Piaggio Vehicles Pvt. Ltd., Pune V. ACIT, Circle-4, Pune

ITA 2583/PUN/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6783 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 14-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 28-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Additional depreciation; Services rendered outside India
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.2583/PN/2012 (ASSESSMENT YEAR : 2008-09) PIAGGIO VEHICLES PVT. LTD., E-2, MIDC AREA, BARAMATI, DIST. PUNE 413 133. PAN : AABCP1225G . APPELLANT VS. ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE- 4, PUNE. . RESPONDENT ASSESSEE BY : MR. M. P. LOHIA DEPARTMENT BY : MR. A. K. MODI DATE OF HEARING : 14-07-2014 DATE OF PRONOUNCEMENT : 25-07-2014 ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL HAS BEEN PREFERRED BY THE ASSE SSEE PERTAINING TO THE ASSESSMENT YEAR 2008-09, WHICH IS DIRECTED AGAI NST THE ORDER OF THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE- 4, PUNE (IN SHORT THE ASSESSING OFFICER) PASSED U/S 143(3) R.W.S. 144C OF THE INCO ME TAX ACT, 1961 (IN SHORT THE ACT) DATED 20.11.2012, WHICH IS IN CONFORMITY WITH THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL, PUNE (IN SHORT THE D RP) DATED 05.09.2012. 2. IN THIS APPEAL, THE PRIMARY DISPUTE RELATES TO A N ADDITION OF RS.2,15,95,600/- WHICH HAS BEEN MADE BY THE ASSESSI NG OFFICER ON ACCOUNT OF A TRANSFER PRICING ADJUSTMENT TO THE STATED VALUES OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS AS SOCIATED ENTERPRISES PERTAINING TO EXPORT OF SPARE, PARTS AND COMPONENTS . THE GROUNDS OF APPEAL RELATING TO THE SAID ADDITION READ AS UNDER :- ITA NO.2583/PN/2012 A.Y. : 2008-09 GROUND NO. 1 - ERRED IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNT ING TO RS.2,15,95,600/- TO THE VALUE OF INTERNATIONAL TRAN SACTION BY REJECTING THE ANALYSIS UNDERTAKEN BY THE APPELLANT TO DETERMINE A RM'S LENGTH PRICE FOR ITS INTERNATIONAL TRANSACTION PERTAINING TO EXPORT OF S PARE PARTS AND COMPONENTS TO THE ASSOCIATED ENTERPRISE. GROUND NO. 2 - ERRED IN REJECTING THE EXTERNAL TNMM APPROACH ADOP TED BY THE ASSESSEE AND INAPPROPRIATELY APPLYING INTERNAL TNMM FOR DETERMINING THE ARM'S LENGTH PRICE FOR THE INTERNATIONAL TRANSA CTION OF EXPORT OF SERVICES SPARES AND COMPONENTS. GROUND NO. 3 - WITHOUT PREJUDICE TO THE OTHER GROUNDS OF APPEAL, ERRED IN INAPPROPRIATELY REJECTING THE ITERATIONS SUGGESTED BY THE APPELLANT IN RESPECT OF DETERMINING THE ARM'S LENGTH PRICE FOR T HE INTERNATIONAL TRANSACTION OF EXPORT OF SERVICES SPARES AND COMPON ENTS. 3. AT THE TIME OF HEARING, IT WAS A COMMON GROUND B ETWEEN THE PARTIES THAT THE AFORESTATED DISPUTE STANDS ON IDENTICAL FO OTING TO THAT CONSIDERED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSM ENT YEAR 2006-07 VIDE ITA NO.1480/PN/2010 DATED 23.07.2012, WHICH HAS THE REAFTER BEEN FOLLOWED BY THE TRIBUNAL FOR ASSESSMENT YEAR 2007-08 ALSO VI DE ITA NO.1614/PN/2011 DATED 28.06.2013. COPIES OF THE AFORESAID PRECEDEN TS HAVE BEEN PLACED ON RECORD AND THERE WAS A CONVERGENCE IN THE STAND OF BOTH THE PARTIES THAT THE AFORESAID PRECEDENTS CONTINUE TO HOLD THE FIELD, AS THEY HAVE NOT BEEN ALTERED BY ANY HIGHER AUTHORITY. 4. IN THE ABOVE BACKGROUND, WE MAY BRIEFLY TOUCH-UP ON THE FACTS OF THE PRESENT CASE. IN ASSESSMENT YEAR 2008-09, ASSESSEE COMPANY FILED A RETURN OF INCOME DECLARING A TOTAL INCOME OF RS.201,18,40, 220/-. THE APPELLANT IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE CO MPANIES ACT, 1956 AND IS, INTER-ALIA, ENGAGED IN MANUFACTURE AND SALE OF THREE WHEELER AND OTHER LIGHT COMMERCIAL VEHICLES FOR TRANSPORTATION OF GOODS AND PASSENGERS. THE APPELLANT COMPANY WAS FORMED AS A JOINT VENTURE BET WEEN GREAVES INDIA LTD. AND PIAGGIO & CS P.A. ITALY (P&C), SO HOWEVER, PRES ENTLY, THE ENTIRE SHAREHOLDING OF THE APPELLANT COMPANY IS WITH THE P IAGGIO & CS P.A. ITALY (P&C). ON ACCOUNT OF ASSESSEE HAVING ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES, THE A SSESSING OFFICER MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARM'S ITA NO.2583/PN/2012 A.Y. : 2008-09 LENGTH PRICE OF SUCH INTERNATIONAL TRANSACTIONS. T HE ASSESSEE UNDERTOOK INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES DURING THE YEAR UNDER CONSIDERATION OF VARIOUS TYPES VIZ. EXPORT OF THREE WHEELED MOTOR VEHICLES; EXPORT OF SPARES AND COMPONENTS OF TWO/THREE/FOUR W HEELED MOTOR VEHICLES; IMPORT OF PARTS AND COMPONENTS FOR USE IN MANUFACTU RE OF VEHICLES; ROYALTY PAID/PAYABLE FOR USE OF TECHNOLOGY, TECHNICAL KNOW- HOW FEES FOR CNG/LPG THREE WHEELED VEHICLES, TECHNICAL KNOW-HOW FEES FOR FOUR WHEELED MOTOR VEHICLES, SERVICE CHARGES PAID FOR ENGINE PLANT, RE IMBURSEMENT OF EXPENSES, ETC.. THE ONLY INTERNATIONAL TRANSACTION, WHICH IS SUBJECT-MATTER OF DISPUTE BEFORE US, PERTAINS TO THE EXPORT OF SPARE PARTS AN D COMPONENTS OF TWO/THREE/FOUR WHEELED MOTOR VEHICLES TO THE ASSOCI ATED ENTERPRISE, WHEREIN THE STATED VALUE IS RS.10,01,45,619/-. BEFORE DETA ILING THE DISPUTE WITH REGARD TO THE DETERMINATION OF ARM'S LENGTH PRICE FOR THE INTERNATIONAL TRANSACTIONS OF EXPORT OF SPARE PARTS AND COMPONENTS OF TWO/THREE/F OUR WHEELED MOTOR VEHICLES, WE MAY BRIEFLY NOTE THE ACTIVITIES UNDERT AKEN BY THE ASSESSEE COMPANY. PRIMARILY, ASSESSEE IS ENGAGED IN THE MAN UFACTURE AND SALE OF THREE WHEELED MOTOR VEHICLES FOR TRANSPORTATION OF GOODS AND PASSENGERS AND ALSO SALE OF SPARES AND COMPONENTS OF THREE WHEELED MOTOR VEHICLES MANUFACTURED BY IT TO SUPPORT ITS AFTER SALE MARKET BOTH IN INDIA AND ABROAD. FURTHER, ASSESSEE IS ALSO ENGAGED IN SOURCING OF CO MPONENTS WHICH ARE REQUIRED BY ITS ASSOCIATED ENTERPRISES ABROAD FOR M ANUFACTURE OF TWO/THREE/FOUR WHEELED MOTOR VEHICLES IS THE ACTIVITY IN DISPUTE. THE TOTAL EXPORT OF SPARES AND COMPONENTS TO THE ASSOCIATED ENTERPRISES AMOUNT ING TO RS.10,01,45,619/, WHICH ACCORDING TO THE TPO IS NOT AN ARM'S LENGTH P RICE. 5. THE ASSESSEE COMPANY BENCHMARKED ITS INTERNATION AL TRANSACTION OF EXPORT OF SPARES AND COMPONENTS TO THE ASSOCIATED E NTERPRISES BY APPLYING THE TRANSACTIONAL NET MARGIN (TNM) METHOD. THE ASS ESSEE COMPANY ASSERTED THAT ITS INTERNATIONAL TRANSACTION RELATIN G TO EXPORT OF SPARES AND COMPONENTS TO THE ASSOCIATED ENTERPRISES WAS AT AN ARM'S LENGTH PRICE ITA NO.2583/PN/2012 A.Y. : 2008-09 BECAUSE THE AVERAGE OF MARGINS OF THE COMPARABLES S ELECTED BY IT CAME TO 3.22%, WHICH WAS FAVOURABLE IN COMPARISON TO OPERAT ING MARGIN OF 14.49% EARNED BY THE ASSESSEE. SO HOWEVER, THE TPO REJECT ED THE APPLICATION OF EXTERNAL TNM METHOD ADOPTED BY THE ASSESSEE, AND IN STEAD APPLIED AN INTERNAL TNM METHOD IN ORDER TO BENCHMARK THE INTER NATIONAL TRANSACTION PERTAINING TO EXPORT OF SPARES AND COMPONENTS TO TH E ASSOCIATED ENTERPRISES. THE AFORESAID ACTION OF THE TPO IS SIMILAR TO THE S TAND OF THE TPO IN THE ASSESSMENT YEAR 2006-07. 6. WHILE BENCHMARKING THE IMPUGNED INTERNATIONAL TR ANSACTIONS ON THE BASIS OF INTERNAL TNM METHOD, THE TPO ANALYZED THE PROFITABILITY OF THE EXPORTS UNDERTAKEN BY THE ASSESSEE TO ITS ASSOCIATED ENTERP RISES ON ONE HAND AND COMPARED IT WITH THE PROFITABILITY OF EXPORTS UNDER TAKEN BY THE ASSESSEE TO THIRD PARTIES (I.E. NON-ASSOCIATED ENTERPRISES). ON THIS BASIS, THE TPO NOTICED THAT THE NET MARGIN (ON TOTAL COST) PERTAINING TO EXPORT SALES TO THE ASSOCIATED ENTERPRISES WAS 16.48% AND THE NET MARGIN (ON COST) PERTAINING TO EXPORTS MADE TO THIRD PARTIES WAS 41.60%. THE TPO ADOPTED THE NET PROFIT MARGIN OF THIRD PARTY EXPORTS I.E. 41.60% AS AN ARM'S LENGTH PRICE MARGIN AND ACCORDINGLY WORKED OUT AN ADJUSTMENT OF RS.2,15,95,600/- TO THE STATED VALUE OF ASSESSEES IMPUGNED INTERNATIONAL TRANSACTIONS OF E XPORT OF SPARES AND COMPONENTS TO ITS ASSOCIATED ENTERPRISES. THE ADJU STMENT SO DETERMINED BY THE TPO IN HIS ORDER PASSED U/S 92CA(3) DATED 28.10 .2011 HAS FORMED THE BASIS FOR THE ASSESSING OFFICER TO MAKE AN ADDITION OF RS.2,15,95,600/- TO THE RETURNED INCOME VIDE ORDER DATED 20.11.2012 (SUPRA) . 7. THE AFORESAID ACTIONS OF THE TPO ARE SIMILAR TO HIS STAND FOR THE ASSESSMENT YEAR 2006-07. THE ASSESSEE HAD ALSO RAI SED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP), ASSAILING THE D RAFT ASSESSMENT ORDER PROPOSED BY THE ASSESSING OFFICER DATED 28.12.2011 PROPOSING ADJUSTMENT OF RS.2,15,95,600/- TO THE VALUE OF THE INTERNATIONAL TRANSACTIONS. THE OBJECTIONS ITA NO.2583/PN/2012 A.Y. : 2008-09 RAISED BY THE ASSESSEE HAVE BEEN REJECTED BY THE DR P VIDE ITS ORDER PASSED U/S 144C(5) OF THE ACT DATED 05.09.2012. IT WAS AL SO A COMMON POINT BETWEEN THE PARTIES THAT THE OBJECTIONS RAISED BY THE ASSES SEE WERE SIMILAR TO THOSE RAISED BEFORE THE DRP IN THE ASSESSMENT YEAR 2006-0 7. A PERUSAL OF THE ORDER OF THE DRP DATED 05.09.2012 REVEALS THAT THE ASSESSEE COMPANY PRESSED INTO SERVICE THE ORDER OF THE TRIBUNAL IN I TS OWN CASE FOR ASSESSMENT YEAR 2006-07 DATED 23.07.2012 (SUPRA). THE DRP NOT ED THAT SINCE THE DEPARTMENT WAS IN THE PROCESS OF FILING AN APPEAL A GAINST THE ORDER OF THE TRIBUNAL BEFORE THE HONBLE BOMBAY HIGH COURT, THE DRP DID NOT CONSIDER IT FIT TO GIVE DIRECTIONS TO MODIFY THE ORDER OF THE TPO I N LINE WITH THE ORDER OF THE TRIBUNAL DATED 23.07.2012 (SUPRA) FOR THE REASON TH AT THE DIRECTIONS OF THE DRP ARE BINDING UPON THE ASSESSING OFFICER AND IF T HE DRP GAVE DIRECTIONS BY FOLLOWING THE ORDER OF THE TRIBUNAL, THE ASSESSING OFFICER IS BOUND TO FOLLOW IT AND THEREFORE THE ASSESSING OFFICER MAY LOSE THE OP PORTUNITY TO AGITATE THE MATTER IN APPEAL IN THIS YEAR WHILE THE DEPARTMENT WAS IN THE PROCESS OF FILING AN APPEAL BEFORE THE HONBLE HIGH COURT ON THE SAME ISSUE FOR THE EARLIER ASSESSMENT YEAR. BE THAT AS IT MAY, THE ASSESSING OFFICER HAS DETERMINED THE ARM'S LENGTH PRICE OF THE IMPUGNED INTERNATIONAL TR ANSACTIONS BY MAKING AN ADJUSTMENT OF RS.2,15,95,600/- TO THE STATED VALUE IN CONFORMITY WITH THE ORDER OF THE TPO. 8. THE STAND OF THE ASSESSEE HAS BEEN THAT THE TPO ERRED IN REJECTING THE EXTERNAL TNM METHOD ADOPTED BY IT. ACCORDING TO TH E ASSESSEE, THE APPLICATION OF INTERNAL TNM MECHANISM FOR DETERMINI NG THE ARM'S LENGTH PRICE OF IMPUGNED INTERNATIONAL TRANSACTIONS WAS NOT JUST IFIED. ACCORDING TO THE ASSESSEE, HAVING REGARD TO THE NATURE OF TRANSACTIO NS WITH ITS ASSOCIATED ENTERPRISES AND NON-ASSOCIATED ENTERPRISES, THE TWO KIND OF TRANSACTIONS ARE NOT COMPARABLE AND THEREFORE THERE WAS NO CREDIBLE INTERNAL COMPARABLE TRANSACTIONS WHICH COULD BE USED FOR BENCHMARKING T HE IMPUGNED INTERNATIONAL TRANSACTION OF EXPORT OF SPARES AND COMPONENTS TO I TS ASSOCIATED ENTERPRISES. ITA NO.2583/PN/2012 A.Y. : 2008-09 THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 (SUPRA) HAS DEALT WITH THIS ISSUE IN THE FOLLOWING MANNER :- 7. THE ASSESSEE HAS EXPLAINED THE VARIED NATURE OF TRANSACTIONS WHICH ARE COMPRISED IN THE SALES OF SPARES AND COM PONENTS AMOUNTING TO RS 14,62,45,611/-. IT HAS BEEN EXPLAINED THAT THREE CA TEGORIES OF TRANSACTIONS ARE CARRIED OUT IN THE ACTIVITY OF SALE OF SPARES AND COMPONENTS. WE MAY SUMMARIZE THE ACTIVITIES AS FOLLOWS CATEGORY A REPRESENTS SALE OF SPARES BY THE ASSESSEE TO THIRD PARTY DISTRIBUTORS AS WELL AS TO THE AES, WHICH ARE REQUIRED FOR THE PURPOSES OF SERVICING THE VEHICLES SOLD BY THE ASSESSEE COMPANY; CATEGORY B REPRESENTS SOURCING OF COMPON ENTS REQUIRED BY THE OVERSEAS AES FOR MANUFACTURE OF TWO AND THREE-WHEEL ERS; AND CATEGORY C REPRESENTS SOURCING OF COMPONENTS REQUIRED BY THE O VERSEAS AES FOR MANUFACTURE OF FOUR-WHEELERS, NAMELY, NEW QUADRACYC LE POKER. THE POINT SOUGHT TO BE MADE OUT BY THE ASSESSEE IS THAT THE E XPORT TO THIRD PARTIES (I.E. NON-AES) IS COMPRISED OF ONLY CATEGORY A TRANSACT IONS, WHICH HAS YIELDED THE MARGIN OF 56.58%, WHEREAS THE EXPORTS TO ITS AE S COMPRISE OF TRANSACTIONS OF ALL THREE CATEGORIES, I.E. A, B AND C, WHI CH HAS YIELDED THE MARGIN OF 11.63% AND THEREFORE THE TWO ARE INCOMPARABLE. BY R EFERRING TO THE FOLLOWING CHART DEPICTING THE OPERATING MARGINS OF VARIOUS SU B-SEGMENTS OF THE TRANSACTIONS OF THE SALES OF SPARES AND COMPONENTS : PARTICULARS SALES TO NON-AES EXPORT TO AE DOMESTIC PARTIES SPARES BO (SERVICE SPARES) EXPORTS TO THIRD PARTIES SPARES BO (SERVICE SPARES) TOTAL SALES TO NON-AES SPARES- BO (SERVICE SPARES) GLOBAL SOURCING AND NQP(SOURCING ACTIVITIES) TOTAL EXPORTS TO AE SALES (RS) 529461000 15451000 544912000 2186000 138 934000 141120000 NET PROFIT (RS) 75591000 5583000 81174000 877000 13832000 14709000 TOTAL COST (RS) 453870000 9868000 463738000 1309000 125102000 126 411000 PROFIT MARGIN (ON SALES) 14.27% 36.13% 14.90% 40.12% 9.96% 10.40% PROFIT MARGIN (ON COST) 16.65% 56.58% 17.50% 67% 11.05% 11.63% THE ASSESSEE HAS POINTED OUT THAT IN RELATION TO CA TEGORY A TRANSACTIONS, THE OPERATING MARGIN ON EXPORTS TO AES IS 67% AS AGAIN ST 56.58% WITH RESPECT TO THE EXPORT TO THIRD PARTIES (NON-AES) AND THEREFORE ON THIS COUNT ITSELF THE ADJUSTMENT IN QUESTION IS UNTENABLE. 8. ON THE OTHER HAND, THE LEARNED CIT-DEPARTMENTAL REPRESENTATIVE, APPEARING FOR THE REVENUE HAS DEFEN DED THE ACTION OF THE AUTHORITIES BELOW BY POINTING OUT THAT THE SUB-SEGM ENTATION OF THE ACTIVITY WITHIN THE TRANSACTION OF EXPORT OF SPARES AND COMP ONENTS IS NOT CALLED FOR. ACCORDING TO THE REVENUE, ALL THE THREE CATEGORIES OF TRANSACTIONS, NAMELY, A, B AND C CONSTITUTE A SINGULAR ACTIVITY. TH E ENTIRE ACTIVITY IS OF SUPPLY OF SPARES BY THE ASSESSEE TO THIRD PARTY DISTRIBUTORS AND ITS AES. IT IS POINTED OUT THAT THE SPARES BEING SUPPLIED TO THIRD PARTIES AND TO THE AES MAY DIFFER IN ITA NO.2583/PN/2012 A.Y. : 2008-09 THEIR APPLICATIONS AS STATED, BUT SPARES REMAIN SPA RES. THEREFORE, THE SUB- SEGMENTATION CANVASSED BY THE ASSESSEE IN ORDER TO BENCHMARK THE TRANSACTION IS NOT RELEVANT AND HAS BEEN RIGHTLY RE JECTED BY THE INCOME-TAX AUTHORITIES. 9. ON THIS ASPECT, WE HAVE CAREFULLY CONSIDERED THE RIVAL STANDS. IT IS A WELL-SETTLED PROPOSITION THAT WHILE CARRYING O UT THE TRANSFER PRICING STUDY OF AN INTERNATIONAL TRANSACTION, IT IS IMPERATIVE THAT A COMPARISON IS MADE WITH THE SIMILARLY PLACED TRANSACTIONS, AS FAR AS POSSIBLE. IN THE PRESENT CASE, AS NOTED EARLIER, THE ASSESSEE BENCHMARKED ITS INTERNATIONAL TRANSACTION OF EXPORT OF SPARES AND COMPONENTS TO ITS AE ON THE BASIS OF TNM METHOD BY RELYING ON EXTERNAL COMPARABLE COMPANIES. SO, HOWEVER, THE INC OME-TAX AUTHORITIES HAVE APPLIED AN INTERNAL TNMM MECHANISM IN ORDER TO BENCHMARK THE IMPUGNED INTERNATIONAL TRANSACTION. THE TPO ANALYZE D THE PROFITABILITY OF EXPORTS OF SPARES AND COMPONENTS TO AES ON ONE HAND , AND COMPARED IT TO THE PROFITABILITY OF EXPORT OF SPARES AND COMPONENT S MADE BY THE ASSESSEE TO THIRD PARTIES (I.E. NON-AES). AT THE THRESHOLD, THE ASSESSEE HAS ASSAILED THE USE OF INTERNAL TNMM MECHANISM AS INAPPROPRIATE AND HAS POINTED OUT THAT THE USE OF TNMM MECHANISM BASED ON EXTERNAL COMPARA BLE IS MORE APPROPRIATE. INITIALLY, WE DO NOT TAKE UP THIS CONT ROVERSY, WHICH WE SHALL DEAL WITH A LITTLE LATER. HOWEVER, ANOTHER PERTINENT PLE A OF THE ASSESSEE IS TO THE EFFECT THAT EVEN THE INTERNAL TNMM MECHANISM APPLIE D BY THE INCOME-TAX AUTHORITIES IS QUITE INAPPROPRIATE AND, THEREFORE, THE SAME HAS RESULTED IN AN UNJUSTIFIED ADJUSTMENT TO IMPUGNED INTERNATIONAL TR ANSACTION. THIS ASPECT OF THE MATTER IS BEING ADDRESSED AT THIS STAGE. THE AS SESSEE UNDERTAKES THREE CATEGORIES OF TRANSACTIONS IN THE COURSE OF THE SAL E OF SPARES AND COMPONENTS. THE THREE CATEGORIES HAVE BEEN NOTED BY US IN THE E ARLIER PART OF THE ORDER AND TO BRIEFLY RECAPITULATE, THE SAME ARE AS FOLLOWS: C ATEGORY A TRANSACTION REPRESENTS SALE OF SPARES BY THE ASSESSEE TO THIRD PARTY DISTRIBUTORS AS WELL AS TO THE AES OF SUCH SPARES/COMPONENTS WHICH ARE REQU IRED FOR THE PURPOSE OF SERVICING THE VEHICLES SOLD BY THE ASSESSEE COMPANY . CATEGORY B TRANSACTIONS REPRESENT SOURCING OF COMPONENTS REQUI RED BY THE OVERSEAS AES FOR MANUFACTURE OF 2/3 WHEELERS, AND CATEGORY C T RANSACTIONS REPRESENT SOURCING OF COMPONENTS REQUIRED BY THE OVERSEAS AES FOR MANUFACTURE OF 4 WHEELERS, NAMELY, NEW QUADRACYCLE POKER. ON THE BAS IS OF SUBMISSIONS AND MATERIAL PUT-FORTH, IT IS SOUGHT TO BE EXPLAINED TH AT THE CATEGORY B AND CATEGORY C TRANSACTIONS INVOLVE SUPPLY TO AES (SI TUATED IN ITALY) OF SUCH PARTS AND COMPONENTS WHICH ARE USED BY THE AE IN THE MANU FACTURE OF VEHICLES ABROAD. IT IS SOUGHT TO BE MADE OUT THAT THE SOURCE EVALUATION, PRICING AND PROCUREMENT TESTS ARE THE PREROGATIVE OF THE AE AND THAT THE ASSESSEE COMPANY BASED IN INDIA MERELY ASSISTS IN LOGISTIC, CO-ORDINATION AND FACILITATION/SUPPORT SERVICES IN RESPECT OF SOURCIN G OF SUCH COMPONENTS. ON THE OTHER HAND, WITH REGARD TO THE CATEGORY A TRANSAC TIONS, IT INVOLVES SUPPLIES TO THIRD PARTIES AS WELL AS AES OF THE SPARES AND COMP ONENTS WHICH ARE REQUIRED FOR THE PURPOSES OF SERVICING THE VEHICLES MANUFACT URED AND SOLD BY THE ASSESSEE COMPANY. IN THIS CATEGORY, THE SPARES AND COMPONENTS SUPPLIED ARE MANUFACTURED TO THE SPECIFICATIONS PRESCRIBED THE A SSESSEE COMPANY AND AS PER THE DESIGNS, DIES, QUALITY, PACKAGING, ETC., AS MANDATED BY THE ASSESSEE COMPANY. ON THIS BASIS, THE ASSESSEE HAS ATTEMPTED TO POINT OUT THAT THE MARGINS IN CATEGORY A TRANSACTIONS CANNOT BE COMP ARED WITH THE TRANSACTIONS OF CATEGORY B AND C, INASMUCH AS IT INVOLVES FU NCTIONAL AND ECONOMIC DIFFERENCES. IT IS SOUGHT TO BE MADE OUT THAT WITH REGARD TO CATEGORY B AND C TRANSACTIONS, THE ASSESSEE DOES NOT EARN THE KIND O F MARGINS AS IT CAN EARN BY UNDERTAKING TRANSACTIONS OF CATEGORY A. 10. IN OUR CONSIDERED OPINION, THE NET PROFIT MARGI N IN ANY PARTICULAR KIND OF ACTIVITY IS INDEED EFFECTED BY VARIOUS FACT ORS WHICH ARE INDUSTRY-SPECIFIC AND CAN ALSO BE UNIT-SPECIFIC HAVING REGARD TO THE DEGREE OF BUSINESS ITA NO.2583/PN/2012 A.Y. : 2008-09 EXPERIENCE ENJOYED BY AN ENTITY. THE FACTORS WHICH CAN BE INDUSTRY-SPECIFIC, FOR EXAMPLE CAN BE IN THE FIELD OF COMPETITIVENESS, NEW ENTRANTS, PRODUCT DIFFERENTIATION AND OTHER GOVERNMENT REGULATIONS, E TC. IT IS THEREFORE QUITE IMPERATIVE THAT WHILE UNDERTAKING TRANSFER PRICING ANALYSIS ONE MUST EXAMINE THE TRANSACTIONS UNDERTAKEN WITH REGARD TO THE RELE VANT FACTORS EFFECTING SUCH TRANSACTIONS VIS--VIS TRANSACTIONS SOUGHT TO BE CO MPARED. IN THIS CONTEXT, WE MAY NOW APPRECIATE THE DISTINCTION BEING SET-UP BY THE ASSESSEE IN RELATION TO TRANSACTIONS OF CATEGORY B AND C ON ONE HAND AND THE TRANSACTIONS OF CATEGORY A ON THE OTHER. WITH REGARD TO THE TRANS ACTIONS OF CATEGORY B AND C, WHICH IS IN THE REALM OF SOURCING OF COMPONENT S, QUITE CLEARLY THE SAME IS IN THE NATURE OF INDUSTRIAL SUPPLIES, WHICH ARE IN- TURN, USED BY THE BUYER IN MANUFACTURING OF VEHICLES AND THE SERVICES BEING RE NDERED BY ASSESSEE IS MERELY LOGISTIC SERVICE EQUIVALENT. ON THE OTHER HA ND, THE NATURE OF TRANSACTIONS IN CATEGORY A EFFECTUATED BY THE ASS ESSEE TO ITS AE ABROAD AS WELL AS THIRD PARTY DISTRIBUTORS INVOLVE SUPPLY OF SERVICING SPARES AND ARE PURELY IN THE REALM OF AFTER-SALE DISTRIBUTION. THE ASSESSEE WHICH MANUFACTURES VEHICLES AND SELLS THE SAME, ALSO UNDE RTAKES SUPPLY OF SPARES AND COMPONENTS REQUIRED FOR SERVICING OF SUCH VEHIC LES SOLD BY IT. QUITE CLEARLY, THE SUPPLIES SO UNDERTAKEN ARE FROM ALREAD Y FIRMED-UP SOURCES, INASMUCH AS THE ASSESSEE IS THE MANUFACTURER OF VE HICLES IN WHICH SUCH COMPONENTS ARE USED, AND AT THE TIME OF PROCUREMENT FOR MANUFACTURING THE ASSESSEE HAS MANDATED THE DIES, DESIGN, QUALITY, WA RRANTIES, ETC. THUS, SUPPLY OF SPARE-PARTS AND COMPONENTS AS PURELY AFTE R-SALES DISTRIBUTION RESULTS IN HIGHER MARGINS. IN CONTRAST, THE SOURCING OF PRO DUCTS FOR OVERSEAS AE ENTAILING CATEGORY B AND C TRANSACTIONS, THE AS SESSEE HAS VERY LIMITED ROLE TO PLAY, WHICH IS AKIN TO LOGISTICS SUPPORT SERVICE PROVIDER. 11. IN THIS BACKGROUND, WE THEREFORE DEEM IT PROPER TO CONCLUDE THAT EVEN ACCORDING TO THE INTERNAL TNMM MECHANISM SOUGHT TO BE APPLIED, THE COMPARISON OF MARGIN OF TRANSACTIONS OF CATEGOR Y B AND C UNDERTAKEN WITH THE AES IS INCOMPARABLE WITH THE TRANSACTIONS UNDERTAKEN WITH THE THIRD PARTIES (I.E. NON-AES) WHICH ARE PURELY IN THE NATU RE OF CATEGORY A. OSTENSIBLY, THE TRANSACTIONS OF CATEGORY B AND C ARE NOT UNDERTAKEN WITH THIRD PARTIES (I.E. NON-AES). 12. SO, HOWEVER, IN SO FAR AS THE TRANSACTIONS OF C ATEGORY A REPRESENTING EXPORT OF SPARES AND COMPONENTS WHICH ARE REQUIRED FOR THE PURPOSE OF SERVICING OF VEHICLES SOLD BY THE ASSESS EE COMPANY, THE TRANSACTIONS UNDERTAKEN WITH THIRD PARTY DISTRIBUTO RS (I.E. NON-AES) ARE COMPARABLE TO THE TRANSACTION WITH THE AES. ON THIS ASPECT, IT IS EVIDENT ON THE BASIS OF THE TABULATION IN PARA 7 THAT THE PROFIT M ARGIN (ON COST) IN RELATION TO EXPORT TO AES IS 67% AND ON TRANSACTIONS OF EXPORTS TO THIRD PARTY DISTRIBUTORS (I.E. NON-AES) IS 56.58% AND THE SAME CLEARLY DEP ICTS THAT THE TRANSACTION UNDERTAKEN BY THE ASSESSEE OF CATEGORY A WITH ITS AES, NAMELY, EXPORT OF SPARES AND COMPONENTS WHICH ARE REQUIRED FOR THE PU RPOSE OF SERVICING OF VEHICLES SOLD BY THE ASSESSEE HAVE BEEN UNDERTAKEN AT AN ARMS LENGTH PRICE AND THE SAME DOES NOT REQUIRE ANY TRANSFER PRICING ADJUSTMENT AS DONE BY THE INCOME-TAX AUTHORITIES. 9. THE AFORESAID DISCUSSION WOULD REVEAL THAT IN RE LATION TO THE INTERNATIONAL TRANSACTIONS OF EXPORT TO THE ASSOCIA TED ENTERPRISES RELATING TO THE SPARES AND COMPONENTS REQUIRED IN SERVICING OF VEHI CLE MANUFACTURED AND SOLD BY THE ASSESSEE, THE TRIBUNAL FOUND THAT EVEN ON AN APPLICATION OF ITA NO.2583/PN/2012 A.Y. : 2008-09 INTERNAL TNM MECHANISM THE INTERNATIONAL TRANSACTIO NS UNDERTAKEN WITH ASSOCIATED ENTERPRISES WAS AT AN ARM'S LENGTH PRICE . FACTUALLY SPEAKING, IN THE YEAR UNDER CONSIDERATION ALSO, SIMILAR POSITION HOLDS GOOD, AS IS EVIDENT FROM THE TABULATION ENUMERATED BY THE TPO IN PARA 5 OF ITS ORDER. THEREFORE, FOLLOWING THE AFORESAID PRECEDENT, THE ADJUSTMENT C OMPUTED BY THE TPO WITH REGARD TO THE EXPORT TO ASSOCIATED ENTERPRISES OF S PARES AND COMPONENTS REQUIRED FOR THE PURPOSE OF SERVICING OF VEHICLES S OLD BY ASSESSEE IS UNTENABLE, AS THE TRANSACTIONS UNDERTAKEN WITH THIR D-PARTY DISTRIBUTORS ARE COMPARABLE TO THE TRANSACTION WITH THE ASSOCIATED E NTERPRISES. 10. THE ONLY OTHER LEG OF THE TRANSACTION RELATES T O EXPORT OF SPARES AND COMPONENTS WHICH ARE REQUIRED BY THE ASSOCIATED ENT ERPRISES FOR MANUFACTURE OF TWO AND THREE WHEELERS UNDERTAKEN BY THEM AND TH E COMPONENTS WHICH ARE REQUIRED BY THE OVERSEAS ASSOCIATED ENTERPRISES FOR MANUFACTURE OF FOUR WHEELERS, NAMELY, NEW, QUADRACYCLE POKER. FOR THES E TWO CATEGORY OF TRANSACTIONS, THE TRIBUNAL NEGATED THE INVOKING OF INTERNAL TNM MECHANISM BY THE TPO AND INSTEAD REMANDED THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE PLEA SETUP BY THE ASSESSEE. THE DECISION OF THE TRIBUNAL ON THIS ASPECT READS AS UNDER :- 13. NOW, WE ARE LEFT WITH THE TRANSACTIONS OF CATE GORY B AND C WHICH HAVE BEEN UNDERTAKEN BY THE ASSESSEE WITH ITS AE. IN SO FAR AS SUCH TRANSACTIONS ARE CONCERNED, THERE IS NO INTERNAL CO MPARABLE TRANSACTION, INASMUCH AS SUCH LIKE TRANSACTIONS HAVE NOT BEEN CA RRIED OUT WITH NON-AES. THE TRANSACTIONS OF SUCH NATURE INVOLVING SOURCING OF SPARES AND COMPONENTS USED IN THE MANUFACTURE OF VEHICLES UNDERTAKEN BY T HE AE ABROAD HAVE NOT BEEN UNDERTAKEN BY THE ASSESSEE WITH NON-AES. THERE FORE, IN THE ABSENCE OF ANY INTERNAL TRANSACTIONS WITH THIRD PARTIES WITH S IMILAR FUNCTIONS AND ECONOMIC SCENARIO, BENCHMARKING OF TRANSACTIONS OF CATEGORY B AND C UNDERTAKEN WITH AES, CANNOT BE DONE APPROPRIATELY BY INVOKING THE INTERNAL TNMM MECHANISM. IN THIS CONTEXT, THE ASSESSEE POINTED OU T THAT FOR BENCHMARKING THE TRANSACTIONS BETWEEN THE ASSESSEE AND THE AES I N RESPECT OF SUCH ACTIVITIES, THE ASSESSEE HAS UNDERTAKEN COMPARISON WITH OPERATING MARGINS EARNED BY THIRD PARTY SUPPORT SERVICE PROVIDERS IN INDIA AND TABULATION IN THIS REGARD HAS BEEN PLACED IN PAGE 223 OF THE PAPER BOO K NO. II. IT IS SOUGHT TO BE MADE OUT THAT THE MARGINS DECLARED BY THE ASSESS EE ON SUCH ACTIVITY AT 11.05% COMPARE FAVOURABLY WITH THE AVERAGE OPERATIN G MARGINS EARNED BY THIRD PARTY SUPPORT SERVICE PROVIDER COMPANIES IN I NDIA WHICH WORKED OUT TO 5.1%. IN OUR CONSIDERED OPINION, THE AFORESAID PLEA OF THE ASSESSEE IS LIABLE TO BE EXAMINED WITH RESPECT TO ITS FACTUAL ASPECTS. FO R THE STATED PURPOSE, WE ITA NO.2583/PN/2012 A.Y. : 2008-09 THEREFORE REMAND THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER WHO SHALL CARRY OUT THE REQUISITE VERIFICATION EXERCISE AND A FTER BEING SATISFIED, HE SHALL PASS AN APPROPRIATE ORDER IN ACCORDANCE WITH LAW ON THIS ASPECT. 11. IN THE PRESENT YEAR ALSO, FOLLOWING THE AFORESA ID PRECEDENT WE REMAND THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER WHO SHALL CARRY OUT THE REQUISITE VERIFICATION EXERCISE AND AFTER BEING SAT ISFIED, HE SHALL PASS AN APPROPRIATE ORDER ON THIS ASPECT IN ACCORDANCE WITH LAW. 12. IN CONCLUSION, WE THEREFORE, DIRECT THE ASSESSI NG OFFICER TO RE-DETERMINE THE ARM'S LENGTH PRICE OF THE IMPUGNED INTERNATIONA L TRANSACTIONS OF EXPORT OF SPARES AND COMPONENTS ON THE BASIS OF THE DECISION OF THE TRIBUNAL IN THE ASSESSEE OWN CASE FOR ASSESSMENT YEAR 2006-07 (SUPR A) AND WHICH HAS BEEN SUBSEQUENTLY APPLIED IN ASSESSEES OWN CASE FOR ASS ESSMENT YEAR 2007-08 (SUPRA) ALSO BY THE TRIBUNAL. 13. IN SO FAR AS, THE GROUNDS OF APPEAL NO.1, 2 AND 3 ARE CONCERNED, THE SAME ARE ALLOWED, AS ABOVE. 14. IN GROUND OF APPEAL NO.4, WHICH READS AS UNDER :- GROUND NO. 4 - ERRED IN DISALLOWING APPELLANT'S CLAIM OF ADDITIO NAL DEPRECIATION OF RS.18,70,555/- IN RESPECT OF COMPUT ERS INSTALLED IN FACTORY. THE DISPUTE RELATES TO ADDITIONAL DEPRECIATION CLAI MED BY THE ASSESSEE U/S 32(1)(II)(A) OF THE ACT IN RESPECT OF COMPUTERS INSTALLED IN ITS FACTORY AT BARAMATI. 15. IN THIS CONTEXT, IT WAS A COMMON POINT BETWEEN THE PARTIES THAT SIMILAR ISSUE WAS A SUBJECT-MATTER OF CONSIDERATION BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08 WHILE CONSIDER ING APPEAL OF THE ASSESSEE VIDE ITA NO.1614/PN/11 DATED 28.06.2013. THE DEPARTMENTAL REPRESENTATIVE HAS NOT RAISED ANY OBJECTION TO THE ASSERTION BY THE ASSESSEE ITA NO.2583/PN/2012 A.Y. : 2008-09 THAT THE PRECEDENT BY WAY OF THE ORDER OF THE TRIBU NAL DATED 28.06.2013 (SUPRA) ON THIS ASPECT CONTINUES TO HOLD THE FIELD AND HAS NOT BEEN ALTERED BY ANY HIGHER AUTHORITY. AS A RESULT THEREOF, FOLLOWI NG THE PRECEDENT, WE ALLOW ASSESSEES CLAIM OF ADDITIONAL DEPRECIATION OF RS.1 8,70,555/- ON COMPUTERS INSTALLED IN ITS FACTORY. RESULTANTLY, THE ORDER O F THE CIT(A) IS SET ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSEE. THUS, ON GROUND OF APPEAL NO.4 ASSESSEE SUCCEEDS. 16. THE NEXT GROUND IN THIS APPEAL CHALLENGES THE P ENALTY PROCEEDINGS INITIATED U/S 271(1)(C) OF THE ACT, WHICH IS PREMAT URE AND ACCORDINGLY DISMISSED. 17. THE LAST GROUND RELATES TO THE LEVY OF INTEREST U/S 234B, 234C AND 234D OF THE ACT, WHICH IS CONSEQUENTIAL IN NATURE AND DO ES NOT REQUIRE ANY ADJUDICATION. 18. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH JULY, 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 25 TH JULY, 2014. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE DRP, PUNE; 4) THE DR B BENCH, I.T.A.T., PUNE; 5) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T., PUNE