TMI Blog2023 (2) TMI 1273X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment order passed u/s 143(3) r.w.s 144C(13) r.w.s 144B of the Act by the AO dated 21.07.2022 with the following grounds of appeal:- I. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another. 1. The learned Assessing Officer ('AO') learned Transfer Pricing Officer ('TPO') and the Honourable Dispute Resolution Panel ('Hon'ble DRP') grossly erred in determining an adjustment of INR 85,30,90,000/- to the Arm's Length Price ('ALP') of the Appellant's international transactions with its Associated Enterprises ('AEs') u/s 92CA of the Income-tax Act, 1961. II. Grounds on rejection of the transfer pricing documentation, computation of Appellant's operating margin and use of various filters 2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of sub-section (3) of 92C of the Act. 3. The Learned AO/ Learned TPO/ Hon'ble DRP erred in rejecting comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer India Private Limited 2. Vanaz Engineers Limited 3. Emmbros Autocomp Limited 4. Pearlite Liners Private Limited 15. The learned AO/ learned TPO/ Hon'ble DPP erred in rejecting companies that ought to have been accepted as comparable companies on the grounds such as functional similarity, companies qualifying applied filters etc.: 1. Bharat Gears Limited 2. Gajra Gears Private Limited 3. Hindustan Hardy Limited 4. Packwell Gaskets Private Limited 5. Rane (Madras) Limited 6. Sar Auto Products Limited 7. Sibar Auto Parts Limited 16. The learned AO/ learned TPOL Hon'ble DRP erred in not considering that Hindustan Hardy Limited was selected by the learned TPO, in Appellant's own case, in the set of comparable companies for AY 2015-16 and AY 2016-17. 17 Further, learned AO/ learned TPO/ Hon'ble DRP erred in not considering the following companies in the final set of comparable companies which have been accepted by the Hon'ble DRP in Appellant's own case in previous assessment years: 1. Bharat Gears Limited in AY 2015-16; 2. Rare (Madras) Limited in AY 2015-16; 3. Packwell Gaskets Private Limited in AY 2016-17; 4. Sibar Auto Parts Limited in AY 2016-17. Iv. Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering Residual PSM and ignoring the fact that the Appellant does not make any unique contribution to the licensed technology. The Appellant merely uses the licensed technology to manufacture the products. 26. The learned AO/ learned TPO/ Hon'ble DRP has erred in not appreciating the fact that Appellant's Functions, Assets and Risk ('FAR') analysis only revolves around the manufacturing process without any contribution to ownership of unique intangibles, thus leading to incorrect application of PSM. 27. The learned AO/ learned TPO/ Hon'ble DRP erred in assigning arbitrary weights to the functions performed by the Appellant vis- -vis the Associated Enterprises without carrying out a detailed FAR analysis. Further, the learned AO/ learned TPO/ Hon'ble DRP erred in applying an ad-hoc 50:50 profit split without giving any logical reasoning for arriving at this method. 28. The learned AO/ learned TPO/ Hon'ble DRP has also erred in determining the royalty rate at 0.335% on sales, without giving any logical basis for the same. 29. The learned AO/ learned TPO/ Hon'ble DRP erred in proposing an adjustment against royalty payment twice. The learned AO/ learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,90,42,060/-. Later, on 31/03/2019, the return was revised declaring same income. The case was selected for scrutiny and statutory notices were issued to the assessee on examining of the documents, it was observed that the assessee had international transactions with its AE s exceeding Rs.15 crores, therefore, the case was referred to the TPO after obtaining approval from the competent authority. 3. The assessee is engaged in manufacturing and sale of automotive front axles, rear axle, propeller shafts, transmission units and engines. The assessee is a vendor to Toyoto Kirloskar Motors Limited. 4. After reference received, the assessee was asked to file documents as per sec. 92D of the Act. The assessee filed same and it was noticed that for determination of ALP, the tax payer had entered into the following international transactions:- Particulars Amount in Rs. Method used Purchase of raw materials components 449,34,41,578 TNMM Sale of sample parts 26,73,450 TNMM Sale of parts 256,47,06,798 TNMM Purchase of fixed assets including CWIP and TA fee CWIP 471,11,509 TNMM other method Payment of technical assistance fee capitaliser 10,51,517 TNMM Payment of royalty 58,02,54,891 TNMM Pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r draft assessment order, the assessee filed rectification application dated 11/10/2021 by stating that the royalty adjustments have been considered twice and there is incorrect computation of royalty adjustments before the TPO u/s 154 of the Act.. The TPO passed order u/s 154 on 29/04/2022, DIN Letter No. ITBA/COM/F/17/2022- 23/1042909477(1) in the case of royalty adjustment, it was reduced to Rs.53,06,90,000/-, accordingly the total adjustments were suggested for Rs. 1,01,13,20,000 ( Manufacturing Segment Rs. 48,06,30,000 + MSS Segment for Royalty Rs. 53,06,90,000). Further the DRP direction dated 15.07.2022 the T.P. adjustment was reduced to Rs. 85,30,90,000/- ( Manufacturing Segment Rs. 32,24,00,000 + MSS Segment for Royalty Rs. 53,06,90,000). 9. Aggrieved from the final assessment order dated 21.07.2022, DIN No. ITBA/AST/S/143/(3)/2022-23/1043968195(1), the assessee filed appeal before the Income Tax Appellate Tribunal. 10. The ld.AR submitted that the assessee filed rectification application before the DRP on 16/08/2022 which is placed at paper book page No. 560 to 562 and submitted that the royalty adjustment has been made twice and it was further submitted that in assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord. The ld. AR has also filed written synopsis which is placed on record 11. Ground No.2 to 11 is academic in nature and does not require any adjudication. 12. On the other hand, the ld. DR relied on the order of the lower authorities and he submitted that the lower authorities have done good reasoned order and does not require any interference, therefore adjustment under the royalty calculated by the lower authorities should be upheld. 13. After hearing both the parties and perusing the entire materials on record and examining the order of the lower authorities, we observe that the ground No.1 was not pressed by the AR of the assessee, therefore, it is dismissed as not pressed. 14. In respect of ground nos.2 to 11, after considering the submissions of the ld.AR that after rectification order passed by the revenue authorities as observed from the their orders which are placed on the paper book , it becomes academic in nature and does not require any adjudication. 15. In ground No.12 to 17 and 29, we found substance in the submissions of ld.AR and after perusal of the rectification orders passed by the revenue authorities, the adjustment made under the manufacturing segment is Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court as no longer the MAM because the conditions necessary for PSM as MAM are not met in the case of the Assessee. Even going by Rule 10B(1)(d), there should be contribution by each of the parties to a transaction for earning profits from sale of goods or provision of services. Then the contribution of each of the parties is identified and the profit is split between those parties. In the case of the Assessee the technology is given by TMC, Japan for which royalty is paid. The use of the technology in manufacturing and the sale of the product so manufactured contribute to the profit of the Assessee and TMC, Japan has nothing to do with that. There is therefore absence the first condition for application of PSM as MAM. As submitted by the Assessee PSM is used as MAM only in a case involving transfer of unique intangible or in multiple inter-related international transactions which cannot be valued separately for determining the ALP. The OECD guidelines cited on behalf of the assessee clearly supports the aforesaid approach and the OECD guidelines in this regard reads as follows:- Further reliance is also placed on OECD Guidelines, which clearly lay down the situations in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urs and the factors affecting business performance in that sector can be particularly relevant to evaluating the contributions of the parties and whether such contributions ale unique and valuable. Depending on the facts of the case, other indicators that the transactional profit split may be the most appropriate method could include a high level of integration in the business operations to which the transactions relate and /or the shared assumption of economically significant risks (or the separate assumption of closely related economically significant risks) by the parties to the transactions. It is important to note that the indicators are not mutually exclusive and on the contrary may often be found together in a single case. 2.127. At the other end of the, spectrum, where the accurate delineation of the transaction determines that one party to the transaction performs only simple functions, does not assume economically significant risks in relation to the transaction and does not otherwise make any contribution which is unique and valuable 2.147. Under the transactional profit split method, the relevant profits are to be split between the associated enterprises on an economica ..... X X X X Extracts X X X X X X X X Extracts X X X X
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