MAHINDRA AUTOMOBILE DISTRIBUTOR P. LTD, MUMBAI V. DCIT RG 2(2), MUMBAI

ITA 2601/MUM/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3475 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2009-2010
• Appeal Filed On: 06-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Avoidance of tax; Revised return
• Section: 92C; 92

Judgement Text

, , , , INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI , . . , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBER AND C.N. PRA SAD,JUDICIAL MEMBER ./I.T.A./2601/MUM/2015, /ASSESSMENT YEAR: 2009-10 MAHINDRA AUTOMOBILES DISTRIBUTOR PRIVATE LIMITED C/O. AUTOMOTIVE SECTOR, MAHINDRA TOWERS, FIRST FLOOR, AKURLI ROAD, KANDIVALI, MUMBAI-400 101. PAN: AAECM 2999 P VS. DCIT, CIRCLE-2(2) AAYAKAR BHAVAN, CHURCHGATE, MUMBAI. ./I.T.A./2618/MUM/2015, /ASSESSMENT YEAR: 2009-10 ADDL. CIT, RANGE-2(2) AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-20 VS. MAHINDRA AUTOMOBILES DISTRIBUTOR PRIVATE LIMITED,MUMBAI-400 101. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI N.K.CHAND-CIT ASSESSEE BY: BHAVIN SHAH / DATE OF HEARING: 20.04.2016 / DATE OF PRONOUNCEMENT: 18.05.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER, DATED 6.2.2015, OF CIT(A)-57 ,MUMBAI, THE ASSESSEE AND THE ASSESSING OFFICER(AO)HAVE FILED CROSS APPEALS F OR THE ABOVE MENTIONED AY.ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF DESI GNING, MANUFACTURING AND MARKETING OF MOTOR VEHICLES, FILED ITS RETURN O F INCOME ON 29.09.2009, DECLARING TOTAL INCOME AT RS.16.21 CRORES. ON 30.3. 2011,IT FILED A REVISED RETURN, DECLARING LOSS OF RS.179.58 CRORES.BEFORE US,THE AU THORISED REPRESENTATIVE (AR)OF THE ASSESSEE STATED THAT ASSESSEE WAS NOT IN TERESTED IN PURSUING GROUND NO.6.HENCE, SAME STANDS DISMISSED. ITA/2601/MUM/2015 ASSESSEES APPEAL : 2. FIRST EFFECTIVE GROUND OF APPEAL(GOA 1-5)IS ABOUT T RANSFER PRICING(TP) ADJUSTMENT OF RS.35.15CRORES.DURING THE ASSESSMENT PROCEEDINGS,THE ASSESSING OFFICER(AO)FOUND THAT ASSESSEE HAD ENTERED INTO INT ERNATIONAL TRANSACTIONS (IT.S)WITH ITS ASSOCIATED ENTERPRISE(AE).HE MADE A REFERENCE TO THE TRANSFER PRICING OFFICER(TPO)FOR DETERMINATION OF ARMS-LENG TH-PRICE(ALP)OF THE TRANSA 2601/15& 2618/15-MAHINDRA AUTOMOBILES 2 -CTIONS REPORTED IN FORM-3CEB. DURING THE TRANSFER PRICING(TP) PROCEEDINGS,THE TPO FOUND THAT THE ASSESSEE WAS A JOINT VENTURE(JV) BETWEEN MAHINDRA & MAHINDRA LTD.(M&M)AND RENAULT S.A.S.,FRANCE,(RF),THAT IT WAS FORMED TO D ESIGN AND BUILD A VEHICLE MANUFACTURING AND ASSEMBLY PLANT/FACILITY AT NASIK WITH AN INSTALLED CAPACITY OF 50,000CARS PER YEAR,THAT IT WAS INCORPORATED ON 2.6 .2005, THAT IT WAS A 51:49 PARTNERSHIP BETWEEN M&M AND RF,THAT COMMERCIAL SALE OF VEHICLE STARTED FROM APRIL 2007,THE JV WAS SET UP FOR MANUFACTURING AND MARKETING LOGAN, A LOW COST FAMILY SEDAN, THAT THE ASSESSEE HAD NET SALES OF RS.591.1 CRORES,THAT TRANSACTION WORTH RS.221 CRORES WERE ENTERED INTO W ITH THE AES,THAT THE PURCHASE FROM THE AE WERE OF RS.154.96 CRORES OUT O F THE TOTAL PURCHASE OF RS. 499 CRORES,THAT THE OPERATING MARGIN WAS ARRIVED AT (-)21.46%(AFTER DEDUCTING THE OPERATING INCOME OF RS.606 CRORES FROM OPERATIN G EXPENDITURE OF RS.736.1 CRORES),THAT THE ASSESSEE HAD IMPORTED SOME COMPONE NTS/SUPPLIES FROM THE AE FOR CARRYING OUT THE MANUFACTURING PROCESS,THAT IT HAD ENTERED INTO CKD PARTS AND COMPONENTS SUPPLY AGREEMENT WITH THE AE ON 28.0 9.2005 TO PURCHASE KNOCKED-DOWN PARTS COMPONENTS AND ACCESSORIES, THAT THE PURCHASE AGREEMENT WAS DECIDED IN THE JV AGREEMENT. IT WAS CLAIMED BEF ORE THE TPO THAT AT THE TIME OF AGREEMENT BOTH THE PARTNERS WERE INDEPENDENT PAR TIES AND THE TERMS AND CONDITIONS OF THE AGREEMENT HAD NOT CHANGED.HOWEVER , THE TPO REJECTED THE CLAIM MADE BY THE ASSESSEE. 3. THE TPO FOUND THAT,DURING THE YEAR UNDER CONSIDERAT ION,THE AE HAD PROCURED 1611 LOGAN VEHICLES FROM THE ASSESSEE,THAT THE PRIC E OF THOSE VEHICLES WAS FINALISED AFTER ROUNDS OF NEGOTIATION BETWEEN THE A SSESSEE AND RF.HE OBSERVED THAT THE ASSESSEE HAD ENTERED INTO TECHNICAL ASSIST ANCE,ENGINEERING AND TRAINING SERVICE AGREEMENT WITH RF VIDE AGREEMENT DT.28.07.2 005, THAT RF HAD DEPUTED ITS SERVICE ENGINEER FOR NASIK PLANT,THAT THE ASSES SEE HAD CHARGED OVERHEADS PLUS A MARK-UP OF 5% ON DIRECT COSTS.HE FURTHER FOUND TH AT THE ASSESSEE HAD SOLD 2601/15& 2618/15-MAHINDRA AUTOMOBILES 3 L90 SPARE PARTS IN INDIA THAT WERE SOURCED FROM R F, THAT THE ASSESSEE HAD RECEIVED COMMISSION ON SALE OF THOSE PARTS FROM THE AE,THAT THE COMMISSION WAS RECEIVED AT A PERCENTAGE ON FOB COST OF THE SPA RE PARTS, THAT THE PERCENTAGE OF COMMISSION AGREED BETWEEN THE PARTIES WAS 5%. IT WAS ALSO FOUND THAT THE ASSESSEE HAD ENTERED INTO A TECHNOLOGY AND LICENCE AGREEMENT WITH RF,THAT AS PER THE SAID AGREEMENT IT WAS REQUIRED TO PAY A ROY ALTY OF 2% ON THE AGGREGATE QUARTERLY SALE OF SPARE PARTS AT EX-FACTORY SUPPLIE R PRICE BEFORE THE EXCISE DUTY OF THE SPARE PARTS MANUFACTURED AND SOLD IN INDIA B Y THE ASSESSEE.THE TPO NOTED THAT THE ASSESSEE HAD AGGREGATED ALL THE ABOV E TRANSACTIONS(EXCEPT PURCHASE OF RAW MATERIAL AND SALARY OF EXPATS)AND H AD BENCH-MARKED ON A WHOLE ENTITY APPLYING TNMM AS THE MOST APPROPRIATE METHO D (MAM)FOR BENCH - MARKING THE IT.S,THAT IT HAD TAKEN SIX COMPARABLE A ND ON THE BASIS OF MULTIPLE YEAR DATA,THAT THE MEAN MARGIN OF SIX COMPANIES WAS ARRIVED AT 3.66%,THAT DATA FOR THE AY.2009-10 WAS NOT AVAILABLE IN RESPECT OF THE COMPARABLES.THE ASSESSEE SUBMITTED UPDATED MARGIN OF 17 COMPANIES W HICH WERE TAKEN AS COMPARABLES WITH RPT FILTER AT 10%.HE DIRECTED THE ASSESSEE TO UPDATE THE MARGIN AND RESUBMIT THE LIST OF COMPANIES AFTER TAK ING RPT FILTER OF 25%.THE SAME WAS SUBMITTED VIDE LETTER DT.8.1.2013 AND IT R EAD AS UNDER : SN COMPARABLES NET SALES TOTAL COST O/P OP/TOTAL SALE (%) 1 ASHOK LEYLAND LTD. 598,107 568,640 29,467 4.93 2. ASIA MOTOR WORKS LTD. 5,574 5,227 346 6.22 3. EICHER MOTORS LTD. 3,774 3,482 292 7.73 4. FORCE MOTORS LTD. 7,730,553,617 8,900,680,759 1,170,127,14 2 -15.14 5. HINDUSTAN MOTORS LTD. 59,118 67,599 8,481 -14.35 6. HONDA SIEL CARS INDIA LTD. 34,982,902 37,466,506 (2,483,604) -7.10 7. MARUTI SUZUKI INDIA LTD. 207,756 195,303 12,453 5.99 8. SONA KOYO STEERING SYSTEMS LTD. 69,590 70,551 (961) -1.38 9. SWARAJ MAZDA LTD. 54,505 52,387 2,118 3.89 10 TATA MOTORS LTD. 25,079 24,834 245 0.98 11. ATUL AUTO LTD. 1,168,820,573 1,179,062,746 (10,242,173) -0.88 12. TVS MOTOR COMPANY LTD. 3,671 3,653 18 0.50 MEAN -0.72 2601/15& 2618/15-MAHINDRA AUTOMOBILES 4 3.1 .AFTER CONSIDERING THE CHART,THE TPO OBSERVED THAT THE MARGIN OF THE COMPAR- ABLES WORKED OUT BY THE ASSESSEE WAS(-)0.72%,THAT S ONA KOYO STEERING SYSTEMS LTD.(SL.NO.8)WAS NOT AN AUTOMOBILE COMPANY AND WAS DEALING ONLY IN CERTAIN PARTS OF AUTOMOBILES, THAT IT WAS NOT A CORRECT COM PARABLE,THAT THE MARGIN OF BALANCE 11 COMPANIES,FINALLY SELECTED BY THE ASSES SEE, CAME TO (-) 0.66%. THE ASSESSEE WAS ASKED THAT SINCE THE ITS MARGIN WAS ( -)21.46% AND THE MARGIN OF COMPARABLES WAS (-)0.66%WHY ADJUSTMENT SHOULD AS PE R THE PROVISIONS OF SECTION 92 OF ACT NOT BE MADE.THE ASSESSEE FILED A N ELABORATE EXPLANATION IN THAT REGARD AND STATED THAT AFTER MAKING ADJUSTMENT THE MARGIN OF THE ASSESSEE WAS BETTER THAN THE COMPARABLES.THE ASSESSEE MADE SUBMISSION FOR GIVING FOLLOWING ADJUSTMENTS : PARTICULARS PBIT (BEFORE ADJUSTMENT) (130.1) -21.47% TOTAL CAPACITY UTILISATION 29.1 (101.0) -16.66% HOMOLOGATION EXPENSES 1.8 ADVERTISEMENT AND BRAND PROMOTION EXPENSES 41.66 43.5 (57.5) -9.49% COMPENSATION FOR SHORTFALL IN MANUFACTURING 22.3 ABNORMAL EXPENDITURE ON ACCOUNT OF EXCHANGE FLUCTUA TIONS 40.3 62.6 5.1 0.85% EXCEPTIONAL WARRANTY EXPENSES 6.7 CHANGE IN EXCISE DUTY 6.5 13.2 18.3 3.02% IT WAS SUBMITTED BY THE ASSESSEE THAT IF THE ADJUS TMENTS WERE TAKEN INTO CONSID - ERATION,THE REVISED OPERATING MARGIN OF THE ASSESSE E WOULD BE 3.02%, THAT THE OPERATING MARGIN OF THE COMPARABLES WAS (-)0.66%, T HAT THE IT.S WERE AT ARMS LENGTH . REGARDING THE ADJUSTMENT ON CAPACITY UTILISATION TH E ASSESSEE SUBMITTED THAT THE MANUFACTURING ACTIVITY WAS HIGHLY CAPITAL INTENSIVE AND REQUIRED HIGH DEGREE OF CAPACITY UTILISATION TO ACHIEVE A HIGH DEGREE OF PR OFITABILITY,THAT IN THE CASE UNDER CONSIDERATION CAPACITY UTILISATION WAS REQUIR ED TO BE MADE,THAT IT STARTED 2601/15& 2618/15-MAHINDRA AUTOMOBILES 5 ITS COMMERCIAL PRODUCTION IN THE AY 2008-09 ONLY, T HAT THE YEAR UNDER APPEAL WAS SECOND YEAR OF SALE, THAT THE INSTALLED CAPACIT Y FOR ASSEMBLY PLANT WAS 50000 UNITS PER ANNUM,THAT IT WAS ABLE TO PRODUCE 1 4404 UNITS (28.81%) AGAINST 50000 UNITS,THAT THERE WAS SHARP DECLINE IN PRODUCT ION.THE TPO NOTED THE CAPACITY UTILISATION AND ASKED THE ASSESSEE TO FIND OUT UTILISATION OF COMPARABLES WHICH WERE FOUND TO BE AT 46.07%. THE ASSESSEE WOR KED OUT UNDER UTILISATION TO THE TUNE OF 29.3% IN FOLLOWING MANNER: PARTICULARS AMOUNT IN CRORES FIXED COSTS (A) 75.10 CAPACITY UTILISATION OF THE APPELLANT (B) 28.81% INDUSTRY UTILISATION RATE (C) 47% COST ATTRIBUTABLE TO UTILSATION (D) ASSESSEE( (A) * (B))/(C) 45.98 ADJUSTMENT FOR UNDER UTILIZED CAPACITY (E)ASSESSEE( A)-(D) 29.13 THE TPO WAS OF THE OPINION THAT THERE WERE CERTAIN COST ITEMS WHICH WERE IN THE NATURE OF FIXED COSTS,THAT SAME AMOUNTED TO 50 CROR ES.HE REWORKED THE CAPACITY UTILISATION ON THE BASIS OF FIXED COST OF RS.50 CRO RES AND MADE CERTAIN ADJUST - MENTS.HE ALLOWED ADJUSTMENT OF RS.19.36 CRORES WHIL E WORKING OUT OPERATING PROFITS.THE WORKING OF TPO READ AS UNDER : PARTICULARS AMOUNT FIXED COST(A) 50.00 CAPACITY UTILISATION OF THE APPELLANT (B) 28.81% INDUSTRY UTILISATION RATE (C) 47% COST ATTRIBUTABLE TO UTILISATION(D)ASSESSEE{(A) *(B )} /(C) 30.64 ADJUSTMENT FOR UNDERUTILIZED CAPACITY (E)ASSESSEE (A)-(D) 19.36 THE ASSESSEE SOUGHT TWO ADJUSTMENTS ON START UP COS T NAMELY HOMOLOGATION EXPENSES AND SALES AND MARKETING EXPENSES.THE TPO H ELD THAT THE HOMOLOGA - TION EXPENSES WERE EXTRAORDINARY EXPENSES WHICH WER E NOT THERE IN THE CASE OF COMPARABLES,THAT IT HAD INCLUDED SALE AND DISTRIBU TION COST,ADVERTISETMENT, SALES PROMOTION ETC.IN THE MARKETING COSTS,THAT IN THE OT HER COMPARABLES ONLY ADVERTI - SEMENT AND SALES PROMOTION COST WAS CONSIDERED,THAT OTHER COMPANIES HAD NOT INCLUDED DISTRIBUTION COST,THAT THE CLAIM OF THE AS SESSEE ABOUT INCURRING EXTRA 2601/15& 2618/15-MAHINDRA AUTOMOBILES 6 ORDINARY EXPENSES IN THE BAD YEAR OF THE AUTOMOBILE INDUSTRY WAS FACTUALLY INCORRECT.FINALLY,HE HELD THAT ADJUSTMENT CLAIMED B Y ASSESSEE ON ACCOUNT OF HIGHER ADVERTISEMENT AND MARKETING COST WAS NOT ALL OWABLE.HE ALLOWED SOME OTHER ADJUSTMENT AND RE-WORKED THE OPERATING MARGIN .HE FINALLY HELD THAT OPERATING INCOME OF THE ASSESSEE WAS RS.605.9 CRORE S,THAT AFTER MAKING THE ADJUSTMENTS,THE OPERATING MARGIN OF THE ASSESSEE WA S (-) 6.46%,THAT THE COMPA - RABLE COMPANIESMARGIN WAS(-)0.66%.HE,PROPOSED AN A DJUSTMENT OF RS.35.15 CRORES. 4. AGGRIEVED BY THE ORDER OF THE TPO/AO,THE ASSESSEE P REFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HI M IT WAS ARGUED THAT IT HAD CLAIMED ECONOMIC ADJUSTMENT IN RESPECT OF VARIOUS I TEMS OF EXPENDITURE,THAT THE TPO HAD REJECTED THE CLAIM FOR ADJUSTMENT OF UNDER CAPACITY UTILISATION (UCU) ABNORMAL SALES AND MARKETING AND CHANGE IN EXCISE D UTY,THAT THE COST PERTAINING TO UCU INCLUDED DEPRECIATION,PERSONNEL COST,OTHER O PERATING EXPENSES, WARE - HOUSE CHARGES,TRAVELLING EXPENSES,INSURANCE,THAT TH E COST OF RESOURCES MAINTAIN - ED ITS EXISTENCE,THAT THE OTHER OPERATING EXPENSES AND PERSONNEL EXPENSES WERE FIXED IN NATURE, THAT SUCH EXPENSES WERE CONSIDERED AS EXTRA ORDINARY EXPENSES, THAT AVERAGE ADVERTISEMENT AND SELLING EXPENSES AS A PERCENTAGE OF NET SALE OF THE COMPARABLE COMPANIES WAS3.75%,THAT THE ADVERTIS EMENT AND SELLING EXPENSES OF THE ASSESSEE AS A PERCENTAGE OF NET SA LE FOR SAME PERIOD WAS 7%, THAT UCU ON ACCOUNT OF FIXED EXPENDITURE WAS ON PRO DUCTION SIDE,THAT THE SELLING AND MARKETING EXPENDITURE WERE ON THE SALE SIDE, THAT THERE WAS NO NEXUS BETWEEN ALLOWANCE OF UCU AND DISALLOWANCE OF ABNORM AL SALES AND MARKETING EXPENSES, THAT THE TPO HAD NOT ALLOWED UCU ON EXPEN DITURE OTHER THAN DEPRECIATION, THAT THERE WAS NO DOUBLE ADJUSTMENT, THAT IN THE RELEVANT FY THERE WAS REDUCTION IN EXCISE DUTY, THAT IT HAD TO COMPEN SATE THE DEALER FOR SUCH REDUCTION,THAT IF THE RELIEF WAS GRANTED ON ABNORMA L SELLING AND MARKETING EXPENSES IT WOULD FALL UNDER PROVISO TO 92C (2) I.E . WITHIN 5% OF TOLERANCE 2601/15& 2618/15-MAHINDRA AUTOMOBILES 7 LIMIT. 4.1. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D ORDER OF THE TPO/AO, THE FAA HELD THAT THE TPO HAD ALLOWED ADJUSTMENT OF RS.29.36 CRORES FOR CUC AFTER COMPARING THE SAME WITH THE COMPARABLE COMPAN IES,THAT THE PERSONNEL COST AND VARIABLE COST WERE NOT TREATED AS FIXED CO ST, THAT THE ASSESSEE WOULD ALWAYS DECREASE/INCREASE SUCH COST DEPENDING UPON T HE MARKET POSITION, THAT OPERATING EXPENSES LIKE TRAVELING EXPENSES,LEGAL-PR OFESSIONAL CHARGES WERE NOT FIXED COST,THAT THE TPO HAD RIGHTLY DISALLOWED SUCH EXPENSES WITH REGARD TO ADJUSTMENT ON ACCOUNT OF ABNORMAL SELLING AND MARKE TING EXPENSES THE FAA HELD THAT THE ASSESSEE HAD NOT REBUTTED THE OBSERV ATIONS OF THE TPO .FINALLY, HE UPHELD THE ORDER OF THE TPO /AO. 5. DURING THE COURSE OF HEARING BEFORE US,THE AR STATE D THAT NO TP ADJUSTMENT COULD BE MADE WHERE THERE WAS A JV ARRANGEMENT,THAT TP ADJUSTMENT SHOULD BE RESTRICTED ONLY TO RELATED PARTY TRANSACTIONS,THAT BOTH THE CONTENTIONS WERE NOT ADJUDICATED UPON BY THE FAA.THE ASSESSEE FILED A FR ESH WORKING WHEREIN IT CLAIMED THAT IF THE TRANSFER PRICING ADJUSTMENTS WE RE RESTRICTED TO ONLY TRANSACTION WITH RELATED PARTY IT WOULD RESULT IN R ESTRICTING THE ADJUSTMENTS TO RS.231.53 CRORES.HE FURTHER SUBMITTED THAT THE TPO HAD ALLOWED ECONOMIC ADJUSTMENT ON ACCOUNT OF UCU ON FIXED COST-DEPRECIA TION ON TANGIBLE AND INTANGIBLE ASSETS,THAT THE TPO HAD NOT ALLOWED UCU ON PERSONAL COST AND OTHER OPERATING EXPENSES,THAT THE ASSESSEE HAD MADE A CLE AR SUBMISSION BEFORE THE TPO AS TO HOW THE SAID EXPENDITURE WERE FIXED IN NA TURE AND THEREFORE,QUALIFY FOR UCU,THAT THE TPO AS WELL AS THE FAA WITHOUT ANY DISCUSSION REJECTED THE SUBMISSION MADE BY THE ASSESSEE,THAT ISSUE WAS NOT DECIDED ON MERITS.WITH REGARD TO THE ECONOMIC ADJUSTMENT ON ACCOUNT OF ABN ORMAL SALES AND MARKETING THE ASSESSEE SUBMITTED THAT SALES AND MARKETING EXP ENDITURE INCURRED BY THE ASSESSEE WERE ABNORMAL IN NATURE,THAT SAME SHOULD B E ALLOWED.FINALLY,THE AR 2601/15& 2618/15-MAHINDRA AUTOMOBILES 8 ARGUED THAT ONCE THE ASSESSEE WAS GRANTED ECONOMIC ADJUSTMENT ON ACCOUNT OF ABNORMAL SALES AND MARKETING EXPENSES,THE PRICE CHA RGED BY IT WOULD BE AT ARMS' LENGTH,THAT EVEN WHERE THE ASSESSEE WAS GRANT ED RELIEF OF RS.2.53 CRORES (RS.235.28 CRORES - RS. 221.66 CRORES), PRICE CHARG E BY IT WOULD FALL WITHIN PROVISO TO SECTION 92C (2) I.E. WITHIN 5% +/- TOLER ANCE LIMIT. HE RELIED UPON THE ORDER OF J.M.FINANCIAL INSTITUTIONAL SECURITIES LTD .(ITA/ 7455/M/2011).HE ALSO RELIED UPON CASES OF THYSSENKRUPP INDUSTRIES INDIA PVT. LTD.(ITA 2201 OF 2013, DT.2.12.2015),RATILAL BECHARLAL & SONS(237TAXMANN 7 1).WITH REGARD TO UCU IT WAS STATED THAT OPERATING EXPENSES AS WELL AS PERSO NAL EXPENSES WERE GENERALLY FIXED IN NATURE,THAT THEY WOULD NOT CHANGE AS PER T HE SALES VOLUME,THAT SUCH EXPENSES WERE CONSIDERED IN THE NATURE OF EXTRA ORD INARY EXPENSES.HE RELIED UPON THE CASE OF M/S.FIAT INDIA PVT.LTD.(2010-TII-3 0-ITAT-MUM-TP)AND STATED THAT THE TRIBUNAL HAD ALLOWED AN ECONOMIC AD JUSTMENT FOR HIGH SALARY COST,THAT SALARY LEVEL WOULD REMAIN MORE OR LESS CO NSISTENT IRRESPECTIVE OF LEVEL OF PRODUCTION, IN CASE OF UCU,THAT ADJUSTMENT ON A CCOUNT OF OTHER FIXED OVER - HEADS SUCH AS EXPENSES,TRAVELLING /CONVEYANCE WERE TO BE ALLOWED, THAT SAME WERE NECESSARY TO OFFSET THE EXCESS COST INCURRED B Y THE ASSESSEE.THE DR ARGUED THAT THE TPO HAD ALREADY ALLOWED THE ALLOWABLE ECON OMIC ADJUSTMENTS WHILE PASSING THE ORDER,THAT SALARY AND WAGES WERE RIGHTL Y EXCLUDED BY THE TPO FOR MAKING ADJUSTMENTS,THAT UCU FACTOR WAS CONSIDERED B Y THE FAA ALSO,THAT ADJUSTMENTS COULD BE MADE EVEN IN THE CASE OF A JV. HE RELIED UPON THE CASES OF METRO TUNNELLING GROUP(154 ITD 774).THE DR DURING T HE COURSE OF HEARING BROUGHT IN THE CONCEPT OF AMP EXPENSES, WHERE THE I NDIAN COMPANY INCURS ABNORMAL ADVERTISEMENT, MARKETING AND PROMOTION(AMP ) EXPENDITURE WHICH RESULTS INTO BRAND BUILDING FOR THE AE.HE ARGUED TH AT THE ASSESSEE SHOULD RECOVERED THE SUCH EXCESS AMP FROM THE AE AT A MARK -UP. 6 .WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL BEFORE US.FIRST OF ALL WE WOULD LIKE TO CONSIDER THE CASES RELIED U PON BY THE BOTH SIDES. IN THE 2601/15& 2618/15-MAHINDRA AUTOMOBILES 9 MATTER OF J.M.FINANCIAL INSTITUTIONAL SECURITIES LT D.(SUPRA)THE TRIBUNAL HAD RESTORED BACK THE ISSUE TO THE FILE OF THE AO FOR D ECIDING THE ISSUE AS TO WHETHER IN CASE OF A JV CAN TP ADJUSTMENTS BE MADE. IN THE CASE OF METRO TUNNELLING GROUP(SUPRA), THE TRIBUNAL HAD HELD THAT IN TRANSFE R PRICING STUDY,TRANSACTION OF REIMBURSEMENT OF HEAD OFFICE OVERHEADS BY THE ASSES SEE-JV TO FOREIGN JV MEMBERS WOULD BE BENCHMARKED WITHIN EXTERNAL COMPAR ABLE,THAT THE AUDITOR CERTIFICATE SPELLING OUT HEAD OFFICE OVERHEADS AS A PERCENTAGE OF REVENUE WOULD NOT SATISFY TEST OF TP STUDY.THE TRIBUNAL HAD RESTO RED BACK THE MATTER TO THE FILE OF THE TPO.IN THE CASE OF FIAT INDIA PRIVATE LTD.(S UPRA) THE TRIBUNAL HAS DEALT WITH THE ISSUE OF SALARY COST,OTHER FIXED OVERHEADS ,HIGHER INCIDENCE OF CHANGE IN EXCISE DUTY RATES ETC.,WHILE DECIDING THE APPEAL.AL L THESE CASES ARE RELEVANT TO DECIDE THE VARIOUS ISSUES RAISED BY THE ASSESSEE. 6.1. WE FIND THAT THE FAA HAD NOT ADJUDICATED TWO GROUND S RAISED BY THE ASSESSEE AND HAD NOT DEALT WITH THE ARGUMENTS TAKEN BY THE ASSESSEE WITH REGARD TO ECONOMIC ADJUSTMENTS.A REASONED ORDER WAS NOT PA SSED BY THE TPO OR THE FAA.IN THESE CIRCUMSTANCES,WE ARE OF THE OPINION TH AT THE MATTER NEEDS FURTHER VERIFICATION.THEREFORE,IN THE INTEREST OF JUSTICE W E RESTORE BACK THE ISSUE OF TP ADJUSTMENTS TO THE FILE OF THE FAA FOR FRESH ADJUDI CATION.HE WOULD DECIDE THE ISSUE AFTER AFFORDING A REASONABLE OPPORTUNITY OF H EARING TO THE ASSESSEE. 6.2. BEFORE DEPARTING,WE WOULD LIKE TO MENTION THAT IN O UR HUMBLE OPINION,THE TPO WAS NOT JUSTIFIED IN MAKING ADJUSTMENT TO THE E NTIRE SEGMENT OF MANUFACTU -RING ACTIVITY AND NOT RESTRICTING THE SAME TO THE ITS.WE FIND THAT IN THE CASES OF TARA JEWELS EXPORTS PVT. LTD.(ITA NO. 1814 OF 2013 ) AND THYSSEN KRUPP INDUSTRIES INDIA PVT.LTD.(SUPRA),THE HONBLE BOMBAY HIGH COURT HAS HELD THAT FOR MAKING ADJUSTMENT AS PER THE PROVISIONS OF CHAP TER X OF THE ACT TRANSACTION WITH AES OF AN ASSESSEE HAD TO BE CONSIDERED. WE WO ULD LIKE TO REPRODUCE THE RELEVANT PORTION OF THE JUDGMENT OF THYSSEN KRUPP I NDUSTRIES INDIA PVT. LTD. (SUPRA)AND SAME READS AS UNDER: 2601/15& 2618/15-MAHINDRA AUTOMOBILES 10 WE FIND THAT IN TERMS OF CHAPTER X OF THE ACT,THE DETERMINATION OF THE CONSIDERATION IS TO BE DONE ONLY WITH REGARD TO INCOME ARISING FR OM INTERNATIONAL TRANSACTIONS ON DETERMINATION OF ALP.THE ADJUSTMENT WHICH IS MANDAT ED IS ONLY IN RESPECT OF INTERNATIONAL TRANSACTION AND NOT TRANSACTIONS ENTE RED INTO BY ASSESSEE WITH INDEPENDENT UNRELATED THIRD PARTIES.THIS IS PARTICU LARLY SO AS THERE IS NO ISSUE OF AVOIDANCE OF TAX REQUIRING ADJUSTMENT IN THE VALUAT ION IN RESPECT OF TRANSACTIONS ENTERED INTO WITH INDEPENDENT THIRD PARTIES.THE ADJ USTMENT AS PROPOSED BY THE REVENUE IF ALLOWED WOULD RESULT IN INCREASING THE P ROFIT IN RESPECT OF TRANSACTIONS ENTERED INTO WITH NON-AE.THE ADJUSTMENT IS BEYOND T HE SCOPE AND AMBIT OF CHAPTER X OF THE ACT. RESPECTFULLY,FOLLOWING THE ABOVE JUDGMENTS,WE HOLD THAT WHILE INVOKING THE PROVISIONS OF CHAPTER X OF THE ACT,THE TPO SHOULD H AVE RESTRICTED ADJUSTMENTS TO THE IT.S. ONLY. 7. GROUND NO.7 IS ABOUT PROVISIONS OF PRODUCT WARRANTY OF RS.13.92 CRORES. THE AR STATED THAT IDENTICAL ISSUE WAS SENT BACK TO THE FILE OF THE AO BY THE TRIBUNAL IN ASSESSEES OWN CASE,WHILE DECIDING THE APPEAL FO R AY.2008-09.DR LEFT THE ISSUE TO THE DISCRETION OF THE BENCH.WE FIND THAT W HILE DECIDING THE APPEAL FOR THE EARLIER AY.,THE TRIBUNAL HAD SENT BACK THE MATT ER TO THE FILE OF THE AO FOLLOWING THE JUDGMENT OF ROTORK CONTROLS INDIA PVT .LTD.(314 ITR 62)OF THE HONBLE APEX COURT. RESPECTFULLY FOLLOWING THE ABOVE,THE ISSUE IS RESTO RED BACK TO THE FILE OF AO FOR FRESH ADJUDICATION. GR.NO.7 IS PARTLY ALLOWED. 8. NEXT GROUND DEALS WITH DEDUCTION FOR PROVISION FOR WARRANTY MADE IN EARLIER YEAR AND NOT REVERSED IN THE YEAR UNDER CONSIDERATI ON. DURING THE COURSE OF HEARING BEFORE US,THE AR STATE D THAT THE AO SHOULD BE DIRECTED TO ALLOW THE DEDUCTION OF ACTUAL EXPENDITU RE INCURRED.THE DR DID NOT OBJECT TO THE SAID PROPOSAL.WE DIRECT THE AO TO MAK E VERIFICATION AND ALLOW THE CLAIM.GROUND NO.8 IS DECIDED IN FAVOUR OF THE ASSES SEE,IN PART. 9. LAST GROUND DEALS WITH SERVICE COUPON COMMISSION OF RS.2.27 CRORES.THE 2601/15& 2618/15-MAHINDRA AUTOMOBILES 11 AO HAD INVOKED THE PROVISIONS OF SECTION 40(A)(IA) R.W.S.194H/194C OF THE ACT. THE AR STATED THAT THE TRIBUNAL HAD RESTORED BACK T HE IDENTICAL ISSUE TO THE FILE OF AO,WHILE DECIDING APPEAL FOR THE EARLIER AY.DR L EFT THE ISSUE TO THE DISCRETION OF THE BENCH.WE FIND THAT WHILE DECIDING THE APPEAL FOR THE EARLIER AY.,THE TRIBUNAL HAS DEALT THE ISSUE AS UNDER :- 5.ONCE OF THE ASSESSEE RELATES TO DISALLOWANCE OF E XPENDITURE BY WAY OF PAYMENT TO DEALERS AGAINST SERVICE COUPONS BY INVOKING PROVISI ONS OF SECTION 40 (A) (IA) OF THE ACT,REJECTING THE CONTENTION OF THE ASSESSEE THAT T HERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE.THE AO DISALLOWED THE AMOUNT BY OBSERVING THAT SAME IS IN THE NATURE OF PAYMENT TO CONTRACTOR FOR WORK ASSIGNED BY THE ASSE SSEE COMPANY TO THE DEALER AND THEREFORE, THE SAME IS COVERED UNDER SECTION 40(A)( IA).THE CIT (A) CONFIRMED THE ACTION OF THE AO BY FOLLOWING THE DECISION FOR THE ASSESSMENT YEAR 2007-08. 6. WE FOUND THAT TRIBUNAL IN ASSESSEES OWN CASE FO R THE ASSESSMENT YEAR 2007-08, WIDE ORDER DATED 86 2012, IN ITA NUMBER 7999/NUM/20 11 HAS DECIDED THE ISSUE, WHEREIN THE TRIBUNAL HAD HELD AS UNDER: XXXXXXXXXXX X THE FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER C ONSIDERATION ARE SAME. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE RESTORE THE MATTER BACK TO THE FILE OF THE AO FOR DECIDING A FR ESH IN TERMS OF DIRECTION GIVEN BY THE TRIBUNAL IN ITS ORDER DATED 8-6-2012. RESPECTFULLY,FOLLOWING THE ABOVE,MATTER IS RESTORED BACK TO FILE OF AO.GROUND NO.9,RAISED BY THE ASSESSEE IS ALLOWED,IN PART. ITA NO.2618/MUM/2015: (REVENUES APPEAL)(09-10): SOLITARY GROUND OF APPEAL,RAISED BY THE AO,IS ABOUT DEALERS INCENTIVES. REPRESENTATIVES OF BOTH THE SIDES AGREED THAT THE I DENTICAL ISSUES WAS SENT BACK TO THE FILE OF THE AO BY THE TRIBUNAL WHILE ADJUDIC ATING THE EARLIER YEARS APPEAL.FOLLOWING THE SAME,WE RESTORE BACK THE MATTE R TO THE FILE OF THE AO FOR FRESH ADJUDICATION. GROUND RAISED BY THE AO IS PART LY ALLOWED. AS A RESULT,APPEAL FILED BY THE ASSESSE AND THE AO STAND PARTLY ALLOWED. . ORDER PRONOUNCED IN TH E OPEN COURT ON 18 TH MAY, 2016. 18 TH , 2016 SD/- SD/- ( . . / C.N. PRASAD ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 18.05.2016. JV.SR.PS. 2601/15& 2618/15-MAHINDRA AUTOMOBILES 12 / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR K BENCH, ITAT, MUMBAI / , , . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.