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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’, NEW DELHI
Before: SHRI J.S. REDDY & SMT. BEENA PILLAI
Date of Hearing 08.10.2015 Date of Pronouncement 07.01.2016 ORDER PER BENCH:
These appeals are filed by the assessee, against the final order dated 22.01.2014 & 13.10.2014 passed by the ld. AO, u/s 143(3) r/w sec. 144C of the Income Tax Act, 1961 for A.Y. 2009-10 & 2010-11, respectively. 2. Brief facts as recorded by the Ld.AO are as under: 2.1 The assessee filed its return of income declaring Rs.35,48,92,962/- on 29.09.2009 for A.Y.2009-10 and Rs.73,80,15,235/- on 13.10.2010, for A.Y.2010-11. Subsequently,
2 the case was selected for scrutiny. As there were international transactions involved, ld. AO made a reference to the Ld.TPO. Form no. 3ECB was filed by the assessee in relation to the international transactions entered into during the relevant year under consideration along with the ROI. 2.2 The company is a 100% subsidiary company of Honda Motors Co. Ltd., Japan. The assessee has been established as a Central spare –parts management entity/division for all Honda products sold in India. It also exports to Honda subsidiaries/dealers in Indian subcontinent/Europe, Africa and South America. The assessee has entered into the following international transactions during the year under consideration: For A.Y.2009-10: S.No. International Amount Amount (Rs.) Method Transaction (Rs.) Payment Applied Receipt 1. Purchase of Spare - 76,70,43,430 TNMM parts 2. Export Sales 6,819,216 - TNMM 3. Reimbursement - 11,56,688 TNMM paid 4. Reimbursement of - 14,01,324 TNMM technical assistance fee Total 6,819,216 7684,56,32,088 The assessee had used TNM Method as the MAM and had taken 8 external comparables, using the data for financial year ending on 31st March, 2009 in all, except in one case, and had calculated the Profit Level Indicator(PLI) of Operating Profits to sales at 21.97%.
For A.Y.2010-11: S. International Amount Amount (Rs.) Method No. Transaction (Rs.) Payment Applied Receipt 1. Import of Spare - 1,069,715,945 TNMM parts for resale 2. Export 81,913,098 - TNMM components 3. Payment of - 1,66,000 TNMM technical guidance fee Total 1,069,881,945 The assessee had used TNM Method as the MAM and had taken 8 external comparables, using the data for financial year ending on 31st March, 2009 in all except in one case and had calculated the Profit Level Indicator(PLI) of Operating Profits to Operating Revenue(OP/OR) at 16.76%. 2.3 For both the assessment years the ld.TPO rejected the Transactional Net Method(TNMM) used by the assessee as most appropriate method(MAM), and held that Resale Price Method (RPM) is MAM. The ld. TPO used internal comparable uncontrolled transaction of the assessee, for determination of the ALP since assessee had transactions with both related and unrelated parties. The ld.TPO held that, in the case of the assessee, where internal comparable is available, internal RPM is the most appropriate method. 2.4 Aggrieved by the order of the ld.TPO, the assessee filed its objections before the DRP. The DRP upheld the action of the TPO by 4 DRP for assessment year 2009-10. The ld.AO gave effect to the directions of the DRP in both the assessment years, vide orders dated 22.01.2014 & 13.10.2014. 3. Aggrieved by the orders of the ld.AO, the assessee is in appeal before us in both the assessment years on the following grounds:
A.Y: 2009-10 1. “The Hon’ble Dispute Resolution Panel (DRP)/ld. Transfer Pricing Officer (TPO) erred in facts and circumstances of the Appellant’s case and thereby failed to appropriately comprehend the business needs & rationale of the Appellant, dynamics/critical market factors driving the spare parts industry, etc. which significantly influence the Appellant’s procurement and pricing decisions.
2. The Hon’ble DRP/ld. TPO erred in comprehending the business operations of the Appellant and has failed to give cognizance to the fact that it is not only purchase but also sells spare parts, components and accessories to both related and unrelated parties. Thus, a thorough analysis of the Appellant’s business operation would clearly reveal that its trading operations can only be viewed as ‘one single business segment’ and cannot be fragmented.
3. The Hon’ble DRP/ld. TPO erred in not accepting the economic analysis of the Appellant using external/independent comparable data, and instead undertaking a skewed analysis using internal comparison of gross margins earned by the Appellant on related party purchases vis-à-vis unrelated party purchases, without taking into cognizance that significant volume of transactions were done with domestic group companies only in the non-associated category. Thus, the action of the Hon’ble DRP/ld. TPO defeats the very foundation of a transfer pricing analysis by using “controlled transaction data” for the purpose of determining the arm’s length price of the impugned international transaction of the Appellant.
4. The Hon’ble DRP/ld. TPO erred in law in rejecting the transfer pricing documentation maintained by the Appellant 5 and thereby re-determining the arm’s length price of the impugned transactions, as the circumstances necessitating the determination of price by the ld. TPO as mentioned in sub-section (3) of section 92C did not exist.
5. Without prejudice, the Hon’ble DRP/ld. TPO erred in law and in facts in rejecting the Appellant’s claim of adjustments on account of basic customs duty, inward freight, insurance etc. being additional costs and statutory levies borne by the Appellant in relation to imported goods.
6. The Hon’ble DRP/ld. TPO followed an approach which is in contradiction to the approach adopted by the ld. TPO’s office in preceding years (i.e. AY 2007-08 and AY 2008-09), whereby the analysis using net margins of external/independent comparable companies has been consistently performed and accepted in the Appellant’s case.
7. The Hon’ble DRP/ld. TPO erred in law in not applying the Proviso to section 92C of the Act and has failed to allow the Appellant the benefit of downward variation of 5% in determining the ALP. 8. The order passed by the ld. TPO is invalid in law as it violates the well-established principles of natural justice. 9. The ld. AO has erred in facts and circumstances of the instant case and thereby initiating penalty proceedings u/s 271(1)(c) of the Act against the Appellant, which is bad in law. The Appellant craves leave to add, amend, vary, omit or substitute, any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal.”
3.1 Ld.AR submitted that Ground Nos. 1 & 8 are general in nature.
A.Y: 2010-11: 1. “That on the facts and in law, the Learned Deputy Commissioner of Income tax, Circle-3, Noida(hereinafter 6 Learned AO”) erred in assessing the income of the Appellant for the relevant assessment year at Rs.839,638,250 as against the returned income of Rs.738,015,235.
The Hon’ble Dispute Resolution Panel (DRP)/ld. Transfer Pricing Officer (TPO) erred in facts and circumstances of the Appellant’s case and thereby failed to appropriately comprehend the business needs & rationale of the Appellant, dynamics/critical market factors driving the spare parts industry, etc. which significantly influence the Appellant’s procurement and pricing decisions.
The Hon’ble DRP/ld. TPO erred in comprehending the business operations of the Appellant and has failed to give cognizance to the fact that it is not only purchase but also sells spare parts, components and accessories to both related and unrelated parties. Thus, a thorough analysis of the Appellant’s business operation would clearly reveal that its trading operations can only be viewed as ‘one single business segment’ and cannot be fragmented.
The Hon’ble DRP/ld. TPO erred in not accepting the economic analysis of the Appellant using external/independent comparable data, and instead undertaking a skewed analysis using internal comparison of gross margins earned by the Appellant on related party purchases vis-à-vis unrelated party purchases, without taking into cognizance that significant volume of transactions were done with domestic group companies only in the non-associated category. Thus, the action of the Hon’ble DRP/ld. TPO defeats the very foundation of a transfer pricing analysis by using “controlled transaction data” for the purpose of determining the arm’s length price of the impugned international transaction of the Appellant.
5. The Hon’ble DRP/ld. TPO erred in law in rejecting the transfer pricing documentation maintained by the 7 Appellant and thereby re-determining the arm’s length price of the impugned transactions, as the circumstances necessitating the determination of price by the ld. TPO as mentioned in sub-section (3) of section 92C did not exist.
6. Without prejudice, the Hon’ble DRP/ld. TPO erred in law and in facts in rejecting the Appellant’s claim of adjustments on account of basic customs duty, inward freight, insurance etc. being additional costs and statutory levies borne by the Appellant in relation to imported goods.
The Hon’ble DRP/ld. TPO followed an approach which is in contradiction to the approach adopted by the ld. TPO’s office in preceding years (i.e. AY 2007-08 and AY 2008- 09), whereby the analysis using net margins of external/independent comparable companies has been consistently performed and accepted in the Appellant’s case.
8. The Hon’ble DRP/ld. TPO erred in law in not applying the Proviso to section 92C of the Act and has failed to allow the Appellant the benefit of downward variation of 5% in determining the ALP.
9. The ld. AO has erred in facts and circumstances of the instant case and thereby initiating penalty proceedings u/s 271(1)(c) of the Act against the Appellant, which is bad in law.
The Appellant craves leave to add, amend, vary, omit or substitute, any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal.”
3.2 Ground nos. 1 & 7 are general in nature.
8 3.3 Mr. Ajit Tolani, the ld. Counsel for the assessee, and Ms. Mitali Madhusmita, appearing on behalf of the Revenue, advanced detailed arguments. We would be adverting to the same as and when necessary in our finding. 3.4 It has been submitted by the Ld.AR that the grounds of appeal are mutually exclusive and without prejudice to each other. The assessee has also filed an application dated 11.03.2015 in A.Y.2009- 10, for admission of additional evidence. The Ld.AR submits that the same is not pressed. Hence, application dated 11.03.2015 for admission of additional evidence, is rejected.
4. We have heard rival contentions. On a careful consideration of the facts and circumstances of the case, perusal of the papers on record and the orders of the authorities below, we summarize the issues as follows.
4.1 The first issue that arise for our consideration is; a) Whether the claim of the assessee company that it is also a manufacturer is correct on facts. b) Which is the Most Appropriate Method to be adopted? c) Whether external or internal comparables are to be adopted for determining the ALP d) whether the adjustments to the ALP, claimed by the assessee, are to be granted or not. 4.2 The ld.AR submits that the assessee is the sole distributor of spare parts, components and accessories for Honda products and the responsibility of the assessee is to ensure that such spare parts, components and accessories are available for the end-customer
9 through replacement market. The ld.AR submits that automobile spare parts, components and accessories are purchased from both related and unrelated suppliers. The ld.AR submitted that certain spare parts and components which cannot be procured locally from domestic suppliers on account of various reasons such as, non- availability of product, available product are of inferior quality, parts/components unique to Honda products are not available etc. are imported from overseas suppliers. The ld.AR submitted that segmental accounting is not possible since the assessee deals with a significant number of spare parts/components and accessories and it is administratively impossible to segregate purchase and sale information from each and every supplier/customer. 4.3 The ld.AR further submitted that, the assessee also gets manufacturing done through third parties by placing job work order on them by specifying the design, quality and quantity. It was further submitted that imported parts are also given to such job order manufactures, for being part of the spare to be manufactured and that, value addition is carried on by the assessee in this process. 4.4 The ld.AR submitted that broadly the assessee company has applied TNMM to all the transactions by following the earlier years TP study methodology. The ld.AR submits that, before Ld.TPO, the assessee had argued that there is a value addition of about 34% to certain components sold, which argument was not been considered by the ld.TPO. Further the ld.AR submits that the assessee not only purchases goods from related and unrelated parties, but also sells 10 its goods to related and unrelated parties. The Ld.AR further submitted that the assessee had used external independent data for the purposes of determining arms length price.
The arguments of the ld. AR are summarised below:- • Assessee is a manufacturing entity in spare parts; • That assessee is also a value added distributor; • That TNMM should be the MAM for determining the ALP; • External comparables have to be taken for arriving at the ALP in the facts of this case. 5.1 The arguments of the ld. DR are summarised below:- • The assessee is a trading entity. The assessee has all along described itself as a distributor. • The assessee has not brought on record any document or evidence to prove that it is a manufacturer of spare parts. • Internal comparables have to be preferred to external comparables for determination of ALP. • The design, quality specification of the spare is determined by the automobile manufacturer and not the assessee. • RPM is the MAM to determine the ALP.
On consideration of the arguments, we observe that the assessee has, in all its reports and submission, stated that it is a distributor/re-seller of spare parts, and that it is selling as well as purchasing the spare parts, from both related and unrelated entities. Even the functional analysis carried on by the assessee in its T.P. report does not claim or indicate that the assessee is carrying out manufacturing activity of any type. In the TP study, the 11 assessee has described itself to be engaged in the business of trading activity. However, the assessee has, as a passing reference, stated before the DRP that it places order for certain spares with the manufacturer in certain circumstances. Placing orders for manufacturing, does not make the assessee a manufacturer. It would be a case of procurement of spares through job work orders on factories. There may be cases of value addition, in case the assessee supplies certain parts to the job work manufacturer for manufacture of a spare part. 6.1 Be it as it may, in our view the assessee is predominantly a distributor. It is involved in some cases in placing orders for certain spares, from factories. This does not in our view, make the assessee a manufacturer. Instead of buying goods off the shelf, it is buying spares by placing job work order from manufacturer. The claim of laying down the design, specification etc. by the assessee, is not acceptable for the reason that, it is the Automobile company which manufactures the car, which does such functions, as rightly pointed by the Ld. DR. The type of specification, quality etc., of spares is duly defined in each and every car/auto manufacture. 6.2 The ld.AR has expressed a situation where certain parts are imported, and used as parts of the kit, that is manufactured/assemble locally on Job order basis, and then sold. Such kit includes, break kit, gear box kit, etc. In such circumstances, there can be a case of value addition to the spares purchased or imported. These cases are to be considered separately. The burden is on the assessee to furnish the required data for 12 ALP in all cases where there is Value addition through manufacture/assembly. 6.3 In our view, the facts and functions of the assessee have not been properly reported by the assessee and resultantly have not been appreciated and adjudicated upon by the TPO. The function of distributor has to be treated differently from the function of job order manufacturer of spare or cases where there is value addition. Hence, the facts of the case, the functional profile etc. have to be examined afresh to arrive at the correct A.L.P. 6.4 In view of the above discussion, we set aside the issue of determining of ALP to the file of the Assessing Officer/TPO, with the following direction; a) RPM is the MAM for the Distributor/trading segment. In our view, this method has to be preferred to other methods. Thus, we uphold the finding of the DRP for the segment where value addition is made to imported spares, and in case where procurement is done by placing job work orders, fresh adjudication is to be done de novo to determine the MAM. c) The burden is on the assessee to substantiate its claim of value addition etc. with facts and figures. d) Internal comparables are to be preferred to external comparables for the distribution segment, wherever appropriate data is available. 6.5 In view of the above discussions and findings, Ground nos. 2, 3, 4, 5, and 7 are set aside to the file of the Assessing Officer for fresh adjudication in accordance with law.
13 Claim of Adjustments: 7. The ld. TPO rejected the contentions of the assessee for adjustment with regard to customs duty and marine freight & insurance charges incurred with regards to imported goods. The Ld.TPO held that, while determining net operating margin, cost of goods shall include total cost of purchases of goods and that the customs duty and marine freight & insurance charges are part of the cost of goods sold in the domestic market. The ld.TPO held further that for determining operating margins, customs duty and marine freight & insurance charges shall be treated as a part of operating cost.
7.1 It is submitted by the ld.AR that, the assessee has paid excise duty amounting to Rs.29,82,46,000/-. The assessee has paid customs duty and marine freight & insurance charges (for transport of goods from the port of exportation and importation), in relation to imported goods. The ld.AR submits that customs duty and marine freight & insurance charges paid are additional costs to the assessee, which is not applicable, in case of locally procured goods. Therefore, it has been submitted by the ld.AR that, if at all a comparison of net operating margins (on goods imported from overseas vis-à-vis goods procured locally) is to be made, then reasonable economic adjustment on account of customs duty and marine freight & insurance charges paid, is warranted. The Ld.AR submitted that, the assessee is only claiming the amount that do not form part of the CENVAT credit.
14 7.2 We find some force in the arguments of the ld.AR. The claim for adjustment for marine freight and insurance cannot be allowed as such costs would also be present in bad purchase. This is rejected as far as statutory levies, imposed by the Indian Customs authorities, are concerned which is not the case with locally procured goods. In case of locally procured goods, excise duty is payable. The difference between the rate of custom duty and the rate of excise duty may be considered for adjustments as these are statutory levies. Such adjustments may have to be considered while comparing the net margins of imported goods vis-a –vis locally procured goods. We are, therefore, inclined to allow this ground of the assessee to the extent indicated above and direct the TPO to adjust for the difference in statutory levies.
In the event of the above discussion the ground nos. 6 stands allowed in part.
The appeals filed by the assessee are allowed for statistical purposes.
The order is pronounced in the open court on 07.01.2016.