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TMI Blog2019 (4) TMI 2071X X X X Extracts X X X X X X X X Extracts X X X X ..... tative for the Revenue on the other hand placed reliance on the orders of Assessing Officer / DRP / TPO. 6. The assessee in ITA No.1468/PUN/2010, relating to assessment year 2006-07 has raised the following grounds of appeal:- 1. The learned Assessing Officer erred in making an addition to the total income of the Appellant in AY 2006-07 of Rs.12,36,57,880 on account of transfer pricing adjustments and not considering the comparability analysis as documented in the transfer pricing study report of AY 2006-07 provided by the Appellant. The Appellant prays that comparability analysis as documented in the transfer pricing study report of AY 2006-07 provided by the Appellant be accepted and the addition made to the total income of the Appellant in AY 2006-07 on account of transfer pricing adjustments be deleted. 2. The learned Assessing Officer erred in rejecting the combined transaction approach followed by the Appellant in AY 2006-07 including use of Transactional Net Margin Method ("TNMM') at the company level for benchmarking various international transactions of AY 2006-07. The Appellant prays that the combined transaction approach followed by the Appellant for AY 2006-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt proceedings of AY 2006-07 be excluded while computing the operating margin of the Appellant for AY 2006-07 for application of TNMM. 9. The learned Assessing Officer erred in disallowing the balance Royalty of Rs 3,93,88,379 as capital expenditure in AY 2006-07 (over and above the disallowance of Royalty expenditure of Rs.2,62,58,920 as a Transfer Pricing adjustment which is also appealed against in Ground No 7). The Appellant prays that the entire Royalty of Rs.6,56,47,299 be allowed as revenue expenditure in AY 2006-07. 10. The learned Assessing Officer erred in disallowing the Project Assistance Technical fees (technical service charges) of Rs.6,66,65,710 as capital expenditure in AY 2006-07. The Appellant prays that the above expenditure be allowed as revenue expenditure in AY 2006-07. 11. The learned Assessing Officer erred in disallowing the payment for Star Diagnostic of Rs.27,06,247 as capital expenditure in AY 2006-07. The Appellant prays that the above expenditure be allowed as revenue expenditure in AY 2006-07. 12. The learned Assessing Officer erred in taxing the prior period transactions relating to the Third Party Account in AY 2006-07. The Appellant pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment for purchase of CBUs. The TPO was also of the view that the assessee had made excess payment of royalty and hence, proposed addition. The Assessing Officer in the draft assessment order notes that claim of royalty payment was disallowed in earlier assessment year also and it was held that entire payment of Rs. 6.56 crores was required to be disallowed in the hands of assessee. The Assessing Officer in this regard show caused the assessee who explained the nature of payment and why the same should be allowed in the hands of assessee. The Assessing Officer observed that the submissions made by assessee were same as before the TPO and hence, the order of TPO was not disturbed and adjustment of Rs. 9.73 crores was made towards international transaction of purchase of CBUs and Rs. 2.62 crores on account of excess royalty paid by the assessee. 9. The Assessing Officer further noted that the assessee had debited sum of Rs. 6.56 crores towards royalty payment @ 5%. He further noted that royalty payment was one of the issues for which case was referred to Transfer Pricing Authority. The TPO had adopted the arm's length royalty rate @ 3% as against 5% paid by the assessee and acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of income for the assessment years 2002-03 and 2003-04, the assessee had offered income out of TP account. The assessee further pleaded that credits pertained to assessment years 1995-96 to 1999-2000 which were not offered to tax and were now recorded in the books of account and hence, referred as prior period income but the same could not be taxed during the year. The Assessing Officer analyzed the submissions and entries and noted that the assessee came into existence during assessment year 1995-96 as Joint Venture between Tata Engineering Locomotive Company Ltd. (TELCO) and Daimler Chrysler AG and from that year onwards the foreign partner of Indian JV was keeping with itself some income of Indian JV, without knowledge of JV partner and the Indian Govt. The Assessing Officer has then analyzed the transaction at pages 13 and 14 of the draft assessment order and was of the view that these were undisclosed financial transactions between assessee and its parent company and were not even known to the other JV partner TELCO. The Assessing Officer further observed that the assessee had disclosed cost of TPA transaction and paid taxes in 2006, but major part of the income was not offe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y conditions. The learned Authorized Representative for the assessee stated that all these transactions were aggregated under TNMM method and were benchmarked by the assessee. He then referred to the order of Tribunal in assessee's own case in assessment year 2005-06 with special reference to paras, 24, 32 and 33, wherein the facts of case were noted and to paras 42 and 43, the directions of the Tribunal to apply TNMM method on aggregate basis; then the Tribunal goes on to hold that where there is no analysis by the TPO on comparables, the matter needs to be adjudicated. However, in the present case, the TPO at pages 241 to 243 looks at the selection of 12 comparables by the assessee and rejects 6 comparables. The mean margins of balance comparables were 6.28% as against margins of assessee at 8.58%. The TPO however, rejects aggregation of all the transactions and finally makes the addition on account of RPM method applied and comparison of margins of CBUs with the margins of trading in spare parts. The second point which needs to be seen is the payment of royalty, which also needs to be benchmarked after aggregation with all the other transactions while applying TNMM method. He po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r their re-sale in the domestic market. The aggregated international transactions of assessee with its associated enterprises totaled to Rs. 239.85 crores. The assessee had applied TNMM method after aggregating all the transactions and its PLI was 8.58%. It had selected 12 concerns as comparables in its TP study report, whose mean margins was 4.92% and held that the transactions were at arm's length price. 14. The case of Revenue on the other hand, was not accepting aggregation report in the first instance and also in applying RPM method for benchmarking international transactions by comparing margins of CBUs sold, with the margins of spares; the TPO had rejected aggregation approach applied by assessee. Though in his order, he has commented upon the selection of 12 concerns by the assessee and rejection of 6 concerns by him. The assessee thus, pleads that in the instant assessment year, the TPO had looked at comparability analysis and in the final analysis, selected 6 concerns as comparables whose mean margin worked out to 6.28%. The issue of application of aggregation approach in respect of import of raw materials, purchase of spare parts and import of CBUs and the method to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y dealers but under a dealership agreement, wherein the dealer was to use only spare parts which were made available by assessee. Such imports were being made of spare parts in order to keep the standard of products sold and also to maintain efficiency of passenger cars. The assessee had fairly admitted that it was covering cost of such spares, which were to be provided free of cost to customers under warranty commitments, from the cost of cars sold by it. In such scenario, the import of spare parts was an activity which was also closely connected with sale of manufactured and imported passenger cars and the same could not be benchmarked independently. Accordingly, we hold that transactions of import of CBUs and import of spare parts were closely and interlinked to the manufacture of passenger cars by assessee and the said activity was to be benchmarked on an aggregate basis along with other transactions under the umbrella of "manufacturing activity‟." 15. Then, the next issue which was decided by the Tribunal in assessment year 2005-06 was the most appropriate method to be applied. The said deliberations are in paras 34 to 41 of the order and findings of Tribunal are in par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto this aspect and determine the arm's length price of international transactions undertaken by the assessee. 17. Now, coming to the facts of present case, which are identical to the facts in assessment year 2005-06 and the Revenue has not pointed out any difference in the facts when compared to earlier year. Hence, we hold that proposition laid down by the Tribunal in assessment year 2005-06 (supra) is squarely applicable to the issue raised in the present appeal. The assessee was engaged in carrying out all the activities i.e. import of raw materials, import of CBUs and also import of spare parts from its associated enterprises and other transactions. All these transactions are to be benchmarked under the umbrella of manufacturing activity on an aggregate basis and after applying TNMM method, margins shown by assessee needs to be compared with the mean margins of finally selected concerns. In this regard, the learned Authorized Representative for the assessee stressed that in the instant year, the factual aspects to this extent were different as the TPO had taken note of selection of comparables by assessee and rejected 6 of them. The said deliberations are in part (vii) at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as capital expenditure. This issue also stands covered by the order of Tribunal in assessment year 2005-06. However, in that year, the Revenue was in appeal since the CIT(A) had allowed balance royalty payment of Rs. 3.30 crores as revenue expenditure. The Tribunal noted that the issue stands covered by earlier orders of Tribunal in assessment years 2002-03 to 2004-05 and following the same parity of reasoning, it was held that the said balance royalty payment of Rs. 3.30 crores is to be allowed as revenue expenditure in the hands of assessee. Following the same parity of reasoning as in paras 61 and 62 of order of Tribunal relating to assessment year 2005-06, we allow this ground of appeal in favour of assessee. 21. Now, coming to the next issue raised vide ground of appeal No.10 i.e. Project Assistance Technical Fees were disallowed as capital expenditure. This issue has also arisen before the Tribunal in assessment years 2002-03 to 2004-05 and also in the appeal of Revenue in assessment year 2005-06. The Tribunal following the same parity of reasoning as in earlier years, has upheld the order of CIT(A) in assessment year 2005-06 in directing the Assessing Officer to allow Proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer for fresh adjudication. The learned Authorized Representative for the assessee points out that in the order passed under section 143(3) r.w.s. 254 of the Act, dated 15.12.2010, the said issue was decided against assessee. The CIT(A) allowed the claim of assessee observing that Star Diagnostic was a tool which was utilized for servicing car on the basis of software installed in the same. The CIT(A) also noted that where Star Diagnostic was owned by the parent company i.e. Daimler AG and not by assessee and rental charges were being paid and since no new asset had been acquired by assessee, the expenditure could not be held to be capital expenditure. Similar issue was also decided by the CIT(A) in assessment years 2004-05 and 2005-06. The learned Authorized Representative for the assessee pointed out that no appeal has been filed by Revenue before the Tribunal against orders of CIT(A) relating to assessment years 1999-2000, 2004-05 and 2005-06. He further pointed out that in assessment year 2007-08, the DRP directed the Assessing Officer to delete addition. Further, the Assessing Officer had not made any disallowance in assessment year 2008-09 onwards. The learned Authorized Re ..... 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