Toyota Kirloskar Auto Parts Private Limited, Bangalore V. ACIT, Bangalore

ITA 1356/BANG/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80739 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-10-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 21-08-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 27-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Capital asset; Depreciation; Transfer pricing; Business expenditure; International transaction; Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER A ND SHRI JASON P.BOAZ, ACCOUNTANT MEMBER IT (TP) A NO. 1356 / BANG/20 11 (ASSESSMENT YEAR: 20 0 7 - 08 ) M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT. LTD. PLOT NO.21, BIDADI INDUSTRIAL AREA, RAMANAGAR DISTRICT, BANGALORE - 562109. PAN:AABCT5590Q APPELLANT VS. ASST. COMMISSIONER OF INCOME - TAX, LTU, BANGALORE. RESPONDENT APPELLANT BY: SHRI K.R.VASUDEVAN, ADVOCATE. RESPONDENT BY: SHRI C.H.SUNDAR RAO, CIT(DR). DATE OF HEARING : 21 - 08 - 2014. DATE OF PRONOUNCEMENT: 22 - 10 - 2014. O R D E R PER SMT. P.MADHAVI DEVI, JM: THIS APPEAL IS FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2007 - 08. THIS APPEAL IS FILED AGAINST THE ORDER OF THE ASSESSING AUTHORITY U/S 143(3) R.W.S 144 OF THE INCOME - TAX ACT, 1961[HEREINAFTER REFERRED TO AS 'THE ACT'] IN COMPLIANCE WITH THE DIRECTION S OF THE DRP U/S 14 4 C OF THE ACT. 2. THE ASSESSEE HAS RAISED GROUNDS OF APPEAL AGAINST THE IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 2 OF 23 (A) TRANSFER PRICING ADJUSTMENT ; AND ALSO AGAINST THE DISALLOWANCE S ( B ) OF EXPENDITURE INCURRED ON SOFTWARE ; ( C ) OF PROVISION FOR SLOW AND NON - MOVING INVENTORY ; AND (D ) OF DEPRECIATION ON ASSETS PURCHASED ON SLUMP SALE. 3. AT THE TIME O F HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE HAS FILED A LETTER DATED 14/5/2014 STATING THAT THE ASSESSEE DOES NOT WISH TO PRESS THE GROUNDS AGAINST THE DISALLOWANCE OF DEPRECIATION ON ASSETS PURCHASED ON SLUM P SALE. THIS GROUND OF APPEAL IS ACCORDINGL Y REJECTED AS NOT PRESSED. 4. COMING TO THE TRANSFER PRICING ADJUSTMENT MADE BY THE AO, BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF AUTOMOBILE PARTS LIKE AUTOMOTIVE FRONT AXLE, REAR AXLE AND PROP ELLER SHAFTS FOR SALE OF THESE COMPONENTS TO ITS GROUP COMPANY TOYOTO KIRLOSKAR MOTOR LTD., FOR ITS ERSTWHILE VEHICLE QUALIS AND AXLES AND PROPELLER SHAFTS FOR THE INNOVA . IT FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2007 - 08 ON 6/11/2007 DECLARI NG NIL INCOME. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE INCOME - TAX ACT, THE AO OBSERVED THAT THE ASSESSEE COMPANY HAD ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES WHICH ARE AS UNDER: IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 3 OF 23 THE AO OBSERVED THAT THESE TRANSACTIONS ARE PURCHASE OF RAW MATERIALS , COMPONENTS AND CONSUMABLES WHICH ARE USED IN MANUFACTURING OF THE REAR AXLE S , FRONT AXLE S AND THE PROPELLER SHAFT S FOR THE MULTI UTILITY VEHICLES MANUFACTURED BY TOYOTO KIRLOSKAR MOTOR PVT. LTD. , AND THE EXPENSES ARE TOWARDS RELATED AND CONNECTED PROCESSES OF MANUFACTURE. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAD ALSO PAID ROYALTY, TECHNICAL ASSISTANCE FEE, ENGINEERING FEE AND INFORMATION TECHNOLOGY SUPPORT FEE TO THE ASSOCIATED ENTERPRISE FOR THE PURPOSE OF MANUFACTURING THE ABOVE SAID MOTOR PARTS. SINCE THE ASSESSEE S TRANSACTIONS WERE INTERNATIONAL TRANSACTIONS, THE ASSESSING OFFICER REFERRED THE MATTER OF DETERMINING THE ARM S LENGTH PRICE (ALP) TO THE TPO U/S 92CA OF THE ACT. THE TPO , VIDE ORDERS DATED 25/3/2010 , AC CEPTED THE TNMM AS THE MOST APPROPRIATE METHOD AT THE ENTERPRISE LEVEL FOR ALL THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE EXCEPT FOR THE PAYMENT OF ROYALTY. HE OBSERVED THAT THE ASSESSEE HAS PAID ROYALTY OF DESCRIPTION OF THE INTERNATIONAL TRANSACTION INR IN 000 S BENCHMARKING METHODOLOGY PURCHASE OF RAW MATERIALS, COMPONENTS AND CONSUMABLES 6,60,217 TRANSACTIONAL NET MARGIN METHOD (TNMM) PURCHASE OF CAPITAL ASSETS 75,944 PAYMENT OF ROYALTY 2,72,309 PAYMENT FOR T ECHNICAL ASSISTANCE 18,828 PAYMENT OF IT SUPPORT FEE 4,905 PAYMENT OF WARRANTY CLAIMS 19,311 PAYMENT OF TRAINING FEES 5,087 PAYMENT TOWARDS REIMBURSEMENT OF EXPENSES 5,032 SALES RETURN 286 IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 4 OF 23 RS.27,23,09,000/ - TO ITS AES TOYOTA MOTOR C ORPORATION AND AISIN TA KAOKA COMPANY AND THAT THE ASSESSEE HAS JUSTIFIED THE PAYMENT OF ROYALTY BY AGGREGATING THIS TRANSACTION WITH ALL OTHER INTERNATIONAL TRANSACTIONS WITH A SINGLE ANALYSIS BASED ON TNM METHOD. HE OBSERVED THAT AS THE ASSESSEE IS MAINL Y INTO MANUFACTURING OF AUTO COMPONENTS, THE NET MARGINS EARNED BY THE ASSESSEE ARE RELEVANT AS FAR AS THE PRICING OF GOODS IMPORTED FROM THE AE IS CONCERNED. HE ALSO OBSERVED THAT AS PER THE ACT, EACH CLASS OF TRANSACTIONS HAS TO BE EXAMINED HAVING REGAR D TO THE ARM S LENGTH PRINCIPLE AND AS PAYMENT MADE IN THE FORM OF ROYALTY IS A CLASS OF ITS OWN , IT REQUIRES SEPARATE ANALYSIS. THEREAFTER , HE HELD THAT FOR TP STUDY OF ROYALTY PAYMENT, THE TRANSACTIONS ARE TO BE ANALYZED UNDER CUP METHOD USING THE BEN EFIT TEST. HE OBSERVED THAT UNIVERSALLY , THE ROYALTY PAYMENTS ARE BEING TREATED AT ARM S LENGTH ONLY WHEN IT IS PROVED SUBSTANTIALLY BY THE TAX PAYER THAT SUCH INTANGIBLE S WERE ACTUALLY RECEIVED AND FURTHER PRO V ING THAT SUCH INTANGIBLES HAVE BENEFITED IT. HE, THEREFORE, SET OUT VARIOUS PARAMETERS TO BE CONSIDERED FOR THE DETERMINATION OF THE ALP OF THE ROYALTY PAYMENT AND THEREAFTER ISSUED A NOTICE DATED 15/2/2010 TO THE ASSESSEE ASKING THE ASSESSEE TO FURNISH THE DETAILS AS REQUIRED UNDER THE NOTICE. TH E ASSESSEE FURNISHED ITS REPLY VIDE LETTER DATED 12/3/2010 STATING THAT THE ROYALTY TRANSACTION IS CLOSELY LINKED WITH OTHER TRANSACTIONS AND, THEREFORE, SAME ARE AGGREGATED UNDER TNMM AND THEREFORE THE ROYALTY TRANSACTION IS IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 5 OF 23 ALSO CONSIDERED TO BE AT ARM S LENGTH . HOWEVER, THE TPO HELD THAT THE ROYALTY TRANSACTION IS A DIFFERENT TYPE OF TRANSACTION AND IS TO BE ANALYZED SEPARATELY UNDER CUP METHOD. THEREAFTER, HE HELD THAT THE TAX PAYER DID NOT PRODUCE ANY PRIMARY EVIDENCE/DOCUMENTATION ON HOW THE ROYALTY RATE IS FIXED OR THE BENEFIT RECEIVED BY THE ASSESSEE FOR FIXING T HE ROYALTY AS UNDER: I) DOMESTIC SALES 3% OF SALES II) EXPORT SALES 5% SALES HE OBSERVED THAT THE ROYALTY PAID BY THE ASSESSEE IS 40.76% OF OPERATING PROFITS BEFORE ROYALTY WHICH IS HIGHLY DIS PROPORTIONATE TO THE PROFITS EARNED USING SUCH TECHNOLOGY. HE FURTHER OBSERVED THAT EVEN AFTER PAYING SUCH HUGE AMOUNTS AS ROYALTY, THE ASSESSEE S MARGIN IS ONLY 6.71% ON SALES, WHICH IS LESSER THAN THE AVERAGE MARGIN OF 8.29% OF THE COMPARABLE COMPANIES (WHO ARE NOT PAYING SIMILAR ROYALTY PAYMENTS AND ALSO DO NOT HAVE SIGNIFICANT INTANGIBLES) CONSIDERED BY THE TPO . THUS , HE CAME TO THE CONCLUSION THAT THE ASSESSEE DID NOT GET ANY TANGIBLE COMMERCIAL BENEFIT IN TERMS OF IMPROVED PROFITABILITY EVEN AFTER PA YING FOR TECHNOLOGY KNOW - HOW AND THE PAYMENTS ARE ONLY TO SIPHON OFF THE PROFITS FROM INDIA WITH MINIMUM INCIDENCE OF TAX. HE ALSO CONSIDERED THE REASONABLENESS OF THE ROYALTY PAID BY THE ASSESSEE AND HELD THAT IT IS NOT PROVED. HE, THEREFORE, DETERMINED THE ALP OF THE ROYALTY PAYMENT AT NIL AND MADE THE ADJUSTMENT OF RS.27,23,09,000/ - U/S 92CA OF THE ACT. PURSUANT TO THE ORDER OF THE TPO, THE AO PROPOSED A DRAFT IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 6 OF 23 ASSESSMENT ORDER AND CALLED FOR OBJECTIONS , IF ANY , OF THE ASSESSEE TO THE SAID DRAFT ASS ESSMENT ORDER. THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP AND THE DRP CONFIRMED THE DRAFT ASSESSMENT ORDER . 5. CONSEQUENT THERE TO, THE ASSESSING OFFICER PASSED THE FINAL ASSESSMENT ORDER AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 6. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD ENTERED INTO A COMMERCIAL AGREEMENT WITH ITS AE FOR SUPPLY OF TECHNICAL KNOWHOW, TECHNICAL ASSISTANCE, TRAINING OF PERSON NEL ETC ., WHICH CANNOT BE DISREGARDED WITHOUT ANY REASON. HE SUBMITTED THAT THE AE HAS INVESTED SUBSTANTIAL FUNDS IN RESEARCH AND DEVELOPMENT ACTIVITIES AND THAT THE ASSESSEE NEITHER UNDERTOOK ANY SIGNIFICANT RESEARCH AND DEVELOPMENT ACTIVITY OF ITS OWN NOR CAN IT PROCURE THE TECHNOLOGY IN THE OPEN MARKET DU E TO NON - AVAILABILITY OF THE SAME IN DOMESTIC MARKET AND IS THUS TOTALLY DEPENDENT ON THE AE FOR THE TECHNOLOGY. HE ALSO S UBMITTED THAT THE TECHNOLOGIES INVENTED BY THE AE ARE PATENTED BY THE AE AND CANNOT BE USED BY OTHERS INCLUDING THE ASSESSEE WITHOUT THE PERMISSION OF THE AE AND THE ASSESSEE HAS REGULARLY ACCESSED THE TECHNOLOGIES OF THE AE FOR USE IN ITS LOCAL DEVELOPMENT AND MANUFACTURING PROCESSES OF THE PRODUCTS. HE SUBMITTED THAT THE ROYALTY RATE FOR OTHER AFFILIATES IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 7 OF 23 OF THE AE IS 6% WHEREAS THE R OYALTY RATE OF THE ASSESSEE IS AT 5% FOR DTA PARTS AND 6% FOR EOU PARTS . HE SUBMITTED THAT THE ASSESSEE HAS BENEFITED SUBSTANTIALLY BY THE USE OF THE TECHNOLOGY AND TECHNICAL KNOWHOW SUPPLIED TO IT BY THE AE AS ITS SALES GREW AT A CAGR OF 208.94% FOR THE FINANCIAL YEAR 2002 - 03 TO 2006 - 07 . HE FURTHER SUBMITTED THAT THE ASSESSEE , THOUGH A LATE ENTRANT IN THE INDUSTRY , HAS ATTAINED A STRONG POSITION IN INDIA WITH IN A PERIOD OF 5 YEARS WHICH CAN DIRECTLY BE ATTRIBUTED TO THE TECHNOLOGY ACQUIRED FROM THE AE. T HUS ACCORDING TO HIM , THE FINDING OF THE TPO AS WELL AS THE DRP THAT THE ASSESSEE HAS NOT DERIVED ANY BENEFIT FROM USE OF THE TECHNOLOGY IS NOT CORRECT. 7. AS REGARDS TNMM BEING THE MOST APPROPRIATE METHOD FOR ARRIVING AT THE ALP OF THE PAYMENT OF ROYA LTY, HE SUBMITTED THAT THE TECHNOLOGY FORMS INTEGRAL PART OF THE MANUFACTURING PROCESS AND THE SAID TRANSACTION CANNOT BE TESTED IN ISOLATION AS THE TECHNOLOGY TO MANUFACTURE IS INTERLINKED TO THE MANUFACTURING PROCESS AND THEREFORE IS REQUIRED TO BE TES TED UNDER TNMM. HE SUBMITTED THAT THE TPO HAS NOT PROVIDED ANY INDEPENDENT TRANSACTION S WHICH ARE SIMILAR OR IDENTICAL IN NATURE THAT REFLECTS THE CHARACTERISTICS OF THE SERVICES PROVIDED BY THE AE S T O THE ASSESSEE FOR APPLICATION OF CUP METHOD. HE SUBM ITTED THAT EVEN ASSUMING THAT CUP METHOD IS TO BE APPLIED, THE TPO HAS TO CONDUCT COMPARABILITY ANALYSIS, WHICH IS AN IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 8 OF 23 ESSENTIAL ELEMENT OF TP ANALYSIS AND FOR FAILURE TO DO SO, THE TP ADJUSTMENT CANNOT BE SUBSTANTIATED. 8. AS REGARDS THE ADOPTION OF TH E TNMM METHOD FOR THE AGGREGAT ION OF THE TRANSACTIONS, HE SUBMITTED THAT THE PAYMENTS OF ROYALTY AND TECHNICAL SERVICES ARE UNDER THE SAME TECHNICAL AGREEMENT AND THEREFORE DIFFERENT APPROACH CANNOT BE ADOPTED FOR THESE TWO TRANSACTIONS WITHOUT GIVING ANY VALID REASONS FOR DOING SO . HE SUBMITTED THAT THE TECHNICAL SERVICES HAVE BEEN AGGREGATED WITH THE OTHER INTERNATIONAL TRANSACTIONS WHILE DIFFERENT APPROACH HAS BEEN ADOPTED FOR DETERMINATION OF ALP FOR ROYALTY. HE FURTHER DREW OUR ATTENTION TO THE FACT THAT THE TPO HAS HIMSELF AGGREGATED ALL THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE DURING THE PREVIOUS ASSESSMENT YEARS I.E. ASSESSMENT YEARS 2004 - 05 AND 2005 - 06 AND 2006 - 07 INCLUDING ROYALTY PAYMENTS TO DETERMINE THE ALP. HE FURTHER SUBMITTED THAT IF THE TRANSACTIONS ARE INTERLINKED , AGGREGATION OF THE TRANSACTIONS IS ACCEPTED BOTH IN INDIA AND INTERNATIONALLY AND ON AGGREGATION, THE ALP OF INTERNATIONAL TRANSACTIONS CAN BE DETERMINED UNDER TNMM IF THE OTHER METHODS CANNOT BE ADOPTED RELIABLY. 9. AS REGARDS FACTS OF THE CASE BEFORE US , THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE S TRANSACTION S WITH RESPECT T O IMPORT OF RAW MATERIALS, PAYMENT OF IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 9 OF 23 TECHNICAL ASSISTANCE FEE AND ROYALTY PAYMENTS ARE INTERLINKED AS THE SAME ARE RELATE D TO MANUFACTURING FUNCTION S UNDERTAKEN BY THE ASSESSEE AND ALL THE ABOVE DIRECTLY AID AND ASSIST THE ASSESSEE TO MANUFACTURE FINISHED GOODS IN ACCORDANCE WITH STIPULATED QUALITY AND INDUSTRY STANDARDS. WITHOUT PREJUDICE TO TH ESE ARGUMENTS, THE LEARNED CO UNSEL FOR THE ASSESSEE HAS ALSO PERFORMED AN EXTERNAL COMPARABLE UNCONTROLLED TRANSACTION (CUT) SEARCH FOR THE PAYMENT OF ROYALTY AND IDENTIFIED 5 COMPANIES AS COMPARABLES TO THE ASSESSEE . THE ARITHMETIC MEAN OF ROYALTY RATES OF THE S E COMPANIES WAS 7.20% A S AGAINST 6% OF SALES FOR EOU AND 5% FOR DTA SALES OF THE ASSESSEE. O N THE BASIS OF SUCH ANALYSIS, HE SUBMITTED THAT THE ROYALTY PAYMENT OF THE ASSESSEE TO ITS AE IS AT ALP EVEN IF CUP METHOD IS ADOPTED AS THE MOST APPROPRIATE METHOD. IT WAS FURTHER SUBM ITTED THAT WITHOUT PREJUDICE TO ALL THE ABOVE CONTENTIONS, EVEN AFTER TAKING THE COMPARABLES OF THE TPO, WHOSE AVERAGE MARGIN IS 8.29%, THE ASSESSEE S MARGIN BEING 6.70% IS AT ARM S LENGTH FALLING WITHIN +/ - 5% RANGE OF ALP. T HE LEARNED COUNSEL FOR THE ASSE SSEE HAS PLA CED RELIANCE UPON THE FOLLOWING DECISIONS IN SUPPORT OF THE CONTENTIONS RAISED ABOVE: TNMM O UGHT TO BE CONSIDERED THE MOST APPROPRIATE METHOD: I) LUMAX INDUSTRIES LTD. (ITA NO.4456/DE/2012) II) CADBURY INDIA LTD. VS. ACIT (ITA NO.7408/MUM/2010 AND IT A NO.7641/MUM/2010 III) AIR LIQUIDE ENGINEERING INDIA P. LTD. (ITA NO.1040/HYD/2011) IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 10 OF 23 ARM S LENGTH PRICE OF ROYALTY PAYMENT CANNOT BE HELD NIL I) EK L APPLIANCES LTD. (ITA NOS.1068/2011 & 1070/2011) II) M/S.AIR LIQUIDE ENGINEERING INDIA P. LTD. HYDERABAD (ITA NO .1040/HYD/2011) III) ABHISHEK AUTO INDUSTRIES LTD. (ITA NO.1433/DE L /2009) IV) THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. (ITA NO.7032/MUM/2011) TAX AUTHORITIES CANNOT DETERMINE THE BUSINESS NEEDS I) DRESSER RAND INDIA PVT. LTD. VS. ADDL. CIT (ITA NO.8753/MUM/ 2010) II) SC ENVIRO AGRO INDIA LTD. VS. DCIT (ITA NO.2057 & 2058/MUM/ 2009) 10 . THE LEARNED DR , ON THE OTHER HAND , SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT EACH OF THE INTERNATIONAL TRANSACTIONS HAS TO BE CONSIDERED SEPARATELY FOR THE DET ERMINATION OF THE ALP AND HAVING REGARD TO THE PECULIAR NATURE OF THE ROYALTY TRANSACTIONS, THE TPO HAS RIGHTLY HELD THAT PAYMENT OF ROYALTY REQUIRES SEPARATE ANALYSIS AND HAS RIGHTLY ADOPTED CUP METHOD. AS REGARDS THE ASSESSE E S CONTENTION THAT THE TPO , HAVING HELD THAT THE CUP IS THE MOST APPROPRIATE METHOD , OUGHT TO HAVE CONDUCTED THE SEARCH FOR COMPARABLES AND, THEREFORE, DETERMIN ED THE ALP, HE SUBMITTED THAT IF THE SAME IS TO BE ACCEPTED, THEN THE MATTER SHOULD BE REMANDED BACK TO THE AUTHORITIES B ELOW FOR DETERMINATION OF THE ALP UNDER CUP METHOD. IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 11 OF 23 11 . HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THEIR RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE FOLLOWING QUESTIONS ARISE FOR OUR CONSIDERATION. 1) WHETHER THE PAYMENT OF RO YALTY IS INTERLINKED AND INTERCONNECTED WITH THE OTHER INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE S ? 2) WHE RE DIFFERENT INTERNATIONAL TRANSACTIONS WITH THE AE ARE INTERCONNECTED AND INTERLINKED , WHETHER THE AGGREGATION OF THE TRANSACTIONS IS REQU IRED AND THE COMPARABLES ARE ALSO BE CONSIDERED ON AGGREGATE BASIS. 3) WHETHER THE TP O CAN APPLY THE BENEFIT TEST TO DETERMINE THE ARM S LENGTH /P RICE OF THE TRANSACTION. 4) WHETHER CUP IS THE MOST APPROPRIATE METHOD IN THE CASE OF PAYMENT OF ROYALTY ? 5) WH ETHER THE TPO IS REQUIRED TO CONDUCT FAR ANALYSIS/TP ANALYSIS FOR DETERMINING THE ALP EVEN UND ER CUP METHOD? 6) WHETHER PAYMENT OF THE ROYALTY BY THE ASSESSEE TO ITS AE IS AT ALP AS COMPARED TO THE EXTERN AL CU T ANALYSIS OF THE ASSESSEE? 12 . HAVING REGARD T O THE CONTENTIONS OF BOTH THE PARTIES AND THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS AGGREGATED ALL THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 12 OF 23 ASSESSEE WITH ITS AE TO COMPUTE THE ALP. THE CONTENTION OF THE ASSESSEE IS THAT THE ALL THE T RANSACTIONS ARE INTERLINKED AND THEREFORE THE SAME ARE AGGREGATED UNDER TNMM. THE TPO HAS, HOWEVER, HELD THAT EACH TRANSACTION HAS TO BE ANALYZED SEPARATELY AND THE ALP OF THE ROYALTY, TECHNICAL ASSISTANCE FEE AND INTRA - GROUP SERVICES ARE TO BE COMPUTED S EPARATELY. IN THE LIGHT OF THE ABOVE, THE IMPORTANT ASPECT TO BE CONSIDERED IS WHETHER THE TRANSFER PRICING ANALYSIS IS REQUIRED TO BE CARRIED OUT WITH RESPECT TO TAX - PAYER S INDIVIDUAL INTERNATIONAL CONTROLLED TRANSACTION OR A GROUP OF INTERNATIONAL CONTR OLLED TRANSACTION HAVING CLOSE ECONOMIC NEXUS ? 13 . AS PER THE INDIAN INCOME - TAX ACT, IDEALLY, THE TRANSFER PRICING IS TO BE MADE ON A TRANSACTION BY TRANSACTION BASIS. HOWEVER, RULE 10A(D) PROVIDES THAT THE TERM TRANSACTION INCLUDES A NUMBER OF CLOS ELY LINKED TRANSACTIONS. THUS, IN CASES WHERE SEPARATE TRANSACTIONS ARE SO CLOSELY LINKED OR ARE CLOSELY INTER - RELATED OR CONTINUOUS AND WHERE APPLICATION OF THE ARM S LENGTH PRINCIPLE ON A TRANSACTION BY TRANSACTION BASIS BECOMES CUMBERSOME FOR ALL INVOL VED AND WOULD NOT LEAD TO AN ACCURATE RESULT, RECOURSE IS OFTEN HAD TO EVALUATE TRANSACTIONS FOLLOWING AN AGGREGATION PRINCIPLE. DUE TO INCREASING PRESENCE OF COMPOSITE CONTRACTS AND PACKAGE DEALS IN AN MNE GROUP, THE AGGREGATION OF TRANSACTIONS BECOM E NECESSARY AS A COM POSITE CONTRACT MAY CONTAIN A NUMBER OF ELEMENTS INCLUDING ROYALT IES , IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 13 OF 23 LEASE S , SALE AND LICENSES ALL PACKAGED INTO ONE DEAL. ONE WOULD USUALLY WANT TO CONSIDER THE DEAL IN ITS TOTALITY TO UNDERSTAND HOW VARIOUS ELEMENTS RELATE TO EACH O THER , BUT THE COMPONENT S OF THE COMPOSITE PACKAGE DEAL MAY OR MAY NOT , DEPEND ING ON THE FACTS AND CIRCUMSTANCES OF EACH CASE, NEED TO BE EVALUATED SEPARATELY TO ARRIVE AT THE APPROPRIATE TRANSFER PRICE. AGGREGATION ISSUE MAY ALSO ARISE WHEN LOOKING AT UNCO NTROLLED COMPARABLE S. THIS IS BECAUSE THIRD PARTY INFORMATION IS NOT OFTEN AVAILABLE AT THE TRANSACTION LEVEL . IN SUCH CIRCUMSTANCES, ENTITY LEVEL INFORMATION IS THE ONLY RECOURSE AVAILABLE . THEREFORE, WHETHER ALP - PRINCIPLE IS TO BE APPLIED ON A TRANSAC TION BY TRANSACTION BASIS OR ON AN AGGREGATION BASIS DEPENDS ON THE FACTS OF EACH CASE AND IS NOT UNIVERSALLY OR GENERALLY APPLIED IN ALL COMPOSITE CONTRACTS INVOLVING MULTIPLE TRANSACTIONS. 14. IN THE CASE BEFORE US, THE ASSESSEE HAS ENTERED INTO VARIO US TRANSACTIONS WHICH INCLUDE PURCHASE OF RAW - MATERIAL, COMPONENTS AND CONSUMABLE S , CAPITAL ASSET S AND PAYMENT TOWARDS ROYALTY, TECHNICAL ASSISTANCE, IT SUPPORT FEE, PAYMENT OF WARRANTY CLAIMS, TRAINING FEE, REIMBURSEMENT OF EXPENSES ETC. IT IS THE CASE O F THE ASSESSEE THAT ALL THESE TRANSACTIONS ARE INTER - LINKED. HOWEVER, ON PERUSAL OF THE TP DOCUMENTS FILED ALONG - WITH RETURN OF INCOME, WE FIND THAT THE PAYMENT OF ROYALTY IS NOT PART OF A COMPOSITE CONTRACT/AGREEMENT BUT IS ON ACCOUNT OF A SEPARATE TECH NICAL ASSISTANCE A GREEMENT ENTERED INTO BY THE IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 14 OF 23 ASSESSEE WITH ITS AE . THE ASSESSEE IS REQUIRED TO PAY THE ROYALTY UNDER THE TECHNICAL ASSISTANCE AGREEMENT FOR USE OF CERTAIN TECHNICAL AND MANUFACTURING KNO W - HOW PROPRIETARY TO TOYOTA MOTO R CORPORATION/AISIN TAKAOKA COMPANY WHICH IS DEVELOPED BY THEM BY VIRTUE OF THEIR INVESTMENT IN RESEARCH AND DEVELOPMENT. THE INTANGIBLE PROPERTY IN THE NATURE OF TECHNICAL AND MANUFACTURING KNOW - HOW CONSISTS OF THE FOLLOWING: LOCAL CONTENT LIST; PRODUCTION DRAWINGS; CAD DA TA; ENGINEERING CHANGE INSTRUCTIONS; TOYOTA ENGINEERING STANDARDS; SAMPLE PARTS; QUALITY STANDARDS; INSPECTION STANDARDS; (COMPLETED PRODUCTS, RAW MATERIAL AND WORK - IN - PROGRESS); CONTENTS OF PART LIST; KD COMPONENTS PART LIST; DISASSEMBLED FORM DRAWINGS; WELDING & PAINTING MANUAL; AND JIG ARRANGEMENT INSTRUCTIONS, GUAGE ARRANGEMENT MANUAL, CUTTING TOOL LAYOUT DRAWING, OPERATION DRAWING AND ACCURACY AND PRECISION LIST. FROM THE ABOVE DETAILS, IT IS SEEN THAT THE PAYMENT OF ROYALTY IS INDEPENDENT OF THE PUR CHASE OF RAW MATERIALS, COMPONENTS, TOOLS, PACKING MATERIALS, FIXED ASSETS ETC. THE ROYALTY IS EXCLUSIVELY TOWARDS THE USE OF KNOW - HOW IN THE MANUFACTURING PROCESS UNDERTAKEN BY THE ASSESSEE AND IS THEREFORE NOT IN ANY WAY INTERLINKED OR INTER - CO NNECTED W ITH OTHER TRANSACTIONS AND IT WOULD NOT LEAD TO INACCURATE RESULT IF IT IS ANALYZED SEPARATELY. IN SUCH A SITUATION, WE ARE OF THE OPINION THAT THE CONTRACT OF PAYMENT OF ROYALTY CAN BE ANALYZED SEPARATELY AND THE ALP OF IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 15 OF 23 SUCH A PAYMENT CAN BE DETERMINED I NDEPENDENTLY. THE L BENCH OF THE TRIBUNAL AT MUMBAI, IN THE CASE OF UCB INDIA(P) LTD. VS. ASS.CIT, REPORTED IN (2009) 121 ITD 131(MUM), HELD THAT, WHEN IN AN ENTERPRISE, ONLY SIMILAR TRANSACTIONS ARE UNDERTAKEN, I.E. ALL THE TRANSACTIONS ARE OF THE SAME TYPE, SAME CLASS AND OF SIMILAR VARIETY, AND THE ENTERPRISE DOES NOT HAVE ANY OTHER TRANSACTION WHICH IS NOT SIMILAR, IN SUCH A SITUATION, THE OPERATING MARGINS OF THE ENTERPRISE WOULD BE THE TNMM OF A CLASS OF TRANSACTIONS. IN VIEW OF THE SAME, WE DO NO T SEE ANY REASON TO TAKE A DIFFERENT STAND FROM THAT OF THE AO ON THIS ISSUE. 15 . AS REGARDS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE ROYALTY IS CONCERNED, WE FIND THAT THE AO HAS ADOPTED THE CUP METHOD WHEREAS THE ASSESSEE HAS ADOPTED THE TNM METHOD. NOW, BETWEEN THE TWO, WHICH IS THE MOST APPROPRIATE METHOD? EACH TP METHOD IS SUITABLE ONLY FOR CERTAIN TRANSACTIONS. UNDER CUP METHOD, HIGHER DEGREE OF PRODUCT SIMILARITY AND SIMILARITY OF PRODUCTS GENERALLY IS REQUIRED AND IT WILL HAVE THE GREATEST EFFECT ON THE COMPARABILITY. IN ADDITION, BECAUSE EVEN MINOR DIFFERENCES IN CONTRACTED TERMS OR ECONOMIC CONDITIONS COULD MATERIALLY AFFECT THE AMOUNT CHARGED IN AN UNCONTROLLED TRANSACTION, COMPARABILITY UNDER THIS METHOD DEPENDS ON CLOSE SIMILARITY WITH RESPECT TO THESE FACTORS OR ADJUSTMENTS TO ACCOUNT FOR ANY DIFFERENCES. THEREFORE, CUP METHOD IS THE MOST DIRECT AND RELIABLE METHOD FOR DETERMINATION IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 16 OF 23 OF ALP FOR THE CONTROLLED TRANSACTION IF AN UNCONTROLLED TRANSACTION HAS NO DIFFERENCES WITH THE CONTROLLED TRANSACTIONS THAT WOULD AFFECT THE PRICE OR IF THERE ARE ONLY MINOR DIFFERENCES THAT HAVE A DEFINITE AND REASONABLY ASCERTAINABLE EFFECT ON PRICE AND FOR WHICH APPROPRIATE ADJUSTMENTS CAN BE MADE. PER CONTRA, TRANSACTIONAL NET MARGIN M ETHOD REQUIRES ESTABLISHING COMPARABILITY AT A BROAD FUNCTIONAL LEVEL, SUCH AS TRADING, MANUFACTURING ETC. THUS, TNMM REQUIRES COMPARISON BETWEEN NET MARGINS DERIVED FROM THE OPERATIONS OF THE UNCONTROLLED PARTIES AND THE NET MARGINS DERIVED BY AN ASSOCIA TED ENTERPRISE FROM SIMILAR OPERATIONS. IN THE CASE BEFORE US, T HE PAYMENT OF ROYALTY IS FOR THE USE OF TECHNICAL KNOW - HOW BY THE ASSESSEE WHICH IS OWNED BY THE AE S . THE TRANSACTION THUS INVOLV ES TRANSFER OF INTANGIBLE S . S UCH TRANSFERS OF GIVEN INTANGIB LE S WOULD GENERALLY OCCUR BETWEEN GROUP ENTITIES ONLY. FURTHER, EACH INTANGIBLE PROPERTY IS UNIQUE AND NOT COMPARABLE. FOR THESE REASONS, THE COMPARABLE TRANSACTION S BETWEEN INDEPENDENT ENTERPRISE S FOR SIMILAR INTANGIBLE MAY BE JUST NON - EXISTENT OR WHERE AVAILABLE, ESTABLISHING COMPARAB ILITY MAY POSE EXCEPTIONAL DIFFICULTIES IN THE ABSENCE OF AVAILABILITY OF ALL RELEVANT INFORMATION IN PUBLIC DOMAIN. THIS IS MORE SO, BECAUSE COMPARAB ILITY IN THE TRANSACTION S OF INTANGIBLE S DEPEND ON VARIETY OF FACTORS SU CH AS A. USE OF INTANGIBLE IN CONNECTION WITH SIMILAR PRODUCT OR PROCESS WITHIN THE SAME GENERAL INDUSTRY OR MARKET; IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 17 OF 23 B. SIMILARITY IN THE PROFIT POTENTIALS OF THE INTANGIBLE. C. TERMS OF THE TRANSFER. D. STAGE OF DEVELOPMENT OR COMMERCIALIZATION OF INTANGIBLE S . E. RIGHTS TO RECEIVE UPDATES. F. CROSS LICENSING OF IMPROVEMENTS IN INTANGIBLES. G. UNIQUENESS OF CONCERNED INTANGIBLE. H. DURATION OF LICENSE . I. ARRANGEMENTS FOR SHARING OF ECONOMIC AND PRODUCT LIABILITY RISKS J. EXISTENCE OF OTHER RELATIONSHIP BETWEEN PARTIES TO THE TRANSACTION K. TYPE AND NATURE OF FUNCTIONS TO BE PERFORMED BY PARTIES L. LICENSED TERRITORY OR GEOGRAPHY. WHERE THE ASSET TRANSFERRED IS AN INTANGIBLE , I.E. IT CANNOT BE EASILY DEFINED, FORMULATED OR GROSSED, IT IS DIFFERENT FROM OTHERS AND THEREFORE FINDING EXACTLY SIMILAR ASSET AND THEREBY ESTABLISHING ARM S LENGTH PRICE OR ROYALTY RATE IS EXTREMELY DIFFICULT. WHERE A MNE GROUP ALSO LICENSES OR TRANSFERS THE SAME OR A SIMILAR INTANGIBLE TO INDEPENDENT ENTERPRISE S , ESTABLISHING ARM S LENGTH PRICE OR ROYALTY RATE S MAY NOT POSE MANY DIFFICULTIES BECAUSE CUP METHOD COULD BE APPLIED WITH APPROPRIATE ADJUSTMENT TO A CC OUNT FOR MATERIAL DIFFERENCES, IF ANY. HOWEVER, WHERE COMPARABLE UNCONTROLLED TRANSACTIONS ARE NOT AVAILABLE, ESTABLISHING ARM S LENGTH PRICE OR RO YALTY RATE MAY NOT BE A STRAIGHT FORWARD EXERCISE AND MAY REQUIRE A FLEXIBLE APPROACH IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 18 OF 23 THAT NEED NOT BE STRICTLY BAS ED O N SPECIFIED TRANSFER PRICING METHOD S . THEREFORE, IN SUCH A SITUATION, THE PERFECT APPROACH FOR INDIRECTLY BENCH MARKING ROYALTY PAYMENT S IS TO BENCH MARK THE PROFIT MARGIN LEFT IN THE TESTED PARTY , AFTER PAYMENT OF LUMP SUM FEE OR ROYALTY WITH THE PROFIT MARGIN S OF COMPARABLE UNCONTROLLED COMPAN IES . THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE AS ENUMERATED IN THE PR ECEDING PARAGRAPH NO .9 ABOVE ALSO SUPPORT THIS VIEW. THEREFORE, WE ARE OF THE OPINION THAT EVEN IF THE ROYALTY PAYMENT IS TO BE ANALYZED SEPARATELY, TNMM IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. 16. TO DEMONSTRATE THAT THE PRICE PAID BY THE ASSESSEE TOWARDS ROYALTY IS AT ARM S LENGTH, THE ASSESSEE HAS FILED COPIES OF THE AGREEMENT OF THE AE WITH ITS OTHER GROUP COMPANIES AS WELL WHERE THE RATES OF ROYALTY ARE THE SAME. THUS, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE PAYMENT IS AT ARM S LENGTH. HOWEVER, WE FIND THAT EVEN BY ADOPTING THE CUP METHOD, THE AO HAS NOT BROUGHT ON RECORD ANY OF THE COMPARABLE COMPANIES TO ARRIVE AT THE ALP BUT HAS ONLY APPLIED THE BENEFIT TEST TO DETERMINE THE ALP AT NIL . THE LEARNED COUNSEL FOR THE ASSESSEE HAD STATED THAT THE VERY FACT THAT THE ASSESSEE HAS MANUFACTURED VEHICLES USING THE TECHNICAL KNOW - HOW OF THE AE DEMONSTRATES THAT THE ASSESSEE HAS BENEFITTED FROM THE USE OF SUCH TECHNOLOGY. HE SUBMITTED THAT THE FINDING IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 19 OF 23 OF THE AO THAT THE ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH THE BENEFIT DERIVED BY IT FROM THE USE OF TECHNICA L KNOW - HOW IS PRE POSTEROUS A S THE TECHNICAL KNOW - HOW WAS THE ESSENCE OR THE HEART OF THE MANUFACTURING PROCESS. THE FACT THAT THE ASSESSEE WAS ENGAGED IN THE ACTIVITY OF MANUFACTURE ITSELF PROVES THE USE OF TECHNICAL KNOW - HOW BY THE ASSESSEE AND THEREFORE, AS HELD BY THE HON BLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES (CITED SUPRA) , THE AO OR THE TPO CANNOT QUESTION THE COMMERCIAL EXPEDIENCY OF THE ASSESSEE OR T HE QUANTUM OF BENEFIT THE ASSESSEE DERIVED WHILE MAKING THE PAYMENT. WE AGREE WITH THIS CONTENTION OF THE ASSESSEE. THE HON BLE DELHI HIGH COURT, IN THE CASE OF EKL APPLIANCES (CITED SUPRA) , HAS CLEARLY HELD THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO S HOW THAT ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY AND ALSO THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PR OFIT OR INCOME EITHER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEAR S . THE HON BLE DELHI HIGH COURT FURTHER HELD THAT THE ONLY CONDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOTHING MO RE AND THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW IN ALLOWING AS BUSINESS EXPENDITURE BUT H E HAS NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR PART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. IT WAS HELD IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 20 OF 23 THAT SO LONG AS EXPENDITURE PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSE OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING AND AS PROVIDED IN THE OECD GUIDELINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT WHOLESALE DISALLOWANCE OF THE EXPENDITURE IS NOT CONTEMPLATED OR AUTHORIZED. RESPECTFULLY FOLLOWING THE DECISION OF THE HON BLE DELHI HIG H COURT, WE SET ASIDE THE FINDING OF THE TPO THAT THE ALP OF THE TRANSACTION OF ROYALTY IS NIL . HOWEVER, FOR DETERMINING THE ALP UNDER THE TNMM, THE ASSESSEE AS WELL AS THE REVENUE HA VE TO SEARCH FOR COMPARABLE COMPANIES. THEREFORE, WE REMIT THIS ISSUE TO THE FILE OF THE AO /TPO TO DETERMINE ALP OF ROYALTY BY ADOPTING TNMM AFTER GIVING THE ASSESSEE A FAIR OPPORTUNITY OF HEARING. THIS ISSUE IS ACCORDINGLY DECIDED IN FAVOUR OF THE ASSESSEE FOR STATISTICAL PURPOSES. 1 7 . THE SECOND DISALLOWANCE AGAINST WHI CH THE ASSESSEE IS AGGRIEVED IS THE DISALLOWANCE OF PROVISION FOR SLOW/NON - MOVING INVENTORIES. BRIEF FACTS RELATING TO THIS ISSUE ARE: THE ASSESSEE HAD MADE A PROVISION TOWARDS SLOW/NON - MOVING ITEMS. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS AS KED TO FURNISH THE DETAILS OF SUCH A PROVISION. IN RESPONSE TO THE SAME, THE ASSESSEE REPLIED THAT THE ASSESSEE - COMPANY CARRIES ON VARIOUS TYPES OF INVENTORIES SUCH AS RAW - MATERIAL, COMPONENTS, STORES, IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 21 OF 23 WORK - IN - PROGRESS, FINISHED GOODS ETC., WHICH ARE USED FOR THE MANUFACTURE OF AXLES AND SHAFTS. IT WAS FURTHER SUBMITTED THAT FROM THE INTERNAL ANALYSIS OF THE INVENTORY CARRIED ON BY THE ASSESSEE AS ON 31 - 3 - 2007 , IT WAS FOUND THAT A SIGNIFICANT PART OF SELECTIVE FITMENT PARTS IS REDUNDANT IN NATURE, CONSIDE RING THE PROCESS OF TOLERANCE AND CURRENT RATE OF CONSUMPTION. IT WAS SUBMITTED THAT THE ASSESSEE HAD DISCONTINUED THE MANUFACTURE OF ITS MODEL QUALIS AND INVENTORIES IN RESPECT OF THE SLOW AND NON - MOVING ITEMS PERTAINS TO THE SPARE PARTS OF QUALIS AND THEREFORE THE ASSESSEE HAD MADE SUCH A PROVISION. THE AO, HOWEVER, DID NOT ACCEPT THIS CONTENTION AND HELD THAT PHASING OUT OF QUALIS STARTED ONLY DURING THE EARLIER ASSESSMENT YEARS AND HENCE THE TREATMENT OF STOCK OF SPARES AS DEAD STOCK APPEARS TO BE P REMATURE. HE, THEREFORE, HELD THAT THE PROVISION OF SLOW MOVING INVENTORY WRITTEN OFF BY THE ASSESSEE AMOUNTING TO RS.2,74,49,000/ - IS TO BE ADDED BACK TO THE INCOME OF THE ASSESSEE AND HE ACCORDINGLY MADE THE ADDITION . THIS DISALLOWANCE WAS CONFIRMED BY THE DRP AND THE ASSESSEE IS IN APPEAL BEFORE US. 1 8 . THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE ASSESSEE S SUBMISSIONS WHEREAS THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 22 OF 23 19 . HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE CONTENTION OF THE ASSESSEE IS THAT THE INVENTORY CONSISTS OF NOT THE SPARE PARTS BUT THE ITEMS WHICH ARE USED TO MANUFACTURE THE SPARE PARTS OF QUALIS. SO, AS RIGHTLY POINTED OUT BY THE L EARNED COUNSEL FOR THE ASSESSEE, IF THE VEHICLE ITSELF IS NOT BEING MANUFACTURED THEN THERE WOULD NOT BE ANY REQUIREMENT TO MANUFACTURE THE SPARE PARTS OF SUCH A VEHICLE AND IN SUCH AN EVENT, STOCK WOULD BE REDUNDANT OR OBSOLETE. HOWEVER, IT IS THE CONTEN TION OF THE ASSESSEE THAT THE STOCK DOES NOT RELATE TO THE SPARE PARTS, BUT RELATES TO VARIOUS COMPONENTS OF SPARE PARTS . THIS FACT NEEDS VERIFICATION. WE THEREFORE DEEM IT FIT AND PROPER TO REMIT THIS ISSUE ALSO TO THE FILE OF THE AO FOR DE NOVO CONSIDER ATION AS TO WHETHER THE ITEMS IN THE STOCK ARE SPARE PARTS OR ARE VARIOUS COMPONENTS OF THE SPARE PARTS. IF THEY ARE NOT FOUND TO BE SPARE PARTS , THEN SUCH AN AMOUNT SHALL BE ALLOWED AS A PROVISION AND THE DISALLOWANCE SHALL ONLY BE RESTRICTED TO THE SPARE PARTS FOUND TO BE PART OF THE STOCK. IN THE RESULT, THIS GROUND OF APPEAL IS ALSO TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 20 . AS REGARDS INTEREST U/S 234D OF THE ACT, WE DIRECT THE AO TO GIVE CONSEQUENTIAL RELIEF, IF ANY, IN ACCORDANCE WITH LAW. IT (TP) A NO . 1356 /BANG/20 1 1 M/S.TOYOTA KIRLOSKAR AUTO PARTS PVT.LTD. PAGE 23 OF 23 2 1. IN THE RESULT, THE ASSESSEE S APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRON OUNCED IN THE OPEN COURT ON 22 ND OF OCTO BER, 201 4 . SD/ - SD/ - (JASON P BOAZ ) ( SMT. P .MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER E KSRINIVASULU COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE ASSISTANT REGISTRAR INCOME - TAX APPELLATE T RIBUNAL BANGALOR E