DY. CIT, CIRCLE-9, PUNE vs. MERCEDES BENZ I PVT. LTD. (FORMERLY KNOWN AS DAIMLER CHRYSLER I PVT. LTD), PUNE

The cross appeals filed by the assessee and Revenue and Cross Objections filed by the assessee were heard together and are being disposed of by this consolidated order for the sake of convenience.

The assessee in ITA No.1083/PUN/2013 has raised the following grounds of appeal:- 1. The learned CIT(A) erred in proposing an adjustment of Rs 2,56,10,076 to the value of international transactions of MB India and not considering the analysis provided in the transfer pricing study report for benchmarking of the Appellant's international transactions. The Appellant prays that the approach followed in the transfer pricing study report be accepted and accordingly, the arm's length price of the international transactions be accepted. 2. The learned CIT(A) erred in rejecting the combined transaction approach followed by the Appellant at the company level for benchmarking various international transactions of the Appellant for AY 2005-06. The Appellant prays that the combined transaction approach followed by the Appellant at the company level for benchmarking various international transactions for AY 2005-06 should be accepted. 3. The learned CIT(A) erred in rejecting certain companies identified by the Appellant as comparable in its transfer pricing study report for benchmarking its international transactions. The Appellant prays that all the companies identified by the Appellant in the transfer pricing study report of AY 2005-06 be accepted as comparable companies. 4. The learned CIT(A) erred by comparing the gross margin from international transaction pertaining to import of CBUs with the international transaction pertaining to import of spares (i.e. both being controlled transactions of the Appellant itself). The Appellant prays that the approach of using controlled transaction as comparable should not be considered and consequently the approach followed by the Appellant in its transfer pricing study report should be accepted. 5. The learned CIT(A) erred in accepting RPM as the most appropriate method for benchmarking the international transaction of import of CBUs by comparing the gross margin from trading of CBUs with gross margin earned from functionally non-comparable activity of trading of spares. The Appellant prays that the approach of using RPM as the most appropriate method be rejected and consequently the approach followed by the Appellant in its transfer pricing study report be accepted. 6. The learned CIT(A) has erred in making an adjustment to the purchase price of CBUs by applying gross margin of spares segment without considering an adjustment on account of differences in functions, risks and assets of the spares segment vis-a-vis CBU segment for AY 2005- 06.

The assessee has also raised additional ground of appeal which reads as under:- “The learned CIT(A) has erred on the facts and in law in computing the transfer pricing adjustment on the entire cost of sales of CBU Unit of the Appellant instead of limiting it to the international transactions with Associated Enterprises in respect of purchase cost of CBU‟s”

The Revenue in ITA No.1110/PUN/2013 has raised the following grounds of appeal:- 1. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in giving directions to the A.O. to verify and decide the admissibility of the claim of expenditure of capitalized cars as given in ground No.6 of A.Y. 2002-03, when the facts for the given assessment year are different from that in A.Y. 2002-03. On the issue of use of Controlled Transaction 2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was correct in law, i) when he implicitly rejected the direct method of Comparable Uncontrolled Price under Rule 10B(1)(a) for the evaluation of the International Transaction of the payment of Royalty & Seems to have preferred Aggregated Transaction Net Margin Method under Rule 10B(1)(e), a indirect method while evaluating the Arms Length Price, which was rejected by him for A.Y. 2005- 06 (and in A.Y. 2008-09 as part of the Dispute Resolution Panel); ii) by rejecting the CUP, a direct method for working out the Arm's Length of the international transaction and uncontrolled transaction; which provides for instant comparison of the prices of the products/services; iii) when the OECD guidelines in para 1.70 clearly suggests that 'an attempt should be made to reach a reasonable accommodation keeping in mind the imprecision of the various methods and the preference for higher degrees of comparability and a more direct and closer relationship to the transaction? On the issue of Consistency. 3. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was correct in law, i) when the assessee company itself has provided separate benchmarking and detailed information regarding the Royalty payment in the later years ; ii) when each year should be treated separately based on the facts and documentation submitted ; (as per the ratio laid down in the case of M/s. Onward Technologies vs. DCIT dated 30.04.2013, appeal No.ITA No.7985/Mum/2010 of ITAT Mumbai) 4. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in treating the royalty payment of Rs.3,30,72,239/- as revenue expenditure when the assessee has acquired enduring benefit as it was conferred manufacturing rights as well as copyrights for technical product documentation etc and further when the Hon'ble DRP while deciding the case for A.Y. 2007-08 has also upheld this treatment given to royalty payment i.e. has held that royalty payment is of Capital nature.

The assessee in CO No.60/PUN/2014 has raised the following grounds of objections:- On the facts and in circumstances of the case, the learned Commissioner of Income –Tax IT/TP ('the learned CIT(A)'): 1. has erred in not considering the facts submitted by the Respondent while adjudicating the Ground No 1 of the appeal filed and further, erred in adjudicating the said Ground on the basis of direction issued in Ground No 6 of AY 2002-03 on the basis of assumption that both these grounds are identical in facts. The learned CIT(A) thereby erred in not deleting the addition of Rs 6,02,000 towards capitalization of manufactured cars made by the learned Assessing Officer. 2. Without prejudice to our contention that royalty expenditure is revenue expenditure, in case the Tax Department's ground that it is a capital expenditure succeeds, then depreciation under section 32 of the Act should be allowed on capitalized royalty. 3. Without prejudice to our contention that Project Assistance Technical Fees is revenue expenditure, in case the Tax Department's ground that it is a capital expenditure succeeds, then depreciation under section 32 of the Act should be allowed on capitalized Project Assistance Technical Fees.

First, we take up the appeal of assessee. The issue raised in the appeal filed by assessee is against transfer pricing adjustment made on account of international transactions entered into by the assessee.

Briefly, in the facts of the case, the assessee company was engaged in the manufacture of automobiles. For the year under consideration, the assessee had filed return of income declaring Nil taxable income under the regular provisions of the Act and had declared taxable income of ₹ 55,97,26,890/- under the provisions of section 115JB of the Act. The case of

In reply, the assessee filed written submissions. The assessee pointed out that information with regard to group pricing policy, common price list for import of raw materials, spare parts, payment of royalty were submitted during assessment year 2002-03 and the same submissions were filed before the

The next plea of assessee was that there was no merit in holding that trading activities of spares and trading of CBUs were two different activities and the two should be segregated and then proposed two to compare the gross profit margins of trading in spares to gross profit margins of CBUs, would mean rejecting the basic principle of functional analysis. The assessee also pointed out that in the activity of import and sale of CBUs, it was expected to earn lesser amount of gross profit as compared to the other activities, in which substantial asset cost and risk of assessee were involved. The assessee on without prejudice basis pointed out that separate Transfer Pricing Review Report submitted regarding the trading segment as a whole may be considered. The assessee also referred to objections raised against payment of royalty and rate to be charged and pointed out that payment of royalty was approved by RBI and Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Govt. of India and hence, the rate as agreed upon should be adopted.

The TPO analyzed the submissions of assessee and was of the view that from the perusal of international transactions undertaken by assessee, it is seen that these were variety of transactions and were different in their nature and scope. In case of any manufacturing company, most of the transactions would be present but in case the assessee’s contention of benchmarking all of them together at the entity level was accepted, it would clearly lead to mean that there would be no necessity to do analysis of international transactions separately. The TPO in this regard pointed out that both the Indian Transfer Pricing Regulations as well as OECD guidelines provided for benchmarking

The next aspect was the import of spares which were provided to end customers through dealers as per requirement and the said activity was held to be same as in the case of CBUs. The TPO noted that out of total sales of ₹ 66.05 crores under the head ‘Trading’, the trading of CBUs constituted ₹ 18.17 crores and the rest of sales amounting to ₹ 47.88 crores was towards trading of spare parts. The TPO thus, held that so far as the nature of transactions or quantum of transactions was concerned, the characteristics were similar and they were dealt with by assessee in similar manner. He thus, observed that contention of assessee in this regard do not affect the gross profitability on account of trading activities done by assessee. Therefore, characteristics of business of import and sale of spare parts and import and sale of CBUs were found to be similar. The TPO also held that in respect of analysis by functions performed, asset employed and risk undertaken, the two were also same and in any case they would not affect assessee’s gross margin.

Then, he took up the set of comparables totaling 19 and noted that the companies selected were in group trading activity where the source of such vehicles was from India only, whereas in the case of assessee, cars were imported from outside India and sold to dealers in India. The TPO noted that one of the comparables Hindustan Motors Exports Ltd. dealt with export of

The next aspect was payment of royalty and relying on the rate of royalty paid by Maruti Udyog Ltd., it was taken @ 3% and arm's length price value of royalty was determined at ₹ 3.30 crores as against actual royalty payment of ₹ 5.51 crores, hence the excess royalty paid by assessee at ₹ 2.20 crores was added to the income of assessee. The TPO thus, proposed an upward adjustment of ₹ 4.76 crores.

The Assessing Officer made the aforesaid TP adjustment in the hands of assessee and made the said adjustment on account of arm's length price of international transactions of assessee.

The CIT(A) dealt with this issue in para 5.3.1 onwards at page 66 of appellate order. Before the CIT(A), the assessee pointed out that TPO had incorrectly applied Resale Price Method (RPM) to make adjustment. It was further stated that the TPO had wrongly compared gross margins earned from sale of spares with sale of CBUs where both transactions of imports were controlled transactions as the spares and CBUs were imported from associated enterprises and hence, the transaction could not be compared. It was further stressed by the assessee that spares and CBUs (cars) could not be considered same and similar products; wherein car was fully finished product, which was ready to be used by customers and the spares were small parts of cars, which carries fractions of value, even the market of spares and CBUs were different. It was further explained that import of CBUs was restricted only to those models, which were not manufactured in India, whereas all the spares dealt with by assessee were for manufactured as well as imported cars. Therefore, the functions performed could not be same or similar for the said products merely because the products were resold to third parties in India. It was stressed that both the products were different and were not comparable and this was the fundamental fact. The assessee also pointed out that functions performed, assets employed and risk assumed in the activities of resale of spares and import of CBUs were different. Further, reliance was placed on Rule 10B(1)(b)(ii) of the Income Tax Rules, 1961 (in short ‘the Rules’) to state

The assessee is in appeal against order of CIT(A).

The learned Authorized Representative for the assessee referred to the facts sheet and pointed out that the assessee was engaged in manufacture and sale of Mercedes Benz passenger cars in the Indian market. The manufacturing unit in India in 2018 was manufacturing E, C, S, GL class and CLA class of passenger cars in India. It was pointed out that generally in automobile sector, a company starts with importing cars in the form of CBUs for three reasons i.e. (a) for assessing and penetrating into the market and then subsequently, depending upon the market situation start importing cars in the form of Semi Knocked Down (SKD) condition, Complete Knock Down (CKD) condition and then eventually operating at part level, (b) for bringing in new products available with AE as CBU, which would take time to supply the same in SKD / CKD / Parts level and also sometimes to bridge a sudden gap of demand and manufacturing capacity and (c) for bringing in niche models which

The learned Authorized Representative for the assessee thus, stressed that combined transactions approach applied by assessee at company level for benchmarking various international transactions should be accepted. Taking up next issue raised vide ground of appeal No.3, the learned Authorized Representative for the assessee then pointed out that TPO had without any basis rejected certain companies identified by assessee, as not being functionally comparable. With regard to ground of appeal No.4, the learned Authorized Representative for the assessee drew our attention to section 92F(ii) of the Act and pointed out that the said principle is to be applied in uncontrolled transactions. He stressed that gross margin of controlled transaction with another controlled transaction could not be compared. The argument of assessee was that import of spares from associated enterprises and import of CBUs from associated enterprises, being controlled transactions could not be compared with each other. In this regard, he placed reliance on the decision of Tribunal in assessee’s case in ITA Nos.1080/PN/2013, 1107/PN/2013 and CO No.57/PN/2014, relating to assessment year 2002-03, order dated 06.06.2016 and also in the case of Addl.CIT Vs. Technimont ICG India Pvt. Ltd. in ITA No.5085/Mum/2010, cross appeal in ITA No.4608/Mum/2010 and CO No.78/Mum/2011, relating to assessment year 2005-06, order dated 17.07.2012 and in the case of M/s. Bobst India Pvt. Ltd. Vs. DCIT in ITA No.1380/PN/2010, relating to assessment year 2006-07, order dated 09.10.2014.

Coming to next ground of appeal No.5, the contention of assessee was under section 92C(2) of the Act, RPM method is to be applied to same or

The learned Departmental Representative for the Revenue on the other hand, pointed out that the assessee was engaged in manufacturing and trading activities of passenger cars under the brand name Mercedes Benz. He further pointed out that assessee was importing CBUs and spares, wherein the total revenue was to the tune of ₹ 465 crores with operating margins of 8.74%. While rejecting aggregation approach, he pointed out that TPO had issued

The learned Authorized Representative for the assessee in rejoinder stressed that in view of closely linked transactions, aggregation approach needs to be applied.

We have heard the rival contentions and perused the record. The assessee had entered into various international transactions with its associated enterprises i.e. import of raw materials, purchase of spare parts, import of CBUs, import of capital goods, payment of royalty, payment of technical services availed, reimbursement / recovery of expenses, recovery of warranty claims, etc. The assessee was primarily engaged in manufacturing activity of passenger cars and in addition to import of raw materials and capital goods. The case of assessee is that manufacturing and sales activities also requires service to its customers, for which it imports spares for after sales service and also provide to the customers the models of cars which were not manufactured in India, in order to build its customer base. While applying transfer pricing provisions, the assessee had adopted combined transactions approach and had identified TNNM method as most appropriate method in order to benchmark its international transactions. The margins of assessee’s

First, we shall take up grounds of appeal raised by assessee, wherein ground of appeal No.1 raised by assessee is general and the same is dismissed. The assessee by way of ground of appeal No.2 has raised the issue against rejection of combined transactions approach applied by assessee. The plea of assessee before us is two-fold; first one is for aggregation approach to be applied in respect of import of raw materials, purchase of spare parts and import of CBUs. The second objection raised by assessee is against method applied by TPO, wherein under the garb of RPM method, the gross margins earned have been compared with another controlled transaction of assessee company and adjustment upheld in the hands of assessee. The case of TPO on the other hand, was that as far as import and sale of CBUs is concerned, it was an independent international transaction, wherein the assessee was importing passenger cars and without making any value addition, the same was sold to end customers and hence was purely an activity of resale, such an activity of resale as per TPO could not be closely linked or be dependent on the manufacturing activity undertaken by assessee. The second aspect of transfer pricing provisions applied by TPO was that such import of CBUs can be compared with import of spares. The assessee was importing spares for providing after sales service to its customers, through its dealers. The assessee pleaded that import of spares was part of warranty

The assessee is a company which is engaged in manufacture and sale of Mercedes Benz passenger cars in Indian market. The assessee had established manufacturing facility in India and was manufacturing some of models of passenger cars. Another connected business activity of assessee was in importing models which were though available in global market but were not manufactured by assessee, which depended on the demand of such models. The intention of assessee was to import cars in the form of Completely Built Units (CBUs). In order to bring in models which would be sold in few numbers, the intention behind importing the said models was to make available entire range of products which were available worldwide, to the customers in India. Such an exercise ensures not only customer satisfaction as claimed by assessee but it could also help in targeting and identifying the market conditions for particular range of cars, enabling the assessee to manufacture the said cars in future. Another set of CBUs were imported in order to bring in new products available with associated enterprises, to India but which otherwise would take time to establish manufacturing facility in India. The assessee has explained that it was importing cars in the form of Semi Knocked Down (SKD), Complete Knock Down (CKD) and then eventually operating at Parts level. In the year under consideration, the assessee was manufacturing C and E class of vehicles but had imported CBUs of class S, SLK, ML (now

Another transaction which was aggregated to benchmark arm's length price of international transactions undertaken by assessee with its associated enterprises was the import of spare parts. The explanation of assessee was that along with sale of passenger cars, the assessee was providing warranty commitments for a period of two years, which could also be extended by another one year with additional cost. Such provision of manufacturer’s warranty was being provided free of charge to the customers but the charges towards providing such warranty were embedded in sale price of cars. The warranty commitment was in respect of manufactured cars and also resale of imported CBUs, under which, in case of failure of any part or component or faulty design / manufacture, then the assessee was obliged to provide for replacement of spare parts. The warranty was being administered through dealers who were also resolving complaints of customers; on the other hand,

Another aspect to be noted is the plea of assessee before us that because of competition in the market i.e. auto industry, passenger cars had to be sold at competitive prices, which in turn, was compensated from the premium pricing on sale of spares. The assessee thus, argues that sale of spares being part of warranty commitments was attached to sale of manufactured cars and resale of imported CBUs. The assessee thus, had aggregated three transactions i.e. manufacture of cars with resale of imported CBUs and also import of spare parts and benchmarked its international

The issue which is raised before us is against aggregation of transactions which were closely linked. Section 92(1) of the Act states ‘any income arising from an international transaction shall be computed having regard to arm's length price’. Under section 92B of the Act, meaning of expression ‘international transaction’ is provided as ‘transaction between two or more associated enterprises’. Further, section 92F(v) of the Act defines transaction to include ‘an arrangement, understanding or action in concert….’. Rule 10A(d) of the Rules explains the meaning of expression ‘transaction’ as ‘transaction includes number of closely linked transactions’. In other words, the Legislature has intended to include transactions of similar nature which were closely linked to each other as a singular transaction. Even the Accounting Standard-17 supports the approach of aggregation of various international transactions. Before proceeding further, we may also refer to Rule 10B(1) of the Rules, which talks of various methods out of which, most appropriate method is to be applied for the purpose of section 92C(2) of the Act to determine arm's length price in relation to an international transaction. In other words, in order to analyze arm's length price of international transactions, the Legislature itself provides that closely linked transactions were to be adopted as one transaction in order to carry out transfer pricing analysis for such transactions by applying any of the prescribed methods as most appropriate method.

The Hon’ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT & Ors. (supra) has held as under:- “… There are often situations where separate transactions are intertwined and linked or are so continuous that they cannot be evaluated adequately on separate basis…”

The Pune Bench of Tribunal in Bobst India Pvt. Ltd. Vs. DCIT (supra) has held as under:- “… if certain transactions are so closely linked that they cannot be evaluated separately such transactions should be evaluated together. Once Assessee has discharged his onus of determining arm's length price based on reliable data then same should not be interfered by the TPO/Assessing Officer. They have not given cogent reasoning for negating the same so Assessing Officer is directed accordingly.”

The Pune Bench of Tribunal in Cummins India Ltd. Vs. DCIT (supra) has held as under:- “16. The assessee for the year under consideration before us is engaged in the manufacturing activity along with other related activities and had aggregated international transactions as tabulated hereinabove and had benchmarked the international transactions by using TNNM method as most appropriate method by taking external comparables and adopted PLI as operating margins to sales. The TPO on the other hand, had made adjustment after rejecting the claim of aggregation and also while applying the TNNM method had compared the same with internal comparables i.e. domestic sales made by the assessee. Under section 92B of the Act, meaning of expression „international transaction‟ is provided i.e. a transaction between two or more associate enterprises. Rule 10A(d) of the Income Tax Rules, 1962 (in short „the Rules‟) explains the meaning of expression “transaction” for computing the arm's length price to include number of closely linked transactions. Rule 10B of the Rules prescribed the manner in which the arm's length price is to be determined by following any of the method prescribed. The combined reading of Rule 10A(d) and 10B of the Rules reflect that number of transactions can be grouped and constituted as single transactions for the purpose of determining arm's length price, provided that such transactions are closely inter-linked. Further, even under the OECD Guidelines under the Chapter III, the proposition of aggregation of individual transactions is taken note of. In such background, it emerges that in appropriate circumstances, where there is existence of closely linked transactions, the same could be considered as one composite transaction and for this, common transfer pricing analysis needs to be carried out by adopting most appropriate method. Depending on the facts and circumstances of each case, it needs to be seen as to which transactions are to be held to be closely linked. Applying the said principle to the facts of the present case, where the primary activity of assessee was to manufacture and sell IC engines and components both for domestic market and for exports, then the activity of importing engine parts and components, payment of royalty for

Now, coming to the facts of present case, where the assessee was engaged in the activities of manufacture of passenger cars worldwide many models of Mercedes Benz were available. However, in the year under consideration the assessee was engaged only in manufacturing activity of C and E class brands of passenger cars. But in order to make available other brands available worldwide, to its customers in India and in the absence of manufacturing facility developed for such models, the assessee imports CBUs and resells the same to customers. The assessee has placed on record some models which were imported in the year under consideration are being manufactured by the assessee in later years, since the demand for such models had increased. In order to efficiently run its business, the assessee had adopted a methodology, under which the most popular models were being manufactured in India and in order to widen its customer base at par the requirement of customers or otherwise, the assessee was importing other models from its associated enterprises. Such import of CBUs and its resale was closely and interlinked to its basic activity of manufacture of passenger cars. Hence, the same has to be aggregated with import of raw materials and cannot be benchmarked independently.

The third segment was import of spare parts which were being imported from associated enterprises in order to fulfill warranty commitments of passenger cars sold by assessee i.e. both manufactured and imported CBUs and also in order to meet other requirements of customers. Undoubtedly, warranty commitments were being fulfilled by 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’.

Now, coming to the next aspect of the issue i.e. most appropriate method to be applied. The assessee is in appeal vide grounds of appeal No.3 and 4 in this regard. The assessee had applied TNNM method as most appropriate method in its TP study report, whereas the TPO had compared gross margins earned by assessee on import of CBUs with import of spare

Section 92(1) of the Act is the basic section where it is provided that any income arising from an international transaction shall be computed having regard to arm's length price.

Section 92F(ii) of the Act defines arm's length price to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.

Section 92C of the Act lays down different methods to be applied having regard to the nature of transaction or classes of associated persons or functions performed, etc. Hence different methods to be applied are enumerated under section 92C of the Act.

Section 92C(2) of the Act provides that most appropriate method referred to in sub-clause (1) shall be applied for determining arm's length price, in the manner as may be prescribed. For this, we have to look to the Rules framed by the Legislature. Rule 10A(ab) of the Rules defines uncontrolled transaction to mean a transaction between enterprises other than associated enterprises, whether resident or non-resident. Rule 10B(2) of the Rules provide the comparability of international transaction with an uncontrolled transaction with reference to various conditions. Hence, under TP provisions it is very important that comparison should be made between uncontrolled transactions

The Third Member in the case of M/s. Technimont ICB Pvt. Ltd. Vs. Addl. CIT (supra) had held that controlled transaction ‘even at arm's length price’ cannot be used for benchmarking another controlled transaction.

Further Pune Bench of Tribunal in the case of Bobst India Pvt. Ltd. Vs. DCIT (supra) has held as under:- “7.9 ….. Without prejudice to above we find that according to TPO/AO has not given cogent reasoning for rejecting TNMM identified by the Appellant as the most appropriate method for benchmarking its international transactions pertaining to domestic operations. The approach adopted by the TPO i.e. using controlled transaction of the Appellant itself (receipt of commission on marketing of spares) for benchmarking the international transaction pertaining to receipt of commission for marketing of machines is not appropriate as per the Indian TP regulations. Accordingly international transaction of the appellant pertaining to receipt of commission for marketing of machines benchmarked by assessee by aggregating the same with other international transactions pertaining to domestic operations using TNMM should not be rejected.”

The Pune Bench of Tribunal in Cummins India Ltd. Vs. DCIT (supra) has held as under:- “31…..issue which arises in the present appeal is whether the rate of commission realized by the assessee from a transaction with one associate enterprise could be the basis for applying internal CUP for computing the arm's length price of other international transaction with another associate enterprise. The said issue stands covered by similar issue being decided in Tecnimount ICB (P.) Ltd. Vs. ACIT (2011) 11 taxmann.com 49 (Mum.), (2012) 138 ITD 23/24 taxmann.com 28 (Mum.), wherein the issue was decided and addition was deleted. Applying the said ratio to the issue before us, we hold that there is no merit in the adjustment made by the Assessing Officer / TPO in respect of international transactions relating to receipt of commission from associate enterprises.”

Following the above said principles, we hold that approach adopted by TPO in comparing margins of controlled transaction i.e. import of spare parts and import of CBUs from associated enterprises and proposing adjustment on account of arm's length price of international transactions does not stand and the same is cancelled. Hence, the TPO had erred in applying RPM method. In any case, under the garb of RPM method, TPO has compared sale of spares with sale of passenger cars. Further, it may be pointed out that TPO compared margins of fully developed vehicles with margins of spare parts, but the two items cannot be said to be functionally comparable and hence, there is no merit in the stand of Assessing Officer / TPO in this regard.

The learned Authorized Representative for the assessee pointed out that in case grounds of appeal No.2 and 4 are allowed, then ground of appeal No.7 would become academic, hence the same is dismissed.

The ground of appeal No.8 raised by assessee is against allowing +/-5% range, which is directed to be allowed.

The ground of appeal No.9 is not pressed, hence the same is dismissed.

The issue in ground of appeal No.10 against charging of interest under section 234B of the Act is consequential, hence the same is dismissed.

The issue raised in additional ground of appeal No.11 is against transfer pricing adjustment to be limited to international transactions with associated enterprises only. The learned Authorized Representative for the assessee also stated that the said ground of appeal would become academic if ground of appeal No.4 is decided in favour of assessee. Hence, same is dismissed.

The learned Authorized Representative for the assessee further stated that ground of appeal No.12 is academic in nature and the same is dismissed.

Now, coming to appeal of Revenue. The first issue raised vide ground of appeal No.1 is against disallowance of expenses in relation to capitalized cars based on the conclusions arrived at for the assessment year 2002-03. The assessee has also raised cross objection No.1 in this regard i.e. against non consideration of facts in respect of disallowance of expenses in relation to capitalized cars on the conclusion arrived at for assessment year 2002-03 when the facts for the year under consideration were different.

The learned Departmental Representative for the Revenue fairly admitted that the said disallowance was also made in assessment years 2002- 03 to 2004-05 and the matter has been remitted to Assessing Officer for fresh consideration.

The assessee on the other hand, has pointed out that this disallowance has not been made in any of the subsequent years.

We have heard the rival contentions and perused the record. The assessee while carrying out its business of manufacturing and selling of passenger cars, in order to promote sale of cars, was required to keep cars for the purpose of display in various events, photo shoots, road shows, tournaments and advertisement campaigns. The assessee also provided its cars to top management employees of India as well as for the official use. The

The Tribunal while deciding the issue in assessment years 2003-04 and 2004-05 had also examined similar issue of action of CIT(A) in remitting the issue back to the file of Assessing Officer to decide admissibility of claim of expenditure of capitalized cars and had held that there is no error in the said findings of CIT(A). The assessee had furnished additional evidence in this regard and the Assessing Officer was directed to decide the same in accordance with law. In order to maintain consistency of approach on similar issue raised in earlier year and also in the present year, though there are no additional evidence filed during the year but we deem it fit to restore the issue back to the file of Assessing Officer, who shall decide the same in accordance with issue being decided in earlier year. Accordingly, directions of CIT(A) are amended to that effect and the ground of appeal No.1 raised by Revenue and cross objection No.1 filed by assessee are dismissed.

The issue in grounds of appeal No.2 and 3 raised by Revenue is against transfer pricing adjustment made to royalty payment by taking the rate @ 3% as against rate of 5% paid by assessee and also disallowing balance royalty expenditure, post TP adjustment considering the same to be capital in nature.

Brief facts relating to the issue are that and as pointed out by us in the paras hereinabove, it is reiterated that the assessee had paid royalty for technical know-how received from its associated enterprises at the running royalty rate of 5% on value addition in India. The assessee had paid royalty to the extent of ₹ 5,51,20,397/-. The assessee had adopted combined approach and selected TNNM method as most appropriate method to benchmark international transactions of payment of royalty in its TP study report. However, the TPO had not accepted application of TNNM method and had considered CUP method as most appropriate method to benchmark the transactions by comparing royalty payment made by assessee @ 3% with royalty payment made by Maruti Udyog Ltd. to Suzuki Motors Corporation, Japan @ 3%. The TPO thus, had made adjustment of ₹ 2.20 crores for the year under consideration.

The CIT(A) had allowed the claim of assessee as royalty paid by Maruti Udyog Ltd. was a controlled transaction and had held that a controlled transaction could not be compared with another controlled transaction. The CIT(A) had also noted that in assessment years 2007-08 and 2008-09, royalty payment @ 5% was held to be at arm's length price.

The Revenue is in appeal against order of CIT(A).

The case of assessee before us is that similar issue has been decided in assessment year 2002-03, wherein the Tribunal dismissed the appeal of Revenue and upheld the order of CIT(A) in holding that royalty was intrinsically

We find that facts and issues raised vide grounds of appeal No.2 and 3 in the year under consideration are similar to the issues raised in assessment years 2002-03 to 2004-05 and following the same parity of reasoning, we hold that payment of royalty is to be aggregated with production and sales activity and could not be benchmarked separately. Further, we also hold that there was no merit in the orders of Assessing Officer / TPO in applying CUP method and comparing the rate of royalty paid by assessee with the rate of royalty paid by Maruti Udyog Ltd. to Suzuki Motors Corporation, Japan, which was controlled transaction. Consequently, grounds of appeal No.2 and 3 raised by Revenue are dismissed. However, the benchmarking of said transactions along with other transactions needs to be computed by Assessing Officer / TPO by applying TNNM method as directed in earlier grounds of appeal. The Assessing Officer shall also include the payment of royalty while applying transfer pricing provisions in order to benchmark international transactions with its associated enterprises.

The next issue raised vide ground of appeal No.4 is whether the CIT(A) was justified in treating royalty payment of ₹ 3.30 crores as revenue expenditure, where the assessee had acquired enduring benefit.

Both the learned Authorized Representatives fairly pointed out that the issue raised vide ground of appeal No.4 is covered by orders of Tribunal in assessment years 2002-03 to 2004-05. The Tribunal vide para 98 in assessment year 2002-03 and vide paras 23 and 24 at pages 30 to 32 in assessment years 2003-04 and 2004-05 had decided the issue. We are referring to the findings of Tribunal in assessment years 2003-04 and 2004-05, wherein vide paras 23 and 24, the said issue has been decided in favour of assessee and the grounds of appeal raised by Revenue were dismissed, but for the sake of brevity, we are not reproducing the same. Accordingly, the ground of appeal No.4 raised by Revenue is dismissed.

Now, coming to the last ground of appeal No.5 raised by Revenue is against order of CIT(A) in directing the Assessing Officer to allow Project Assistance Technical charges as deductible expenditure under section 37(1) of the Act. The said disallowance was made in the hands of assessee as made in earlier years also.

The Tribunal vide para 49 at page 24 of the order relating to assessment year 2002-03 and in paras 25 and 26 at pages 32 to 34 relating to assessment years 2003-04 and 2004-05 has decided the issue. We are referring to the said observations of Tribunal, but are not being reproduced for the sake of brevity.

The cross objection Nos.2 and 3 filed by assessee are not pressed, hence the same are dismissed as not pressed.

In the result, appeal of assessee is partly allowed, appeal of Revenue is dismissed and cross objections of assessee are dismissed.