Assistant Commissioner of Income-tax, V. Keihin Fie Pvt. ltd., Pune

ITA 1590/PUN/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1890 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 8 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 14-08-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PAVAN DUDHEDHIYA
• Keywords: Business income; Transfer pricing; International transaction; Rule of consistency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE , !', $ % BEFORE MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM ITA NOS.1590 & 1591/PN/2014 ASSESSMENT YEARS : 2008-09 & 2009-10 THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 9, PUNE. . APPELLANT VS. KEIHIN FIE PVT. LTD., PLOT NO.B-3, MIDC, CHAKAN, PHASE-I, MAHALUNGE, PUNE 410 501. PAN : AABCK2407R . RESPONDENT / APPELLANT BY : SHRI SANJAY PUNGLIA / RESPONDENT BY : SHRI PAVAN DUDHEDHIYA / DATE OF HEARING : 07.04.2016 / DATE OF PRONOUNCEMENT: 27.04.2016 & / ORDER PER PRADIP KUMAR KEDIA, AM : THE CAPTIONED TWO APPEALS ARE PREFERRED BY THE REVE NUE AGAINST THE ORDER OF CIT(A)-IT/TP, PUNE DATED 23.05.2014 RELATI NG TO ASSESSMENT YEARS 2008-09 AND 2009-10 PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT). 2. SINCE THE APPEALS RELATE TO THE SAME ASSESSEE AN D INVOLVE A COMMON ISSUE, THEY HAVE BEEN CLUBBED AND HEARD TOGETHER AN D A CONSOLIDATED ORDER IS BEING PASSED FOR THE SAKE OF CONVENIENCE AND BREVIT Y. 3. IN BOTH THESE APPEALS, THE SUBSTANTIVE COMMON IS SUE RELATES TO THE DETERMINATION OF ARM'S LENGTH PRICE OF INTERNATIONA L TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES FOR THE PU RPOSES OF COMPUTING INCOME THEREFROM IN TERMS OF SECTION 92(1) ACT. 2 ITA NOS.1590 & 1591/PN/2014 4. IN ORDER TO APPRECIATE THE CONTROVERSY AND THE R ELEVANT FACTS OF THE CASE, THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2008- 09 IS TAKEN AS THE LEAD CASE. 5. THE ASSESSEE BEFORE US IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS, INTER-ALIA , ENGAGED IN THE BUSINESS OF MANUFACTURING OF CARBURETTORS AND AIR SUCTION VALVE S (ASVS) FOR MOTOR CYCLES/THREE WHEELERS. IT HAS ITS PRODUCTION FACIL ITY AT PUNE, MAHARASHTRA. THE ASSESSEE IS A JOINT VENTURE BETWEEN KEIHIN CORPORAT ION, JAPAN (HOLDING 74% SHAREHOLDING) AND FUEL INSTRUMENTS & ENGINEERS PRIV ATE LIMITED, INDIA (HOLDING 26% SHAREHOLDING). FOR THE ASSESSMENT YEA R UNDER CONSIDERATION, IT FILED A RETURN OF INCOME DECLARING A TOTAL INCOME O F RS.1,16,98,03,686/-, WHICH WAS SUBJECT TO A SCRUTINY ASSESSMENT. THE ASSESSIN G OFFICER NOTED THAT ASSESSEE HAD ENTERED INTO CERTAIN INTERNATIONAL TRA NSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) AND INCOME ARISING FROM SUCH TRAN SACTIONS WAS LIABLE TO BE COMPUTED HAVING REGARD TO THEIR ARM'S LENGTH PRICE AS PER SECTION 92(1) OF THE ACT. THE ASSESSING OFFICER REFERRED THE MATTER FOR COMPUTATION OF ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS TO THE TRAN SFER PRICING OFFICER (IN SHORT TPO) U/S 92CA(1) OF THE ACT. THE TPO AFTER ALLOW ING THE ASSESSEE APPROPRIATE OPPORTUNITIES OF BEING HEARD, PASSED AN ORDER U/S 92CA(3) OF THE ACT DATED 17.10.2011 DETERMINING THE ARM'S LENGTH P RICE AT A FIGURE HIGHER THAN THE STATED VALUE OF THE INTERNATIONAL TRANSACTIONS BY A SUM OF RS.18,10,697/-. THE ASSESSING OFFICER PASSED DRAFT ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 144C(1) OF THE ACT DATED 19.12.2011 AND COMP UTED THE TOTAL INCOME OF THE ASSESSEE U/S 92CA(4) OF THE ACT IN CONFORMITY W ITH THE ARM'S LENGTH PRICE SO DETERMINED BY THE TRANSFER PRICING OFFICER. IN RESPONSE TO THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED A LETTER DATED 12.01.2012 REQUESTING THE ASSESSING OFFICER TO PASS A FINAL ORDER TO PURSUE R EMEDY BEFORE THE CIT(A). ACCORDINGLY, THE FINAL ASSESSMENT ORDER DATED 10.02 .2012 UNDER SECTION 143(3) R.W.S. 144C(3) OF THE ACT WAS PASSED WHEREIN THE AS SESSING OFFICER MADE AN ADDITION OF RS.18,10,697/- TO THE RETURNED INCOME O N ACCOUNT OF THE TRANSFER PRICING ADJUSTMENT. 3 ITA NOS.1590 & 1591/PN/2014 6. THIS ADDITION WAS CARRIED IN APPEAL BY THE ASSES SEE BEFORE THE CIT(A). THE CIT(A) DELETED THE ADJUSTMENT MADE TO THE STATE D VALUE OF THE INTERNATIONAL TRANSACTIONS FOLLOWING THE EARLIER OR DER. 6.1 THE RELEVANT PARAS OF CIT(A) ORDER IS EXTRACTED HEREUNDER :- AY 2008-09 AND AY 2009-10 GROUND 1 TO 6 TRANSFER PRICING ADJUSTMENT RS.18,1 0,699 AY 2008-09 RS.61,64,929 AY 2009-10 2.1.1 DURING THE AY 2008-09, THE APPELLANT HAS CARR IED OUT INTERNATIONAL TRANSACTIONS OF EXPORT OF COMPONENTS AND SPARE PART S WORTH RS.2,79,86,069/-. THE APPELLANT HAD BENCHMARKED ITS INTERNATIONAL TRANSAC TIONS INCLUDING THE ABOVE TRANSACTIONS BY USING TRANSACTIONAL NET MARGIN METH OD (TNMM). FOR THE AY 2008-09, THE APPELLANT DETERMINED THE AVERAGE OPERA TING MARGIN OF THE COMPARABLE COMPANIES IS OF 9.38%, WHEREAS THE APPELLANTS OPER ATING MARGIN IS OF 23%. ACCORDINGLY, THE APPELLANT STATED THAT ITS INTERNAT IONAL TRANSACTIONS WERE CARRIED OUT AT THE ARM'S LENGTH PRICE. 2.1.2 THE LEARNED TPO NOTICED THAT THE AVERAGE OPER ATING PROFIT ON SALES IN RESPECT OF GOODS EXPORTED WORKS OUT TO BE 16.77 %, WHEREAS AS MENTIONED, APPELLANT'S OVERALL OPERATING PROFIT ON SALES WORKE D OUT TO BE 23%. THE LEARNED TPO ALSO NOTED THAT THE APPELLANT'S DOMESTIC OPERAT ING PROFIT WAS OF 23.24%. THE LEARNED TPO AFTER CONSIDERING THE OBJECTIONS RAISED BY THE APPELLANT MADE AN ADJUSTMENT OF RS 18,10,699 BASED ON THE DIFFERENCE IN NET MARGIN FROM THE DOMESTIC SALES AND NET MARGIN DERIVED FROM THE EXPORT SALES (23.24% - 16.77% = 6.47%). 2.1.3 SIMILARLY IN AY 2009-10, THE APPELLANT HAS CA RRIED OUT INTERNATIONAL TRANSACTIONS OF EXPORT OF COMPONENTS AND SPARE PART S WORTH OF RS 7,74,48,857. IN THIS YEAR ALSO, THE LEARNED TPO ON THE SIMILAR LINE S AS DONE IN THE EARLIER YEARS AND AFTER CONSIDERING THE OBJECTIONS RAISED BY THE APPE LLANT MADE AN ADJUSTMENT OF RS 61,64,929 BASED ON THE DIFFERENCE IN NET MARGIN FRO M THE DOMESTIC SALES AND NET MARGIN DERIVED FROM THE EXPORT SALES (14.97 % - 7.0 1 % = 7.96 %). 2.1.4 AS STATED, THE LEARNED TPO IN BOTH THE ASSESS MENT YEARS HAS MADE THE ADJUSTMENT AFTER COMPARING PROFITABILITY OF EXPORT SEGMENT (AE) WITH THE PROFITABILITY OF THE DOMESTIC SEGMENT (NON-AE). THE LEARNED TPO HAS FOLLOWED THE SAME APPROACH AS FOLLOWED BY HIM FOR MAKING THE ADJ USTMENT ON INTERNATIONAL TRANSACTION OF EXPORT OF COMPONENTS AND SPARE PARTS AS DONE BY HIM IN AY 2005-06 AND IN AY 2007-08. 2.1.5 THE APPELLANT HAS FURNISHED THE SAME OR ALMOS T SIMILAR ARGUMENTS, WHICH WERE ADVANCED BY IT AGAINST THE ADJUSTMENT MADE BY IT IN THE APPEAL OF AY 2005-06 AND IN AY 2007-08 FILED BEFORE THE CIT(A). I HAVE D ECIDED THESE APPEALS IN WHICH, I HAVE REPRODUCED THE APPELLANT'S ARGUMENTS IN DETAIL IN MY APPELLATE ORDER NO 27 AND 28 DATED 18.02.2013 OF AY 2005-06 AND AY 2007-0 8. THEREFORE, I DO NOT REPRODUCE THE APPELLANT'S ARGUMENTS AGAIN HERE. 2.1.6 THE APPELLANT SUMMARIZED ITS ARGUMENTS BY STA TING THAT THE LEARNED TPO HAS NOT CONSIDERED SIGNIFICANT DIFFERENCES BETWEEN EXPO RT TRANSACTIONS AND DOMESTIC SALES TRANSACTIONS. ACCORDINGLY, IT IS NOT CORRECT TO COMPARE EXPORT TRANSACTION AND DOMESTIC SALES MADE BY THE COMPANY WITHOUT MAKING R EASONABLY ACCURATE ADJUSTMENTS. THEREFORE, THE ADJUSTMENT MADE BY THE LEARNED TPO OF RS 18,10,699 IN AY 2008-09 AND OF RS 61,64,929 IN AY 2009-10 BE DELETED. FINDINGS 4 ITA NOS.1590 & 1591/PN/2014 2.1.7 AS STATED, I HAVE PASSED THE APPELLATE ORDER NO DATED IN THE APPELLANTS CASE FOR THE AY 2005-06 AND AY 2007-08 ON THE SAME ISSUE . THE FACTS PERTAINING TO THE ADJUSTMENT AND THE APPELLANTS ARGUMENTS ARE SAME F OR THESE AYS AS WELL. THEREFORE, I FOLLOW MY DECISION TO DECIDE THE DISPU TE IN FAVOUR OF THE APPELLANT. I REPRODUCE MY DECISION GIVEN IN MY APPELLATE ORDER O F AY 2005-06 FOR THE READY REFERENCE AS UNDER : 2.1.15 I HAVE CONSIDERED THE FACTS OF THE CASE, A RGUMENTS OF THE APPELLANT AND ARGUMENTS OF THE LEARNED TPO. IN MY V IEW, THE LEARNED TPO HAS MADE COUPLE OF FUNDAMENTAL ERRORS. FIRST OF ALL , HE HAS BENCHMARKED NET MARGIN DERIVED FROM THE EXPORT OF COMPONENTS, WHICH IS A TRADING ACTIVITY WITH THE PROFIT MARGIN OF DOMESTIC SALES, WHICH PRI MARILY CONSIST OF MANUFACTURED CARBURETTORS. IT HAS BEEN OBSERVED BY THE LEARNED TPO ON THE FIRST PAGE OF ITS ORDER THAT THE APPELLANT DERIVES MAJOR REVENUE FROM THE SALE OF CARBURETTORS. IT IS VERY FUNDAMENTAL THAT THE MA RGINS DERIVED IN TRADING ACTIVITY CANNOT BE COMPARED WITH THE MARGINS DERIVE D FROM THE MANUFACTURING ACTIVITY. IN EXPORT SEGMENT, THE APPE LLANT HAS PERFORMED FUNCTIONS OF A TRADER WHEREAS IN THE DOMESTIC SALES SEGMENT, THE APPELLANT HAS FUNCTIONED AS MANUFACTURER AND DISTRIBUTOR. ACC ORDINGLY, BOTH THE SEGMENTS ARE NOT COMPARABLE. 2.1.16 SECONDLY, THE LEARNED TPO HAS RELIED ON THE INTERNAL COMPARABLE FOR BENCHMARKING, WHICH IT IS NOT A COMP ARABLE FROM THE POINT OF VIEW OF THE CATEGORIES OF THE PRODUCTS SOLD. THE AP PELLANT HAS EXPORTED COMPONENTS AND PARTS, WHICH PREFERABLY SHOULD BE CO MPARED WITH THE PROFIT DERIVED FROM THE SALE OF PARTS AND NOT MANUFACTURED PRODUCTS. THE LEARNED TPO STATED THAT HE RELIED ON THE INTERNAL COMPARABL E BECAUSE THE APPELLANT DID NOT FURNISH PROFIT AND LOSS ACCOUNT PERTAINING TO DOMESTIC SALES OF COMPONENTS AND PARTS. IT IS ADMITTED FACT THAT VOLU ME OF DOMESTIC SALES OF COMPONENTS AND PARTS IS QUITE INSIGNIFICANT TO CONS TITUTE VALID COMPARABLE WITH THE EXPORT TRANSACTION. IN SUCH CIRCUMSTANCES, THE LEARNED TPO OUGHT TO HAVE BENCHMARKED EXPORT TRANSACTIONS WITH THE EXTER NAL COMPARABLES. HOWEVER, HE DID NOT DO SO. 2.1.17 THIRDLY, TURNOVER OF EXPORT TRANSACTION IS OF RS 8.12 CR WHEREAS, APPELLANT'S DOMESTIC SALES IS AROUND 258 C R. THE SUBSTANTIAL DIFFERENCE IN TURNOVER BETWEEN EXPORT SALES AND DOM ESTIC SALES MAKE BOTH INCOMPARABLE APPLYING THE RATIO OF GENISYS INTEGRAT ING SYSTEM LTD OF BANGALORE ITAT. 2.1.18 THE LEARNED TPO HAS MENTIONED THAT THE APPE LLANT IN THE TRANSFER PRICING REPORT AND IN THE FORM 3CEB HAD DE SCRIBED EXPORT TRANSACTION AS OF 'EXPORT OF FINISHED GOODS'. THIS WAS LATER CHANGED AND IT WAS STATED THAT THE APPELLANT EXPORTED COMPONENTS A ND PARTS. THE LEARNED TPO APPARENTLY HAS ACCEPTED THE CHANGE IN THE POSIT ION OF THE APPELLANT BECAUSE HE SOUGHT TO COMPARE PROFITABILITY OF THE E XPORT TRANSACTIONS WITH THE PROFITABILITY OF THE DOMESTIC SALES OF COMPONEN TS AND PARTS. 2.1.19 THE APPELLANT HAS ALSO STATED THAT THE LEAR NED TPO DID NOT MAKE REASONABLY ACCURATE ADJUSTMENTS FOR THE TRANSA CTIONAL DIFFERENCES. I DO NOT CONSIDER THIS ARGUMENT RELEVANT, AS ACCORDING T O ME, THE LEARNED TPO HAS COMPARED OTHERWISE INCOMPARABLE, THAT IS, MANUF ACTURING AND DISTRIBUTION WITH TRADING. 2.1.20 IN VIEW OF THE ABOVE DISCUSSION, I DELETE T HE ADJUSTMENT MADE BY THE LEARNED TPO OF RS 62,72,857. 2.1.8 ACCORDINGLY, FOLLOWING MY APPELLATE ORDER OF AY 2005-06 AND OF AY 2007- 08, I DELETE THE ADJUSTMENT MADE BY THE LEARNED TPO OF RS.18,10,699 IN AY 2008-09 AND ALSO DELETE THE ADJUSTMENT OF RS.61,64,929 MADE BY THE LEARNED TPO IN AY 2009-10. 5 ITA NOS.1590 & 1591/PN/2014 3. WITH THE RESULT, THE APPEAL IS ALLOWED. 6.2 THE SUM AND SUBSTANCE OF THE ABOVE DISCUSSION I N THE ORDER OF THE CIT(A) SHOWS THAT ACCORDING TO HIM THE TPO ERRED IN DETERMINING THE ARM'S LENGTH PRICE BY CARRYING OUT COMPARABILITY ANALYSIS BETWEEN TRANSACTIONS WHICH WERE OTHERWISE NOT COMPARABLE. THEREFORE, HE HAS D ELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 7. AGAINST SUCH A DECISION OF THE CIT(A), REVENUE I S IN APPEAL BEFORE US. 7.1 BEFORE WE PROCEED FURTHER, IT MAY BE NOTED THAT THE INTERNATIONAL TRANSACTIONS IN QUESTION FOR BOTH THE ASSESSMENT YE ARS ARE SIMILAR. AT THE TIME OF HEARING, IT WAS STATED BY THE LD. AUTHORIZED REP RESENTATIVE FOR THE ASSESSEE THAT THE STAND OF THE TPO IS SIMILAR IN BOTH THE CA PTIONED YEARS. 7.2 RELEVANT FACTS GOVERNING THE ISSUE FOR ASSESSME NT YEAR 2008-09, IN BRIEF, ARE THAT ASSESSEE IS ENGAGED IN MANUFACTURING OF CE RTAIN MODELS OF CARBURETTORS AND AIR SUCTION VALVES (ASVS), WHICH ARE MAINLY CAT ERING TO TWO/THREE WHEELER MANUFACTURERS IN INDIA. THE ASSESSEE COMMI SSIONED COMMERCIAL PRODUCTION OF CARBURETORS FOR TWO AND THREE WHEELER S W.E.F. 01.10.2000. CARBURETORS ARE ITS MAIN SOURCE OF REVENUE. THE AS SESSEE IS A MARKET LEADER IN CARBURETORS FOR TWO WHEELERS IN INDIA REPRESENTING A GROWTH RATE OF 18.28%. DURING THE YEAR, THE ASSESSEE HAS UNDERTAKEN FOLLOW ING INTERNATIONAL TRANSACTIONS WITH ITS AES :- DESCRIPTION AMOUNT METHOD (IN RUPEES) (I) PURCHASE OF RAW MATERIAL AND PARTS 30,78,77,045 TNMM (II) SALE OF COMPONENTS/PARTS 2,79,86,069 TNMM (III) PURCHASE OF CAPITAL GOODS 2,57,59,602 CUP/TNMM (IV) PAYMENT OF ROYALTY 11,31,29,601 TNMM (V) PAYMENT OF TECHNICAL KNOW-HOW FEES 1,46,21,600 TNMM (VI) PAYMENT OF TECHNICAL ASSISTANCE FEES 35,58,725 TNMM (VII) REIMBURSEMENT OF EXPENSES 62,63,869 CUP TOTAL 49,91,96,511 6 ITA NOS.1590 & 1591/PN/2014 7.3 THE DISPUTE REVOLVES AROUND ARM'S LENGTH PRICE OF SALE OF COMPONENTS/PARTS DECLARED BY THE ASSESSEE AT RS.2,7 9,86,069/- (SUPRA). DURING THE ASSESSMENT YEAR 2008-09, THE ASSESSEE HAS CARRI ED OUT INTERNATIONAL TRANSACTIONS OF EXPORT OF COMPONENTS AND SPARE PART S WORTH RS.2,79,86,069/- AS PER ITEM (II) ABOVE. AS CAN BE SEEN FROM THE TABUL ATED DATA NOTED HEREINABOVE, THE ASSESSEE BENCHMARKED ITS INTERNATIONAL TRANSACT IONS INCLUDING THE ABOVE TRANSACTIONS BY USING TRANSACTIONAL NET MARGIN METH OD (TNMM). THE ASSESSEE DETERMINED THE AVERAGE OPERATING MARGIN OF THE COMPARABLE COMPANIES AT 9.38% AS AGAINST THE ASSESSEE OPERATIN G MARGIN AT 23% AT ENTITY LEVEL. ACCORDINGLY, THE ASSESSEE STATED THAT ITS I NTERNATIONAL TRANSACTIONS WERE CARRIED OUT AT ARM'S LENGTH PRICE. 7.4 THE TPO NOTICED THAT THE AVERAGE OPERATING PROF IT ON SALE OF GOODS EXPORTED WORKED OUT TO 16.77% WHEREAS THE OVERALL O PERATING PROFIT OF THE ASSESSEE AT ENTITY LEVEL WORKED OUT TO 23%. THE TP O ALSO NOTED THAT THE ASSESSEE EARNED OPERATING PROFIT FROM SALE OF COMPO NENTS AND PARTS IN THE DOMESTIC MARKET AT 23.24%. THE TPO DID NOT ACCEPT THE IMPUGNED INTERNATIONAL TRANSACTIONS OF THE ASSESSEE AT ARM'S LENGTH PRICE AND PROCEEDED TO MAKE TRANSFER PRICING ADJUSTMENT BY ADOPTING A DIFF ERENT APPROACH. THE TPO COMPARED THE PROFITABILITY OF THE ASSESSEE FROM THE EXPORT OF COMPONENTS AND PARTS WITH PROFITABILITY OF THE ASSESSEE FROM THE D OMESTIC SALE OF THE COMPONENTS AND PARTS. HE, THUS, MADE AN ADJUSTMENT OF RS.18,10,697/- BASED ON THE DIFFERENCE IN THE OPERATING PROFIT MARGIN FR OM THE DOMESTIC SALE AND OPERATING PROFIT MARGIN DERIVED FROM THE EXPORT SAL E. 8. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESS EE AT THE OUTSET SUBMITTED THAT THE ISSUE IS NO LONGER RES INTEGRA AND IDENTICAL ISSUE HAS ALREADY BEEN ADJUDICATED IN ITS OWN CASE RELEVANT TO ASSESS MENT YEAR 2005-06 AND 2007-08. 9. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVE NUE RELIED ON THE ORDER OF THE ASSESSING OFFICER/TPO. 7 ITA NOS.1590 & 1591/PN/2014 10. WE FIND THAT ISSUE IS SQUARELY COVERED BY THE D ECISION OF THE PUNE BENCH OF THE TRIBUNAL IN ITS OWN CASE FOR THE ASSESSMENT YEARS 2005-06 & 2007-08 IN ITA NOS.1001 & 1002/PN/2013, ORDER DATED 30.01.2015 . THE RELEVANT PARAS OF THE SAID ORDER OF THE TRIBUNAL DATED 30.01.2015 (SUPRA) ARE EXTRACTED HEREUNDER :- 15. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. THE CRUX OF THE CONTROVERSY IS WITH REGARD TO THE DETERMINATION OF ARM'S LENGTH PRICE OF THE TRANSACTION OF EXPORT OF COMPONENTS AND PARTS MAD E BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES. BEFORE WE PROCEED FURTHER, IT WOULD BE PERTINENT TO NOTE THAT IN ITS TRANSFER PRICING STUDY, ASSESSEE HAS ENUMERA TED THE IMPUGNED TRANSACTIONS AS EXPORT OF FINISHED GOODS. THE FINISHED GOODS OF THE ASSESSEE ARE CARBURETTORS AND ASVS WHICH ARE BEING MANUFACTURED AT ITS PRODUCTION FACILITY IN PUNE AT MAHARASHTRA. THESE PRODUCTS ARE MAINLY SUPPLIED TO TWO/THREE WHEELER MANUFACTURERS IN INDIA. INASMUCH AS 97% OF THE TOT AL SALES OF THE ASSESSEE COMPRISED OF SALE OF CARBURETTORS AND ASVS TO THE O EMS SUCH BAJAJ AUTO AND HERO HONDA. IN THE COURSE OF THE TRANSFER PRICING PROCE EDING BEFORE THE TPO, ASSESSEE POINTED OUT THAT THE HEADING EXPORT OF FINISHED GO ODS ACTUALLY REFERS TO EXPORT OF PARTS AND COMPONENTS USED IN THE MANUFACTURE OF CAR BURETTORS AND ASVS. FACTUALLY SPEAKING, THE AFORESAID EXPLANATION/CLARIFICATION R ENDERED BY THE ASSESSEE HAS NOT BEEN DISPUTED BY THE TPO AND EVEN BEFORE US THE REV ENUE HAS NOT CONTROVERTED THE AFORESAID ASPECT OF THE MATTER. 16. NOW, WE MAY COME TO THE AREA OF DIFFERENCE BETW EEN THE ASSESSEE AND THE INCOME-TAX AUTHORITIES. THE TPO, WHILE ACCEPTING T HE DECISION OF THE ASSESSEE TO SELECT THE TNM METHOD AS THE MOST APPROPRIATE METHO D, DID NOT ACCEPT ASSESSEES APPROACH OF AGGREGATING THE FOLLOWING INTERNATIONAL TRANSACTIONS AND BENCHMARKING THEM AT ENTITY LEVEL WHILE APPLYING THE TNM METHOD, I.E. IMPORT OF RAW MATERIAL AND PARTS; EXPORT OF COMPONENTS AND PARTS; PAYMENT OF R OYALTY; PAYMENT OF TECHNICAL KNOW-HOW; PAYMENT OF TECHNICAL ASSISTANCE FEE; AND, REIMBURSEMENT OF EXPENSES. THE TPO DISAGREED WITH THE ASSESSEE ONLY WITH RESPE CT TO AGGREGATION OF THE TRANSACTION OF EXPORT OF COMPONENTS AND PARTS TO ASSOCIATED ENTERPRISES AND CONSIDERED IT AS AN INDEPENDENT BUSINESS ACTIVITY. 17. ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE TH E CIT(A). IN APPEAL, ASSESSEE INTER-ALIA DISPUTED THE APPROACH OF THE TPO IN DISR EGARDING ITS AGGREGATION APPROACH. AT THIS STAGE, WE DO NOT DWELL ON THIS A SPECT OF THE CONTROVERSY, AS THE CIT(A) HAS ALLOWED RELIEF ON A DIFFERENT FOOTING. THE CIT(A) PROCEEDED ON AN ALTERNATE CLAIM OF THE ASSESSEE TO THE EFFECT THAT THE EVEN IF THE IMPUGNED EXPORT ACTIVITY WAS TO BE CONSIDERED AS AN INDEPENDENT BUS INESS ACTIVITY, THE TPO WAS WRONG IN BENCHMARKING IT WITH THE DOMESTIC SALE ACT IVITIES WHICH CONSISTED PRIMARILY OF MANUFACTURED CARBURETTORS AND ASVS. IN THIS CON TEXT, FROM THE ORDER OF THE AUTHORITIES BELOW, IT IS QUITE EVIDENT THAT ASSESSE E SUCCEEDED IN POINTING OUT THAT THERE WAS A DIFFERENCE IN THE NATURE OF ITEMS EXPOR TED TO ASSOCIATED ENTERPRISES VIS- -VIS SALES IN THE DOMESTIC MARKET. THE FUNDAMENTA L POINT MADE OUT BY THE ASSESSEE WAS THAT THE COMPONENTS AND PARTS EXPORTED TO ASSOC IATED ENTERPRISES WERE PROCURED FROM LOCAL THIRD PARTY VENDORS WHEREAS THE DOMESTIC SALES WHICH COMPRISED OF ALMOST 97% OF THE TOTAL SALES CONSIST PRIMARILY OF MANUFACTURED CARBURETTORS/ASVS. THE PLEA SETUP BY THE ASSESSEE WAS THAT THE IMPUGNE D ACTIVITY OF EXPORT TO ASSOCIATED ENTERPRISES WAS A TRADING ACTIVITY AND THEREFORE NE T MARGIN FROM SUCH EXPORT ACTIVITY CANNOT BE COMPARED WITH THE PROFIT MARGIN OF DOMEST IC BUSINESS WHICH PRIMARILY CONSIST OF MANUFACTURED CARBURETTORS. IN OUR CONSI DERED OPINION, THIS FACT-SITUATION IS AMPLY BORNE OUT OF THE MATERIAL ON THE RECORD AN D THE FINDING OF THE CIT(A) IN THIS REGARD IS UNIMPEACHABLE. 8 ITA NOS.1590 & 1591/PN/2014 18. APART THEREFROM, THE ASSESSEE ALSO DEMONSTRATED BEFORE THE LOWER AUTHORITIES THAT THERE WAS A DIFFERENCE IN THE NATURE OF CUSTOM ERS IN THE DOMESTIC MARKET AND THE IMPUGNED EXPORT MARKET. IN THE DOMESTIC MARKET ASS ESSEE WAS SUPPLYING CARBURETTORS AND ASVS TO OEMS SUCH AS BAJAJ AUTO AN D HERO HONDA WHO USED THESE PRODUCTS IN THE PRODUCTION OF VEHICLES THAT THEY MA NUFACTURED. IN CONTRAST, THE ASSOCIATED ENTERPRISES TO WHOM THE COMPONENTS AND P ARTS WERE EXPORTED WERE ESSENTIALLY MANUFACTURERS OF CARBURETTORS, WHO USED THE PRODUCTS EXPORTED BY THE ASSESSEE FOR MANUFACTURE OF CARBURETTORS WHICH IN T URN THEY SOLD TO THE OEMS. THIS DIFFERENCE WAS BROUGHT OUT BY THE ASSESSEE TO ESTAB LISH THAT THERE WERE DIFFERENCES IN FUNCTIONS PERFORMED AND RISKS ASSUMED WITH REGARD T O EXPORT OF COMPONENTS/PARTS AND THE SALE OF CARBURETTORS/ASVS IN THE DOMESTIC M ARKET. THE CIT(A) HAS APPRECIATED THE AFORESAID DIFFERENCES AND IN OUR CO NSIDERED OPINION, THERE IS NO COGENT MATERIAL OR EVIDENCE BEFORE US TO DISSUADE U S FROM AFFIRMING THE STAND OF THE CIT(A). THE CIT(A) HAS CATEGORICALLY NOTED THAT AS SESSEE HAD EXPORTED COMPONENTS AND PARTS WHOSE PROFIT MARGINS SHOULD BE COMPARED W ITH THE MARGINS DERIVED FROM SALE OF PARTS/COMPONENTS AND NOT SALE OF MANUFACTUR ED PRODUCTS. GOING FURTHER, THE CIT(A) HELD THAT VOLUME OF DOMESTIC SALE OF COMPONE NTS/PARTS WAS QUITE INSIGNIFICANT TO CONSTITUTE A VALID COMPARABLE WITH THE EXPORT TRANSACTIONS. FOR ALL THE AFORESAID REASONS, CIT(A) HAS DIFFERED WITH THE APPROACH OF THE TPO IN BENCHMARKING THE IMPUGNED TRANSACTION OF EXPORT OF COMPONENTS AND PARTS WITH THE PROFIT MARGIN OF DOMESTIC SALES WHICH PRIMARILY CON SIST OF MANUFACTURED PRODUCTS I.E. CARBURETTORS. 19. IN VIEW OF THE ABOVE DISCUSSION, WE FIND NO REA SON TO INTERFERE WITH THE ULTIMATE CONCLUSION OF THE CIT(A) TO DELETE THE ADD ITION ON THE GROUND THAT THE TPO WRONGLY COMPARED THE TESTED TRANSACTIONS WITH AN IN COMPARABLE TRANSACTION. AS A CONSEQUENCE, WE HEREBY AFFIRMED THE ORDER OF THE CI T(A) AND ACCORDINGLY REVENUE HAS TO FAIL ON THIS ASPECT. 20. BEFORE PARTING, WE MAY DEAL WITH THE GROUNDS OF APPEAL NO.2.2 RAISED BY THE REVENUE, WHICH HIS BASED ON THE DECISION OF THE MUM BAI BENCH OF THE TRIBUNAL IN THE CASE OF CAPGEMINI INDIA PRIVATE LIMTIED (ITA NO .786/MUM/2011) FOR ASSESSMENT YEAR 2007-08. THE POINT MADE OUT IS THA T EVEN IF THE QUANTUM OF EXPORT SALES IS NOT COMPARABLE WITH THE DOMESTIC SALES DUE TO VARIATION IN VOLUME BUT THE PROFIT MARGINS PER-SE DO NOT GET EFFECTED BY THE VO LUME OF TURNOVER AND FOR THAT PROPOSITION RELIANCE HAS BEEN PLACED ON THE DECISIO N OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF CAPGEMINI INDIA PRIVATE LIM ITED (SUPRA). IN OUR CONSIDERED OPINION, IT WOULD SUFFICE TO OBSERVE THAT THE AFORE SAID STAND OF THE REVENUE IS QUITE MISPLACED BECAUSE IN THE PRESENT CASE, IT IS NOT ME RELY THE DIFFERENCE IN VOLUME OF THE TWO CATEGORY OF TRANSACTIONS BUT THE VERY NATUR E OF THE TRANSACTIONS HAS BEEN FOUND TO BE INCOMPARABLE. NOTABLY, THE TRANSACTION OF EXPORT OF COMPONENTS AND PARTS IS A TRADING ACTIVITY WHEREAS THE DOMESTIC BU SINESS CONSISTS OF SALES PRIMARILY OF THE MANUFACTURED CARBURETTORS. THEREFORE, ON TH IS GROUND ITSELF, WE FIND THAT THE REFERENCE TO THE DECISION OF THE TRIBUNAL IN THE CA SE OF CAPGEMINI INDIA PRIVATE LIMITED (SUPRA) IN THE PRESENT CASE IS ERRONEOUS. 21. AT THIS POINT, IT WAS POINTED THAT THE ASSESSEE HAD UNDERTAKEN TRANSACTIONS BY WAY OF EXPORT OF COMPONENTS AND PARTS TO ASSOCIATED ENTERPRISES IN THE SAME MANNER FOR ASSESSMENT YEARS 2002-03, 2003-04 AND 2004-05 A LSO. AT THE TIME OF HEARING, THE LD. REPRESENTATIVE FOR THE ASSESSEE MADE A STAT EMENT AT BAR THAT IN THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE FOR SUCH A SSESSMENT YEARS, IT HAD ADOPTED THE AGGREGATION APPROACH AND APPLIED THE TNM METHOD FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS. IT WAS ASSERTED THAT T HE TPO ACCEPTED THE AGGREGATION METHODOLOGY ADOPTED BY THE ASSESSEE. THIS ASPECT O F THE MATTER HAS NOT BEEN CONTROVERTED BEFORE US AT THE TIME OF HEARING. IT WAS CONTENDED THAT EVEN ON THE PRINCIPLE OF CONSISTENCY, THE IMPUGNED APPROACH OF THE TPO IN CAPTIONED YEARS IS UNTENABLE. 9 ITA NOS.1590 & 1591/PN/2014 22. AS A CONSEQUENCE, SO FAR AS THE ASSESSMENT YEAR 2005-06 IS CONCERNED, THE GROUNDS OF APPEAL NO.1 & 2 RAISED BY THE REVENUE AR E DISMISSED. 23. IN SO FAR AS THE ASSESSMENT YEARS 2006-07 AND 2 007-08 ARE CONCERNED, THEREIN ALSO THE ASSESSING OFFICER HAS MADE ADDITIO N ON ACCOUNT OF THE TRANSFER PRICING ADJUSTMENT TO THE STATED VALUES OF THE TRAN SACTION OF EXPORT OF COMPONENTS AND PARTS TO THE ASSOCIATED ENTERPRISES. IN BOTH T HESE YEARS, THE RIVAL PARTIES SUBMITTED BEFORE US THAT THE FACTS AND CIRCUMSTANCE S REMAIN THE SAME, AS CONSIDERED BY US IN THE APPEAL FOR ASSESSMENT YEAR 2005-06 IN EARLIER PARAS. THE RIVAL CONTENTIONS ALSO REMAIN THE SAME, AS CONSIDERED BY US IN THE APPEAL FOR ASSESSMENT YEAR 2005-06 (SUPRA). THEREFORE, OUR DECISION IN A SSESSMENT YEAR 2005-06 (SUPRA) SHALL APPLY MUTATIS-MUTANDIS IN THE ASSESSMENT YEAR S 2006-07 AND 2007-08 ALSO. WE HOLD SO. 11. FOLLOWING THE PARITY OF REASONING, WE DO NOT FI ND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AND UPHOLDING THE SAME, WE DISM ISS THE GROUNDS RAISED BY THE REVENUE IN ITS APPEAL. 12. AS NOTED EARLIER, THE FACTS AND ISSUE IN ITA NO S.1590 & 1591/PN/2014 ARE SIMILAR. IN THE RESULT, BOTH THE CAPTIONED APP EALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED ON THIS 27 TH DAY OF APRIL, 2016. SD/- SD/- ( SUSHMA CHOWLA ) ( PRADIP KUMAR KEDIA ) / JUDICIAL MEMBER $ / ACCOUNTANT MEMBER PUNE ; DATED : 27 TH APRIL, 2016. & ' ()* +*( / COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-IT/TP, PUNE; 4) THE CIT-IT/TP, PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. &, / BY ORDER , ' # //TRUE COPY// $ %& # '( / SR. PRIVATE SECRETARY ) '* , / ITAT, PUNE