparables and adopted operating profit by sales as profit level indicator ( PLI ). The assessee s margin was at 6.04% on sales while the comparable companies margin was arrived at 4.46%. Accordingly, claims that international transactions were considered to be at Arm s length price. 41. During transfer pricing proceedings, the TPO did not accepted TP study conducted by the assessee at entity level by applying TNMM as most appropriate method and on the basis of segmental financials furnished by the assessee, the ld.TPO has carved out domestic segment (manufacturing and spares) alone and benchmarked it with comparable compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 98.68 million 6. Margin level adjustment: 6.1 Need for segmentation: The assessee is engaged in manufacturing and selling cars in India as well as exporting them to its AEs abroad. During the Financial Year 2012-13, the assessee aggregated all the international transactions and benchmarked the same by applying TNMM using third party comparable companies. During the course of T.P. assessment proceedings the assessee was called upon to furnish segmental results showing the margins from AE export segment and domestic segment separately. This approach was required since the FAR profile of these two segments were different. It was observed that the margins from these two segments are not required to be the same. The segmental financials furnished by the assessee confirmed the observation as may be seen from the table below: Description Margin on revenue Margin on cost Domestic Export Domestic Export Vehicles 3.88 % 9.70 % 4.03 % ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent on the cost side, the AE transactions affecting the cost side of the financials are proportionately allocated as done by the assessee in the segmental results. The same would form the basis for giving a parity approach while determining the quantum of adjustment. 6.4 Computing the profit margin of the domestic segment: 6,4.1 Show Cause Notice: While computing the operating income, the assessee has taken certain non-operating items also. Therefore vide show cause notice dated 28-9-2016 the assessee was called upon to state its objections, if any, to exclude certain incomes which are taken as operating income and to include forex loss which is taken as non-operating. Vide reply dated 11-10-2016 the assessee raised its objections, which are discussed item-wise hereunder: 6.4.2 . Royalty income - ₹ 1116 millions: Assessee s claim: In an earlier year, the assessee had transferred its genuine parts division, which is after sales service parts, to M/s. Mobis India Ltd. Apart from the consideration for the transfer of genuine parts. division, Mobis India agreed to pay the running royalty calculated at a percentage on sales of genuine parts di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account in the year of performance/ eligibility in accordance with the related scheme, and when there is no uncertainty in receiving the incentives. This is actually an entry in the books of accounts recognising the revenue and subject to realisation and reversal in the later years, if not received . When that is the case, the assessee's claim that it would constitute revenue from operations appears less convincing. Besides, the assessee has failed to substantiate its pricing taking note of the incentive from the Government. It is also correctly classified in the financials as an item distinct from Revenue from Operations and shown under the head Other income . Such a classification cannot be treated as without any meaning. Therefore the incentive income is treated as nonoperating in nature. This treatment is also in tune with the stand taken by this office last year. 6.4.4 Commission / Discount received- ₹ 73 million: Assessee s claim: The assessee claims that it receives discount/commission as follows: Discounts offered by suppliers as a result of timely/early payment of bills raised towards purchase of materials/components ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Claim relates to damage/loss inside factory, in transit, at port for billed export cars Impact damage 1956404 claim relates to damage/loss inside factory for unbilled cars Total 35887660 From the above break-up, it is seen that the breakup of domestic car loss claim is to the extent of ₹ 19,33,712 (₹ 3,17,381 + ₹ 1616331 (computed, out of 1956404, in proportion to the domestic cars sold) only. The impact of this claim on the margin is negligible and therefore ignored. 6.4.6 Foreiqn exchange loss - ₹ 726.69 million: Assessee s claim: The assessee has claimed that forex gain and losses should be treated as non-operating in nature. The assessee had huge international transactions denominated in foreign currency and the exposure is admittedly not covered through hedging or swap or other forward contracts. The assessee has decided to take the risk of volatility in the reporting currency and the transaction currency. Whether the foreign exchange loss as recorded in the book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounting to ₹ 516.36 million has to be allowed as non-operating in nature. Position of this Office: The assessee did not furnish the entire forex account portfolio substantiating the losses and gains from transactions and translations in relation to revenue and capital items. Besides, the assessee has failed to reconcile the figures of forex loss as per cash flow statement and the forex loss added back as part of total income. The computation shows unrealised loss on Korean Exim loan is ₹ 47.595 crores. In the absence of the necessary d this claim is not entertained. 6.4.7 Erroneous computation of value of international tractions in the show cause notice: Assessee s claim: The assessee claimed that the technical knowhow fees of ₹ 274.15 million has actually been capitalised in the books and therefore it warrants similar treatment as has been given to acquisition of capital assets. Only 10% of ₹ 274.15 million has to be taken as the quantum of international transactions pertaining to both domestic and export segment. Position of this office: This contention of the assessee will be suitably considered while quantify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3% of b) e Whether Variation exceeds 3% of Transfer Price Yes (if c d) f TP Adjustment - after parity [Final] 1,021 ('c) Therefore, a downward adjustment of ₹ 102,08,60,000/- is proposed to the Assessing Officer in respect of the AE transactions relevant to the domestic segment of manufacture of cars and spares. 42. The AO, in pursuant to transfer pricing adjustment, as suggested by the TPO vide his order dated 31.10.2016 has passed draft assessment order u/s.143(3) r.w.s. 144C(1) of the Income Tax Act, 1961 (hereinafter the Act ) on 30.12.2016 and proposed TP adjustment of ₹ 102,08,60,000/- towards value of imports pertains to domestic sales segment. The assessee has filed objection before the DRP-2, Bangalore against order of the ld.AO and challenged TP adjustment suggested by the TPO in respect of domestic car sales segment on standalone basis by rejecting the TP study conducted by the assessee at entity level by applying TNMM as most appropriate method. The assessee had also cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only current year data. Further, revised OECD Guidelines 2010 had also discussed the issue of use of multiple year data. The crux of these guidelines is that multiple year data needs to be looked at when there is a correlation between the assessee s circumstances and that of the comparables, due to certain economic conditions, or if there is a difference due to different business or product cycles or if the results of some comparables over the years can lead to discovery of anomalies rendering them incomparable. However, the OECD also cautions that, use of multiple year data does not necessarily imply the use of multiple year averages. The ld.DRP has also taken support from various judicial precedents to support its findings to reject objections filed by the assessee. The relevant findings of the DRP are as under: Panel: The above grounds are related and hence they are considered together. The submissions of the assessee have duly been considered. It is seen that the TP study of the assessee is rejected after recording reasons. Hence the contention cannot be accepted. On analysis of the TP study of the assessee, the TPO recognized the margins of the arm s length comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction independent of financial results and capable of verification separately. Decision of ITAT Delhi in case of Benetton India Pvt Ltd ITA No. 3829/Del/2010 and Aztec Software Limited 107 ITS 141 also are in the similar line. It is observed that the OECD guidelines also require that Arm s Length principle should be applied on a transaction by transaction basis for arriving at the most precise approximation of fair market value. The TPO has discussed very logically the issues invo1ved in his order giving cogent reasoning nd justification for his decision. Considering all the aspects, and for the reasons mentioned in preceding discussions, the action of TPO is upheld and the objection of the assessee is rejected. 10. Ground of objection 10 - contentions on the operating and non-operating nature of certain income and expenses for the purpose of computation of the operating margins of the tested party (applicant) The Ld. TPO erred in excluding certain items of income, which are operating in nature while computing the operating income and operating profits and erred in including certain items of expense / losses, which are not operating in nature while computing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is called for. As regards the contention relating to the rejection of multiple year data by the TPO, we note that Rule 10B(4) which makes it mandatory to use only the current financial year's data. The word used in this Section is Shall implying thereby that neither the tax payer nor the Department has any choice regarding the use of data pertaining to the financial year in which the tax payer has entered into the international transactions. The proviso to Rule l0B(4) allows for use of earlier period data only if it reveals certain facts which leave an influence on the determination of transfer prices of the transactions being corn)3a1 ed. The implication here is that the earlier year data is in addition to the data pertaining to the relevant financial year. In terms of the proviso, the appellant has not been able to demonstrate with evidence how the data of past years influenced the price of the transaction. It is seen that the revised OECD Guidelines 2010 have discussed the issue of use of multiple year data. The crux of these guidelines is that multiple year data needs to be looked at when there is a correlation between the assessee's circumstances and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as per which, the assessee s operating margin is much higher than the comparable companies margin. The ld.AR further submitted that approach of the ld.TPO is erroneous as he has artificially carves out a portion of total international transactions which is apportioned to domestic car sales segment, at the same time, failed to test the remaining portion of the same international transactions for arm s length price. The ld.AR further submitted that the ld.TPO while segregating the transactions into domestic sales segment and export sales segment, has failed to consider the fact that comparables selected by the assessee in its TP documentation is also having domestic sales as well as export sales segment and thus choosing very same comparable selected by the assessee for entity wide benchmarking is incorrect. The ld.AR referring to Rule 10A(d) of Income Tax Rules, 1962 and guidance note on report under Section 92E of the Act, issued by the Institute of Chartered Accountants of India ( ICAI ) and also OECD Transfer Pricing Guidelines 2010 and United Nations Practical Manual on Transfer Pricing for Developing Countries, submitted that where there is existence of closely linked transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles of consistency. Further, substantial portion of the forex loss is attributable to restatement of External Commercial Borrowing ( ECB ), which forms part of financing activity and hence, it would be incorrect to treat same as part of operating cost for benchmarking purpose. The ld.AR further referring to Ground Nos.8.10 and 8.11 submitted that the TPO has made proportionate adjustment on the basis of international transactions pertaining to domestic car sales segment, whereas the ld.DRP without providing an opportunity to the assessee, enhanced said adjustment by adjusting shortfall of margins to entire cost which predominantly consists of third party cost. It is a well settled principle of law that TP adjustment has to be computed only in respect of international transactions and not at an entity level, which is evident from the fact that as per the provisions of Section 92(1) and Rule 10B(1)(e), it had specifically refers to any income arising from international transaction shall be computed having regard to the arm s length price. Therefore, the ld.DRP without appreciating relevant provisions has enhanced TP adjustment to total cost, which is incorrect. In this regard, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / ld.DRP have given valid reasons to reject objection filed by the assessee and hence, their orders should be upheld. 49. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We have also carefully considered various case laws cited by the ld.AR for the assessee. The assessee is a wholly owned subsidiary of Hyundai Motor Company, South Korea. The assessee is engaged in manufacturing and selling cars in India and exporting them to AE s abroad. The assessee has entered in to various international transactions with its AE s and claimed it as tested party and benchmarked the same by applying TNMM as most appropriate method. The TPO did not accept TP study conducted by the assessee and according to him, there is huge variation between profit margins of domestic segment and export to AE segment, in both categories of vehicles and spares. Accordingly, he has rejected TP study conducted by the assessee and re-characterized TP study by segregating domestic car sale segment on a standalone basis and made TP adjustment. We have given our thoughtful consideration to the reasons given by the ld.TPO / DRP and arguments adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rums had held that arm s length price should be determined on a transaction by transaction basis, based on functions performed, asset employed and risk assumed by the assessee. Further, the Act is very clear, as per which each international transaction has to be benchmarked based on the nature of transactions by applying most appropriate method. There is no common rule for applying TNMM as most appropriate method for all transactions. Some international transactions have to be tested by applying CUP method, resale price method or cost plus method and selection of appropriate method is depends upon nature of transactions. Therefore, we are of the considered view that there is no merit in the arguments taken by the ld.AR for the assessee that the TPO / DRP has erred in segregating domestic car sale segment on a standalone basis for the purpose of benchmarking ALP of international transactions with its AE. 50. Be that as it may. The fact remains that the TPO while segregating domestic car sale segment on a standalone basis has benchmarked transactions by considering 5 comparables selected by the assessee in its TP documentation. It was the claim of the ld.AR for the assessee tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w and same has been treated as operating expenses by the TPO. The assessee has received royalty income from Mobis under similar agreement for sharing technology and know-how, but the same has been considered as non-operating by the TPO. When the TPO has considered royalty payment by the assessee to its parent company as operating in nature, then there is no reason for the TPO to consider royalty income received from Mobis as non-operating income. Therefore, we are of the considered view that the ld.TPO was erred in considering royalty received from Mobis as non-operating. Hence, we direct the ld. TPO to consider Royalty income as operating income for computing operating margin. 52. As regards commission / discount income, incentives and insurance claim income, we find that all these incomes are generated from main business activity of the assessee of manufacturing and sales of cars. The assessee has received commission / discount on procurement of raw materials and insurance claim is received towards damaged cars manufactured by the assessee. When the assessee is recognizing income from sale of cars as operating in nature, then insurance claim received towards damaged cars is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture, when the law has been substantially changed in subsequent assessment years. Further, it is a well settled principle of law that forex gain or loss is revenue in nature and operating income/expenditure. Therefore, we are of the considered view that there is no merit in the arguments taken by the ld.AR for the assessee that forex loss should be considered as nonoperating in nature. Hence, we reject arguments taken by the assessee. 54. As regards working capital adjustment claimed by the assessee by filing additional ground, we find that the issue is now settled by various decisions including the decision f ITAT, Chennai in the case of Doosan Power Systems India Pvt. Ltd., in ITA No.581/Mds/2016, where myself is one of the party to the decision held that working capital adjustment needs to be given while computing operating margin of the assessee. Therefore, there is merit in additional ground taken by the assessee requesting working capital adjustment. But, fact remains that since assessee has taken additional ground, the facts with regard to claim of the assessee was not before the TPO. Hence, this issue needs to go back to the file of the TPO to examine the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
