KEHIN INDIA MANUFACTURING PVT. LTD.,GURGAON vs. ADDL, NEW DELHI

PER KULDIP SINGH, JUDICIAL MEMBER

“1. The Ld. Assessing Officer has erred in law and on facts and circumstances of assessee's case in making additions/disallowances of Rs.2,72,86,266/- on wholly illegal, erroneous and untenable grounds. 2 The order of assessment is bad in law. TRANSFER PRICING GROUNDS 3 The Ld/ AO/TPO/DRP have grossly erred in law and on facts and circumstances of the assessee's case in making an adjustment of Rs.72,01,410/- in relation to international transaction of purchase of traded goods by the assessee from the its associated enterprise (AE) amounting to Rs.40,18,52,663/-. 4 The Ld. TPO/DRP and consequently Ld AO has erred in law and on facts and circumstances of the case in not accepting the Transactional Net Margin Method (TNMM) as the most appropriate method (MAM) as the Resale Price Method cannot be legally applied under the circumstances when the traded goods are admittedly sold to an associated enterprise of the assessee i.e. HSCI.

5 The Ld. TPO/DRP and consequently ld AO have grossly erred in law and on facts and circumstances of the case by rejecting the search process of the assessee on wholly untenable grounds and without appreciating that the assessee has carried out its search process adopting a scientific basis. 6 The Ld. DRP/TPO and consequently Ld AO have grossly erred in law and on the facts and circumstances of the case in conducting a fresh search process using 'prowess database' which is bad in law on the following grounds:- a) that fresh search was conducted by the Ld TPO without giving cogent reasons and the same has not been provided to the assessee. b) that all new com parables selected by the Ld TPO were available in the assessee's search process using 'Capitaline database' but were rejected by assessee under justified quantitative and qualitative filters. c) that neither industry or product filter was applied nor FAR analysis of new companies selected by the Ld. TPO was provided to the assessee. d) that new companies selected by the Ld TPO are functionally, product wise dissimilar to the assessee and hence are not comparable as per Rule 10B(2).

7 Without prejudice, the Ld. AO/TPO has grossly erred in law by not following the Ld. DRP's mandatory directions for exclusion of 'Autolite (India)' as a comparable company, thereby disregarding the 'Principles of judicial hierarchy'.

8 Without prejudice, the Ld. AO/TPO has grossly erred in computing the gross profit margins of the comparable companies (PAE Limited & Associated Auto Parts) selected by Ld. AO/TPO.

9 The Ld TPO/DRP and consequently Ld AO have grossly erred in not granting risk adjustment to the assessee in view of Rule 10B(3) of the IT Rules. a) The findings of Ld TPO/DRP on risk adjustments are erroneous and contradictory.

10. The Ld TPO/DRP and consequently Ld AO have grossly erred in law and on facts and circumstances of the case by not following the 'aggregation' principle and by further segregating the trading segment of the assessee into two product segments namely 'ECU' and 'other AC parts' (thus erroneously holding 'ECU' as an AE segment):-

a) by not offering an opportunity to the assessee to raise the objection on segregation of such segment which is against the principle of reasonable justice. b) by disregarding the fact that AC parts are inextricably linked to ECU such that segregation of trading segment which is single functional segment is not appropriate. c) by incorrectly treating the 'ECU segment' as AE segment, while assessee has also imported 'other AC parts' from its AE. d) by basing the segregation of trading segment on the quantitative disclosures as per Schedule VI of Companies Act, 1956, made by the assessee in its notes to accounts as per the mandate of law. e) in not following the rule of consistency by not accepting the principle of aggregation.

11 Without prejudice to the above, the Ld TPO and consequently Ld AO have grossly erred in law and in facts of the case, in not following the mandatory directions dated 23.09.16 issued by Ld DRP for calculation of correct GP margin of ECU segment. a) The Ld TPO incorrectly calculated the GP margin of ECU segment at 5.69% instead of 16.01% by not making adjustment of custom duty of Rs.3,90,47,501. 12 The Ld TPOIDRP and consequently Ld AO have erred in not granting the benefit of second proviso to Section 92C(2) of IT Act (+5%) to the assessee. CORPORATE TAX GROUNDS 13 The Ld AO has grossly erred in law and in facts in disallowing Rs.84,856 on account of assets written off, by wrongly treating it as related to capital assets. 14 That the penalty proceedings initiated under See 27I(1)(c) is on wholly illegal and untenable grounds since there was no concealment of any income nor submission of any inaccurate particulars of income, nor any default according to law by the assessee. 15 That the charging of interest u/s 234A, 234B and 234C is bad in law and is prayed not to be upheld.”

S.No. Nature of International Transaction Value (in INR) 1 Purchase of raw materials parts and 667,740,754 components 2 Purchase of traded goods 401852663 3 Purchase of Capital goods 4466952 4 Payment of Royalty 4719747 5 Payment of Technical Guidance fee 1079435 6 Reimbursement (Paid) 3986564 7 Reimbursement (Received) 830489 8 Interest for delay in payment 156554 9 Sale of finished goods 192713 10 Payment for technical know-how 24996000 Total 1,11,00,21,871 3. In manufacturing segment, the taxpayer supplied all its manufacturing units of air-conditioning equipment under technical collaboration of its AE i.e. the taxpayer to Honda Seil Cars India Ltd. for which it imported the raw material from its AE in Japan.

The taxpayer in its Transfer Pricing (TP) study in order to determine the Arm’s Length Price (ALP) of its international transaction applied Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) with Profit Level Indicator (PLI) as OP/Sales and computed its margin at 1.89% with updated margin of comparables, namely, Autolite (India) Ltd. and Subros chosen from the capitalline databases at 1.13% and found its transaction qua manufacturing segment at arm’s length.

GROUNDS NO.1 & 2

GROUNDS NO.3, 4, 5, 6, 7, 8, 9, 11 & 12

“8. We have heard the rival submissions and also perused the relevant material referred to at the time of hearing. It is an undisputed fact that assessee has purchased traded goods from AE amounting to Rs. 42,67,98,329/- which is subject matter of transfer pricing adjustment. Assessee is purchasing the goods from Honda Trading Corporation , Japan and only customer to whom it is selling the Honda Siel Cars India Limited which is an entity connected with the Honda group. The share holding of the assessee by different AEs including one with whom the assessee has undertaken the transaction of purchase and sale has already been given in an earlier part of the order. Thus, both Honda Trading Corporation Japan and HSCIL are associated enterprises of the assessee. As observed by the TPO, on both the ends, i.e., purchase and sale transaction is with the related parties, i.e., are controlled transactions. Once both the legs of the transactions are with the AE, then whether under these circumstances RPM can be held to be most appropriate method or not. The relevant Rule 10B (l)(b) which describes the RPM method reads as under :-

"Resale price method) by which.:

(i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise} is identified;

(ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services} in a comparable uncontrolled transaction} or a number of such transactions;

(iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of properly or obtaining of services;

(iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market;

(v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise.

9. Following the order passed by the coordinate Bench of the Tribunal in taxpayer’s owner case for AY 2010-11 (supra), when undisputedly business model of the taxpayer has not undergone any change during the year under assessment and the taxpayer has purchased the goods from Honda Trading Corporation, Japan and has sold the goods to Honda Siel Cars India Ltd. (HSCIL) which is an entity connected with the Honda group. When we go by the shareholding of the taxpayer by different AEs, the only conclusion drawn is Honda Trading Corporation, Japan and HSCIL are AEs of the taxpayer. So, in these circumstances, we are of the considered view that RPM cannot be treated as MAM to benchmark the international transactions, more particularly when both the transactions qua sales and purchase of the goods and resale are with AEs which are related parties. So, RPM cannot be applied in case of related party transactions/controlled transactions. We are of the further considered view that when method adopted by the TPO itself is not sustainable, the entire exercise as to benchmarking the international transactions has to be redone.

Consequently, the issue is set aside to the TPO to decide afresh after applying the TNMM as MAM after providing adequate opportunity of being heard to the taxpayer.

GROUND NO.10

“10. Now coming to the applicability of TNMM as MAM, we find that in all the earlier years TNMM has been finally held to be most appropriate method on the facts of the assessee's case and since there is no change in material facts or FAR, then TNMM should be adopted as the most appropriate method to benchmark the international transaction of the assessee with the AE in the trading segment. Since this method has not been analysed by the TPO and the same comparable selected by the assessee has been adopted by the TPO for the purpose of RPM, therefore, we are of the opinion that the matter should be remanded back to the file of the TPO and AO, firstly, to consider TNMM as the MAM constituting the past history of the assessee; and secondly, to carry our fresh search analysis of the comparables and then benchmark the assessee's transaction in the trading segment. The TPO shall give effective opportunity to the assessee to substantiate its case and after analysing the comparables, ALP of the Trading Segment should be determined. All the other grounds raised by the assessee before us relating to transfer price adjustment shall be open before the TPO, except for the directions given herein above. In the result, ground pertaining to transfer pricing adjustment is treated as partly allowed for statistical purposes.”

GROUND NO.13

GROUND NO.14

GROUND NO.15