MagnaSteyr India Pvt. Ltd., Pune V. ACIT, Circle-6, Pune

ITA 297/PUN/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 0765 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 06-08-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 30-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Assessee Lawyers: VISPI T PATEL; SURESH DHOOT
• Keywords: Business income; Transfer pricing; International transaction
• Section: 92C; 143(3); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , . . , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM . / ITA NO. 297 /PN/201 3 / ASSESSMENT YEAR : 200 8 - 0 9 MAGNASTEYR INDIA PVT. LTD., 1 ST FLOOR, KAPIL ZENITH, SR. NO.55, HISSA NO.1, BAVDHAN KHURD, PUNE 4 11021 . / APPELLANT PAN: AA FCS3693H VS. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 6 , PUNE . / RESPONDENT / APPELLANT BY : S/SHRI VISPI T. PATEL AND SURESH DHOOT / RESPOND ENT BY : SHRI S.K. RASTOGI / DATE OF HEARING : 1 5 .0 9 .2015 / DATE OF PRONOUNCEMENT: 14 . 1 2 .2015 / ORDER PER SUSHMA CHOWLA, JM : THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF A CIT , CIRCLE - 6 , PUNE , DATED 12 .0 9 .201 2 RELATING TO ASSESSMENT YEAR 20 0 8 - 0 9 PASSED AGAINST ORDER UNDER SECTION 144C(13) R.W.S. 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) . 2 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : - 1 . THE TRANSFER PRICING PROCEEDINGS INITIATED BY THE AO UNDER SECTION 92CA( 1 ) 1 . THE TRANSFER PRICING PROCEEDINGS INITIATED BY THE AO UNDER SECTION 92CA( 1 ) OF THE ACT ARE WITHOUT ANY JURISDICTION AND OUGHT TO BE QUASHED. 2. THE LEARNED AO IN PURSUANCE OF THE DIRECTION GIVEN BY THE LEARNED DRP ERRED I N CONFIRMING THE ADDITION OF INR 4,93,89 , 573 BEING UPWARD ADJUSTMENTS MADE BY THE TRANSFER PRICING OFFICER (TPO) WHILE DETERMINING THE ARM ' S LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH ITS ASSOCIATED ENTERPRISE WITH REGARD TO PROVISION OF ENGINEERING DESIGN SERVICES AS PER THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT . 3. THE LEARNED DRP ERRED IN NOT DIRECTING THE AO I TPO TO APPLY THE COMPARABLE UNCONTROLLED PRICE METHOD AS THE MOST APPROPRIATE METHOD. 4. WITHOUT PREJUDICE TO THE ABOVE , THE L EARNED DRP ERRED IN NOT ' DE L ETING THE 4. WITHOUT PREJUDICE TO THE ABOVE , THE L EARNED DRP ERRED IN NOT ' DE L ETING THE ADJUSTMENT WHICH WAS MADE BY THE AO I TPO BY APPLYING THE TRANSACTIONAL NET MARGIN METHODOLOGY CTNMM') ON AN ARBITRARY BASIS I . E.: A. BY NOT DISCLOSING THE SEARC H PROCESS (IF A N Y) CARRIED OUT I N TH I S REGARD. B. BY SELECTING THE CO M PANIES ENGAGED IN INFORMATION TECHNOLOGY ENABLED SERV I CES (ITES ' ) WHICH ARE NOT FUNCT I ONAL L Y COMPARABLE TO THE BUSINESS OF THE ASSESSEE . 5. THE LEARNED DRP ERRED IN NOT DIRECTING THE AO /T PO TO CONSIDER THE APPELLANT'S CLAIM FOR ADJUSTMENT OF EXTRA - ORDINARY COST IN RELATION TO UNDERUTILIZATION OF CAPACITY , ETC . WHILE COMPUTING THE OPERATING MARGIN OF THE APPELLANT DERIVED FROM THE INTERNATIONAL TRANSACTIONS. 6. THE LEARNED DRP ERRED IN NOT DIRECTING THE AO /T PO TO CONSIDER THE SEGMENTAL ACCOUNTS AS SUBMITTED BY THE APPELLANT IN RELATION TO ITS TRANSACTION WITH AE AS WELL AS NON - AES. 7. WITHOUT PREJUDICE TO THE ABOVE , THE LEARNED DRP, ERRED IN NOT DIRECTING THE AO / TPO TO CONSIDER THE INTERNAL PROFITABILITY COMPARISON DATA SUBMITTED BY THE APPELLANT . 8. WITHOUT PREJUDICE TO THE ABOVE , THE LEARNED DRP ERRED IN NOT DIRECTING THE AO /T PO TO RESTRICT THE TRANSFER PRICING ADJUSTMENT ONLY TO THE INTERNATIONAL TRANSACTIONS. 9. THE DRP ERRED IN NOT DIRECTING THE AO / TPO TO GRANT THE RELIEF AS PROVIDED IN 9. THE DRP ERRED IN NOT DIRECTING THE AO / TPO TO GRANT THE RELIEF AS PROVIDED IN PROVISO TO SECTION 92C(2) OF THE ACT . 10 . EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITHOUT PREJUDICE TO THE OTHER . 11. THE APPELLANT RESERVES THE RIGHT TO ADD , ALTER OR AMEND TO THE ABOVE GROUNDS OF OBJECTION. 3. THE ISSUE RAISED IN THE PRESENT APPEAL IS AGAINST THE ADDITION OF RS.4,93,89,573/ - BEING ADJUSTMENT MADE ON ACCOUNT OF TRANSFER PRICING PROVISION 3 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. UNDER SECTION 92CA(3) OF THE ACT. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN THIS REGARD ARE GROUNDS OF APPEAL NO.2 TO 9. 4. THE ISSUE VIDE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE AGAINST INITIATION OF PROCEEDINGS BEING WITHOUT ANY JURISDICTION, WAS NOT PRESSED AND THE SAME IS DISMISSED AS NOT PRESSED. 5. BRIEFLY, IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE HAD FILED RETURN OF INCOME DECLARING TOTAL LOSS OF RS. 5,85,74,807/ - . THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES AT RS. 5,53,58,003/ - . THE ASSESSING OFFICER MADE A REFERENCE UNDER SECTION 92CA(1) OF THE ACT TO THE TRANSFER PRICING OFFICER (IN SH ORT TPO) AFTER OBTAINING THE STATUTORY APPROVALS FROM THE CIT. THE TPO ISSUED NOTICE TO THE ASSESSEE REQUIRING THE ASSESSEE TO FILE DETAILS / EXPLANATION WITH REGARD TO COMPUTATION OF ARM'S LENGTH PRICE OF ITS INTERNATIONAL TRANSACTIONS. THE ASSESSEE COMPUTATION OF ARM'S LENGTH PRICE OF ITS INTERNATIONAL TRANSACTIONS. THE ASSESSEE W AS RENDERING ENGINEERING DESIGN SERVICES IN THE AUTOMOBILE SECTOR TO THE FOREIGN AND DOMESTIC SECTORS. THE ASSESSEE WAS A SUBSIDIARY COMPANY OF MAGNA STEYR FAHRZEOUGTECHNIK AG & CO KG, AUSTRIA AND WAS REGISTERED AS 100% EXPORT ORIENTED UNIT. THE ASSESSEE HAD UNDERTAKEN VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES AS TABULATED UNDER PARA 4 OF THE ORDER OF TPO TOTALING RS. 5,53,58,003/ - . THE ASSESSEE HAD APPLIED CPM METHOD FOR THREE SERVICES AND CUP METHOD FOR TWO SERVICES AND THE BALANCE SERVICES WERE VALUED AT COST. HOWEVER, IN THE TP STUDY REPORT FURNISHED BEFORE THE TPO, THE ASSESSEE APPLIED TNMM AND CUP METHOD. THE TPO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE TO EXPLAIN BASIS FOR BENCHMARKING ITS INTERNATION AL TRANSACTION S. THE TPO NOTED THAT THE ASSESSEE HAD USED TNMM METHOD AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING WITH SUPPORT FROM CUP METHOD. THE ASSESSEE HAD USED OP / TC AS PLI INDICATOR AND HAD TAKEN SEVEN COMPARABLES WITH THE AVERAGE OF 6.88% 4 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. (UN ADJUSTED OP / TC COMPANY WAS NEGATIVE 51.53%). THOUGH THE ASSESSEE HAD CHANGED OVER FROM CPM TO TNMM METHOD IN ITS LATEST SUBMISSIONS, IT HAD NOT PROVIDED ANY TP STUDY REPORT EXPLAINING THE SEARCH PROCEDURE OR ACCEPT/REJECT MATRIX OR THE FAR ANALYSIS. OUT OF COMPARABLES SELECTED BY THE ASSESSEE, THE TPO REJECTED 2 COMPARABLES I.E. KPIT CUMMINS GLOBAL BUSINESS SOLUTIONS LTD. AND KIRTI SOFT TECHNOLOGIES LTD. AS THEY WERE FUNCTIONALLY DIFFERENT. THE TPO ALSO NOTED THAT NO FAR ANALYSIS OR FOR THAT MATTER TP ST UDY REPORT HAD BEEN PROVIDED. THE TPO IN REPLY PROPOSED 16 COMPARABLES WITH AVERAGE OF 30.07% AND PROPOSED AN ADJUSTMENT. IN REPLY, THE ASSESSEE OBJECTED TO THE REJECTION OF 2 COMPARABLES MADE BY THE TPO, THE REJECTION OF COMPANY, WHICH HAD INCURRED LOSS ES HAD EARNED LOW MARGINS, AS PER THE ASSESSEE WAS NOT CORRECT SINCE INCURRING OF LOSSES WERE PART AND PARCEL OF BUSINESS. RELIANCE IN THIS REGARD WAS PLACED ON DCIT VS. QUARK SYSTEMS (P.) LTD. (IT APPEAL NO.100(CHD) OF 2009 ) . IT WAS FURTHER POINTED OUT BY THE ASSESSEE THAT OP / TC MARGINS OF 5 COMPARABLES AFTER REJECTING 2 COMPARABLES BY THE TPO WORKS OUT TO 10.77% AND THE SAME SHOULD BE ACCEPTED FOR BENCHMARKING EXERCISE. ELEVEN MORE COMPARABLES PICKED UP BY THE TPO WERE OBJECTED TO BY THE ASSESSEE AND I T WAS OBSERVED THAT ALL 11 NEW COMPARABLES WERE NOT FOUND IN THE SELECT/REJECT PROCESS R UN BY THE ASSESSEE. IT WAS ALSO POINTED OUT THAT THE NATURE OF BUSINESS OF ADDITIONAL 11 NEW COMPARABLES SELECTED BY THE TPO WERE TOTALLY DIFFERENT AS COMPARED TO THE BUSINESS OF ASSESSEE COMPANY AND IN VIEW THEREOF , IT WAS PRAYED THAT THE SAME SHOULD NOT BE CONSIDERED FOR COMPUTING AVERAGE MARGINS. IN RESPECT OF THREE OF THE COMPANIES I.E. CORAL HUBS ONLINE SERVICES P. LTD., ECLERX SERVICES LTD. AND MOLD - TEK TECHNOLOG IES LTD. , T HE ASSESSEE POINTED OUT THAT THE SAID COMPANIES WERE SHOWING ABNORMAL PROFITS AND WERE NOT TO BE SELECTED. THE ASSESSEE FURTHER EXPLAINED THE REASONS FOR ITS LOSSES I.E. HAD MOVED INTO A LARGE PREMISES WITH 200 SEATING CAPACITY, OUT OF WHICH 45 SEATS WERE OCCUPIED AND OUT OF 45 EMPLOYEES, ONLY 14 RESOURCES WERE UTILIZED. THE PLEA OF THE ASSESSEE IN THIS REGARD WAS THAT ANY ABNORMAL LOSS / EXTRAORDINARY 5 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. COST, LOW CAPACITY UTILIZATION RELATED OVERHEADS, ETC. HAVE TO BE DISCOUNTED WHILE WORKING OUT THE RELATED ORDER / JOB COSTING , ITS PROFITS, ETC. THE PLEA OF THE ASSESSEE WAS THAT IT HAD DEMONSTRATED THE SAME VIDE ANNEXURE - 4 AND 5 OF THE SUBMISSIONS DATED 15.09.2011 AND THE SAME WERE NOT CONSIDERED BY THE TPO. THE NEXT PLEA OF THE ASSESSEE I N THIS REGARD WAS THAT ON PRINCIPAL BASIS, CARVE - OUT IN RESPECT OF EXCESS OVERHEADS AND DUE TO UNDER - UTILIZATION OF CAPACITY OUGHT TO BE GRANTED TO THE ASSESSEE. IT WAS POINTED OUT THAT CARVE - OUT WAS ALSO RECOGNIZED IN OECD COMMENTARY. ACCORDINGLY, THE C HARGEABLE EXPENSES OUT OF TOTAL INCURRED EXPENDITURE WERE WORKED OUT AND CONSIDERED FOR BENCHMARKING AND THE SAME SHOULD BE CONSIDERED. AFTER CONSIDERING THE REPLY OF THE ASSESSEE, THE TPO SELECTED 12 COMPANIES, OUT OF WHICH 5 COMPANIES WERE ALREADY SELEC TED BY THE ASSESSEE. THE AVERAGE OF MARGINS OF THE SAID COMPANIES WORKED OUT TO 22.31 % AND TPO WORKED OUT THE ADJUSTMENT AT RS.6,57,15,476/ - . THE NEXT PLEA OF THE ASSESSEE TO ALLOW CARVE - OUT OF CAPACITY, WAS REJECTED BY THE TPO. HOWEVER, TAKING INTO CON SIDERATION THE SUBMISSIONS OF THE ASSESSEE ON EXTRA COST DUE TO MOVING INTO NEW PREMISES DURING THE YEAR AND PAYMENT OF BROKERAGE, THE TPO WORKED OUT THE REVISED PLI OF THE ASSESSEE AT ( - ) 46.99%. THE TPO FURTHER OBSERVED THAT IT WAS THE MARGINS OF COMPAR ABLE COMPANIES, WHICH WERE TO BE ADJUSTED AND NOT THE MARGINS OF TESTED PARTIES, HENCE, THERE WAS NO QUESTION OF MAKING OF SUCH ADJUSTMENT AT THIS JUNCTURE. THE ADJUSTMENT THUS CLAIMED IN THE HANDS OF ASSESSEE BEING BEYOND THE PURVIEW OF LAW WAS HELD TO B E NOT ALLOWABLE. CONSEQUENTLY, THE TPO WORKED OUT THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES AT RS. 4,93,89,573/ - . THE ASSESSING OFFICER THUS, PROPOSED AN ADJUSTMENT OF RS.4,93,89,573/ - . 6. THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (IN SHORT DRP), PUNE. THE FIRST OBJECTION OF THE ASSESSEE WAS THAT COMPARABLE UNCONTROLLED PRICE METHOD I.E. CUP METHOD SHOULD BE APPLIED AS MOST APPROPRIATE 6 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. METHOD. SINCE THE CLAIM OF TH E ASSESSEE WAS THAT THE PRICING OF SERVICES WAS DETERMINED BY THE ASSESSEE BASED ON THE BUDGETED HOURLY RATE, THE BASIC BUDGETED RATE USED BY THE ASSESSEE TO QUOTE THE ESTIMATED FEES TO THE CLIENTS WAS ALWAYS THE SAME IRRESPECTIVE OF WHETHER THE PROSPECTIV E CLIENT IS AE OR NON - AE, THUS SINCE THE PRICING METHODOLOGY USED BY THE ASSESSEE TO ARRIVE AT THE RATE WAS COMMON, THE INTERNAL DATA AVAILABLE FOR ESTIMATING AND QUOTING THE FESS TO BOTH I.E. AE AND THIRD PARTIES, WAS TO BE USED AS AN INTERNAL CUP TO BENC HMARK THE INTERNATIONAL TRANSACTIONS OF PROVISION OF ENGINEERING DESIGN SERVICES TO THE ASSOCIATED ENTERPRISES. THE PLEA OF THE ASSESSEE IN THIS REGARD WAS THAT AS PER THE METHODOLOGY ADOPTED BY IT, THE CHARGE - OUT RATE EQUAL TO EURO 24 PER HOUR WHICH WAS CONSIDERED AS A BASIS FOR FEES CHARGEABLE TO THE CLIENTS INCLUDING ASSOCIATED ENTERPRISES. 7 . ANOTHER PLEA RAISED BY THE ASSESSEE WAS THAT DURING THE YEAR UNDER CONSIDERATION, HOURLY RATE CHARGED BY THE ASSESSEE TO UNRELATED OEMS WAS EITHER CONSIDERATION, HOURLY RATE CHARGED BY THE ASSESSEE TO UNRELATED OEMS WAS EITHER LESSER THAN OR AT PAR WITH THE RATES CHARGED BY IT TO ITS ASSOCIATED ENTERPRISES. HENCE, THE ASSESSEES INTERNATIONAL TRANSACTION OF PROVISION OF ENGINEERING DESIGN AND ALLIED SERVICES / ACTIVITIES WERE CLAIMED TO BE AT ARMS LENGTH PRICE. THE ASSESSEE BY WAY OF EXA MPLES FURNISHED THE INFORMATION THAT IT HAD CHARGED HIGHER RATE TO ASSOCIATED ENTERPRISES AS COMPARED TO NON - ASSOCIATED ENTERPRISES, WHICH DEMONSTRATED THAT THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE HAD ADHERED TO ARMS LENGTH PRINCIPLES. THE DRP CAL LED FOR TPOS COMMENTS SINCE THIS ISSUE WAS NEVER RAISED BEFORE THE TPO, IN TURN, THE TPO REPLIED THAT THE ASSESSEE HAD UNDERTAKEN SEVERAL INTERNATIONAL TRANSACTIONS AS PER ITS AUDIT REPORT IN FORM NO.3CEB, IN WHICH IT HAD CLAIMED CPM METHOD IN SOME CASES AND CUP METHOD. THE SECOND TP DOCUMENTATION SUBMITTED BY THE ASSESSEE ON 22.10.2011 BEFORE THE TPO IN REPLY TO THE SHOW CAUSE NOTICE, THE TPO FURNISHED INFORMATION, WHEREIN THE ASSESSEE HAD ADOPTED TNMM METHOD AND CUP METHOD FOR VARIOUS 7 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. TRANSACTIONS. THE DRP NOTED THAT THE AMOUNT OF INTERNATIONAL TRANSACTIONS INCREASED BY APPROXIMATELY RS.1 CRORE ALONG WITH CHANGE IN THE MOST APPROPRIATE METHOD OF BENCHMARKING INTERNATIONAL TRANSACTION, SINCE THE ASSESSEE HAD ADOPTED CPM METHOD AS MOST APPROPRIATE METHOD IN ITS AUDIT REPORT IN FORM NO.3CEB. THE DRP OBSERVED THAT THIS MEANT THAT THERE WAS AN EFFECTIVE EXISTENCE OF AGREEMENT BETWEEN THE ASSESSEE COMPANY AND AES REGARDING REMUNERATION ABOVE THE COSTS AND IF THAT WAS SO, THE ASSESSEE SHOULD HAVE MADE DECENT P ROFITS ON COSTS INCURRED. HOWEVER, THE ASSESSEE IN THE SECOND EXPLANATION HAD APPLIED TNMM METHOD AS MOST APPROPRIATE METHOD AND IT WAS OBSERVED BY THE DRP THAT AS IN ALL PROBABILITY THE AGREEMENT BETWEEN THE ASSESSEE AND AE SEEM TO HAVE NOT WORKED OUT. ALTERNATIVELY, THE AES SHOULD HAVE REIMBURSED THE ASSESSEE COMPANY, BUT HAVE REFUSED TO BEAR THE LOSSES. IN THIS VIEW, THE TNMM METHOD WAS ADOPTED BY THE ASSESSEE TO COVER FOR ITS LOSSES, WHICH WOULD NOT INCUR BY ADOPTING CPM METHOD. LOOKING AT THE FACT S AND CIRCUMSTANCES, THE DRP OBSERVED THAT THE ASSESSEE WAS JUST A CAPTIVE WHOSE DECISION MAKING WAS IN THE HANDS OF EXP ER TS FROM THE AE AND THE ASSESSEE WAS NOT A MARKET FACING ENTITY AND IT DID NOT TAKE MUCH RISK OF AN ENTREPRENEUR. AFTER MAKING SEARCH STUDY OF THE PROJECTS UNDERTAKEN BY THE AE OF THE ASSESSEE, THE DRP OBSERVED THAT ALTHOUGH THERE IS A CONTROL TRANSACTION, BUT RATES CHARGED TO AES WERE NOT AT ARMS LENGTH PRICE. THE DRP ALSO NOTED THE FACT THAT THE ASSESSEE CHANGED ITS STAND FROM CPM T O TNMM AND NOW TO CUP METHOD. HOWEVER, IN THE ORIGINAL TP DOCUMENTATION SUBMITTED BY THE ASSESSEE, THE ASSESSEE HAD SELECTED TNMM METHOD AS MOST APPROPRIATE METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTIONS ENTERED INTO WITH ITS AES. HOWEVER, FOR TRANSA CTIONS OF INCOME AND EXPENDITURE REIMBURSEMENT, CUP METHOD WAS USED FOR BENCHMARKING PROCESS. THE DRP VIDE PARA 7.4 OBSERVED AS UNDER: - 7.4 WE HAVE GONE THROUGH THIS ISSUE. THE ASSESSEE HAD UNDOUBTEDLY SELECTED CPM AS THE MAM WHILE FILING THE 3CEB REPORT . DURING THE COURSE OF TP PROCEEDINGS, IN THE TP STUDY REPORT FILED, TNMM WAS SELECTED AS THE MAM AND THE TRANSACTIONS WERE BENCHMARKED WITH EXTERNAL COMPARABLES. IN THE OBJECTIONS FILED ALONG WITH FORM NO.35 WITH THE DRP ORIGINALLY THERE WAS 8 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. NO SUCH OBJEC TION WITH RESPECT TO EITHER THE APPLICATION OF TNMM OR THE APPLICATION OF CUP METHOD. IT WAS ONLY IN THE SECOND ROUND OF FILING OF OBJECTIONS THAT THE PLEA OF CUP AS MAM HAS BEEN TAKEN. WHILE APPLYING TNMM AS THE MAM IN THE TRANSFER PRICING STUDY REPORT, IT WAS ITSELF STATED BY THE ASSESSEE THAT THE CUP METHOD REQUIRES A VERY HIGH DEGREE OF COMPARABILITY. A TRANSACTION IS CONSIDERED COMPARABLE ONLY IF BOTH THE TANGIBLE PROPERTY SOLD OR SERVICE PROVIDED AND THE CIRCUMSTANCES SURROUNDING THE CONTROLLED TRANS ACTIONS ARE SUBSTANTIALLY THE SAME AS THOSE OF THE CONTROLLED TRANSACTIONS. ADDITIONAL FACTORS FOR DETERMINING COMPARABILITY INCLUDES; THE QUALITY OF THE PRODUCT OR THE SERVICE, THE VOLUME OF SALES OR REVENUE, THE LEVEL OF MARKET, THE GEOGRAPHIC MARKET IN WHICH THE TRANSACTION TAKES PLACE AND ALTERNATIVE COMMERCIAL ARRANGEMENTS REALISTICALLY AVAILABLE TO BOTH THE PARTIES. ANY DIFFERENCE CAN BE TAKEN INTO ACCOUNT IF ADJUSTMENTS CAN BE MADE FOR SUCH DIFFERENCES AND THESE ADJUSTMENTS HAVE A REASONABLY ASCERT AINABLE EFFECT ON THE PRICE. ON THE BASIS OF THE ABOVE, CUP METHOD WAS REJECTED BY THE ASSESSEE ITSELF AS ACCORDING TO THE ASSESSEE THE SERVICES PROVIDED BY THE ASSESSEE WERE NOT COMPARABLE INTERNALLY OR EVEN EXTERNALLY. THE INTERNAL COMPARABILITY NOW GIV EN BY THE ASSESSEE AS PER APPENDIX - I HAS BEEN LOOKED INTO BY US. IT IS SEEN THAT TO THE AE MAGNA STEYR ITALY, ENGINEERING DESIGN SERVICES BEING 'TRIM' WAS RENDERED AT THE AVERAGE MAN HOUR RATE OF EURO 18 AND MAN HOURS BILLED WERE 42,345 FOR 7,82,370 EUROS. THIS IS THE BIGGEST TRANSACTION/SERVICES RENDERED BY THE ASSESSEE TO THE AE IN TERMS OF.MAN HOURS BILLED AND THE VALUE OF SERVICES. TO THE UNRELATED THIRD PARTIES THIS SERVICE HAS NOT BEEN RENDERED. FURTHER, THIS 'TRIM' SERVICE UNDER THE ENGG. DESIGN SERVICES WAS RENDERED TO THE OTHER ASSOCIATED CONCERNS BEING 'ENGG. CENTRE STEYR MAGNA POWER TRAINED AG & COMPANY AND MAGNA STEYR FRANCE AS ALSO TO LNTIER AUTOMATIVE SETTING TO A SMALLER EXTENT WHILE NO SUCH FRANCE AS ALSO TO LNTIER AUTOMATIVE SETTING TO A SMALLER EXTENT WHILE NO SUCH SERVICES WERE RENDERED TO ANY OF THE UNRELATED P ARTIES. IN VIEW OF THE STRICT NATURE OF THE COMPARABILITY IN CUP METHOD, IT IS NOT POSSIBLE TO HOLD THAT FOR DIFFERENT SERVICES RENDERED THE AVERAGE MAN HOUR RATE WOULD BE SUFFICIENT FOR COMPARABILITY ANALYSIS. FURTHER, IT IS NOTICED THAT UNDER THE HEAD EN GG. DESIGN SERVICES, COMPUTER AIDED ENGG. SERVICE WAS STATED TO BE RENDERED TO THE AES AS ALSO TO THE UNRELATED THIRD PARTIES. FOR EURO 25, AVERAGE MAN HOUR RATES, THE MAN HOURS BILLED WERE ONLY 30 FOR UNRELATED PARTIES, WHILE THOSE WERE 677 + A PART OF 73 75 HOURS + 531 + 415 + 170 + 240 HOURS FOR THE AES. SUCH GENERALIZED SERVICES RENDERED UNDER THE HEAD COMPUTER AIDED ENGG. CANNOT BE COMPARED ON THE BASIS OF MAN HOURS BILLED. FURTHER, THE AES AND THE UNRELATED THIRD PARTIES ARE IN DIFFERENT GEOGRAPHICA L AREAS. IT IS TRITE LAW THAT THE ECONOMIC SITUATION IN A PARTICULAR GEOGRAPHICAL AREA IS OF UTMOST IMPORTANCE FOR THE PURPOSE OF COMPARABILITY ESPECIALLY IN THE CASE OF CUP. IN VIEW OF THE DISCUSSION ABOVE, THE CUP ADOPTED BY THE ASSESSEE IS REJECTED. 8 . COMING TO THE SECOND ISSUE OF REJECTION OF 2 COMPANIES OUT OF 7 COMPANIES SELECTED BY THE ASSESSEE, IN THIS REGARD, THE FINDING OF THE DRP ARE VIDE PARA 8.5, WHICH READS AS UNDER: - 8.5 IN VIEW OF THE ABOVE, AND THE FACT THAT THE AO HAD SELECTED THE CO MPARABLES ON THE BASIS OF ASSESSEES ASSERTION THAT THE INTERNATIONAL TRANSACTION WAS WITH RESPECT TO ITES ON WHICH BASIS THE COMPARABLES WERE SELECTED BY THE TPO, THE ASSESSEES OBJECTION WITH RESPECT TO THE FUNCTIONAL 9 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. COMPARABILITY WITH THE COMPARABLES I S REJECTED. THE TPO / AO IS DIRECTED TO MAKE THE ADJUSTMENT AS ENVISAGED IN THE DRAFT ASSESSMENT ORDER. 9 . NEXT OBJECTION OF THE ASSESSEE WAS AGAINST DISREGARDING THE ASSESSEES CLAIM FOR ADJUSTMENT OF EXTRAORDINARY COST IN RELATION TO UNDER - UTILIZATION OF CAPACITY, EXPANSION OF FACILITIES, ETC., WHILE COMPUTING THE OPERATING MARGIN OF THE ASSESSEE DERIVED FROM THE INTERNATIONAL TRANSACTIONS. THE SAID ADJUSTMENT CLAIMED BY THE ASSESSEE WAS ALSO REJECTED SINCE THE TPO HAD ALREADY ALLOWED SUM OF RS.1.33 CRORES ON ACCOUNT OF EXPANSION OF FACILITY I.E. RENT AND BROKERAGE FEES. THE DRP OBSERVED THAT IF AN ADJUSTMEN T WAS MADE IN THE TESTED PARTIES ON THE BASIS OF ONE OR MORE FUNCTIONS, IT WOULD CREATE AN ANOMALY SINCE THE ADJUSTMENTS WERE REQUIRED TO BE MADE IN THE HANDS OF COMPARABLES. 10 . ANOTHER ISSUE DECIDED BY THE DRP WAS THAT MAKING ADJUSTMENT ON ENTITY BASI S WOULD BE UNFAIR AS IT WOULD AMOUNT TO ADJUSTMENT TO NON - AE TRANSACTIONS ALONG WITH AE TRANSACTIONS. THEREFORE, IT WAS NECESSARY TO LIMIT THE ADJUSTMENT TO ALONG WITH AE TRANSACTIONS. THEREFORE, IT WAS NECESSARY TO LIMIT THE ADJUSTMENT TO THE INTERNATIONAL TRANSACTIONS WITH THE AE TRANSACTIONS ONLY. THE ASSESSEE IN VIEW THERETO, SUBMI TTED THE AE/NON - AE SPLIT OF ITS ACCOUNT AFTER CONSIDERING THE NECESSARY CARVE - OUT. CONSIDERING THE REPLY OF TPO, THE DRP OBSERVED AS UNDER: - 10.4 WE HAVE GONE THROUGH THIS ISSUE. IT IS SEEN THAT THE ASSESSEE HAS NEVER PRODUCED THE AUDITED SEGMENTAL ACCO UNTS EITHER TO THE TPO OR BEFORE THE DRP. THE SEGMENTAL ACCOUNTS NOW PRODUCED SHOW THAT THE COMPARABILITY IS BEING MADE ON INCOME FROM OPERATION OF 74.35 LACS FROM NON - AE SEGMENT WITH THE AE SEGMENT OF 357.02 LACS. ON SUCH INCOME THE COST WAS ADJUSTED AS ACCEPTED BY THE TPO TO BRING THE OPERATING PROFIT TO COST AT MINUS 42.98% IN BOTH THE SEGMENTS. FURTHER, THE OPERATING COST RELATING TO AE SEGMENT WAS COMPUTED AT 6.26 CRORES. ALL THESE FIGURES HAVE NOT BEEN JUSTIFIED ANYWHERE BY THE ASSESSEE. HAD THE ASSESSEE WANTED ONLY THE AE SEGMENT TO BE BENCHMARKED, THE TP STUDY REPORT SHOULD HAVE SHOWN THE COMPARABILITY ANALYSIS OF ONLY THE EXPORT TURNOVER AND THE COMPARABLES SHOULD HAVE BEEN CHOSEN COMPARING ONLY THE EXPORT TURNOVER. FURTHER, THE FAR ANALYSIS I N SUCH CASE WOULD ALSO HAVE CHANGED. IT IS INCORRECT TO STATE THAT THE ADJUSTMENT WAS BEING MADE IN THE HANDS OF THE NON - AE SEGMENT ALSO AS WHILE DOING ENTITY LEVEL ADJUSTMENT OF MARGINS, THE NON - AE SEGMENT IS TREATED AS AT ARMS LENGTH AND THE ADJUSTMENT IS MADE ONLY WITH RESPECT TO THE INTERNATIONAL TRANSACTION WITH THE AE. IN VIEW OF THE ABOVE, THE CONTENTION OF THE ASSESSEE IS REJECTED. 10 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. 1 1 . THE ASSESSING OFFICER THUS, PASSED AN ORDER UNDER SECTION 144C(13) R.W.S. 143(3) OF THE ACT MAKING AN ADDITION OF RS.4,93,89,573/ - . 1 2 . THE ASSESSEE IS IN APPEAL AGAINST THE SAID ORDER OF ASSESSING OFFICER. 1 3 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE WAS ENGAGED IN PROVIDING ENGINEERING DESIGN SERVICES, WHICH IN TURN WERE CONNECTED TO AUTOMOBILE SECTOR. IT WAS FURTHER POINTED OUT BY HIM THAT THIS WAS THE FIRST YEAR OF EXPANSION, WHEREIN THE AREA OF OPERATION WAS INCREASED FROM 4000 SQ.FT. TO 28,000 SQ. FT., EVEN THE EMPLOYEES STRENGTH WAS INCREASED FROM 45 TO 200 AND CONSEQUENTLY, LOSS WAS DECLARED IN THE RETURN OF INCOME. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER BROUGHT TO OUR NOTICE THAT AS AGAINST INTERNATIONAL TRANSACTION OF RS.3.57 CRORES, THE ADJUSTMENT ON ACCOUNT OF ARM'S LENGTH PRICE HAS BEEN PROPOSED AT RS. 4.93 CRORES. HE FURTHER SUBMITTED THAT IN THE AUDIT REPORT, THE ASSESSEE HAD PREFERRED COST PLUS METHOD SINCE THE SERVICES WERE CHARGED ON THE BASIS OF COST PLUS MARK - UP, BUT AS PER THE ACT, THE CUP METHOD WAS ON GROSS PROFIT MARGINS. THE NEXT CONTENTION OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD REPRESENTED THAT THE COST REFLECTED IN THE BOOK S WERE ACTUAL FINANCIAL COSTS AND THE INCOME OF INTERNATIO NAL TRANSACTION HAD TO BE DETERMINED. HOWEVER, THE ASSESSING OFFICER DID NOT ALLOW THE CONTENTION OF THE ASSESSEE AND APPLIED TNMM METHOD TO BENCHMARK INTERNATIONAL TRANSACTION . BEFORE THE DRP , THE ASSESSEE CLAIMS TO HAVE FILED THE METHODOLOGY TO USE INT ERNAL CUP METHOD. OUR ATTENTION WAS DRAWN TO THE WORKING AT PAGE 61 OF THE PAPER BOOK AND POINTED OUT THAT THE CHARGEABILITY OF SERVICES WAS ON THE BASIS OF MAN HOUR OF BOTH AES AND UN - RELATED THIRD PARTIES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT THE DRP DID NOT USE THE CUP METHOD, BUT UPHELD THE ORDER OF TPO IN USING TNMM METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION . OUR ATTENTION WAS DRAWN TO THE ORDER OF 11 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. TPO, WHICH IS ON TWO ACCOUNTS, THE APPLICATION OF TNMM METHOD AND TO ALLOW CARVING OUT. BEFORE THE DRP, THE ASSESSEE HAD RAISED NEW PLEA TO APPLY THE CUP METHOD. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT BOTH FOR ITS TRANSAC TIONS WITH AES AND THIRD PARTIES, SOURCES WERE COMMON AND THE SAME INFRASTRUCTURE AND ALSO SOFTWARE USED WAS SAME. UNDER THE TRANSFER PRICING PROVISIONS, THE ONUS WAS UPON THE ASSESSEE TO DEMONSTRATE WHETHER THE TRANSACTIONS WITH AES OR IN DOMESTIC SECTOR , SAME PARAMETERS HAVE BEEN USED, THEN AT BEST INTERNAL TNMM METHOD COULD BE APPLIED. IT WAS THE CONTENTION OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT IN THE PRESENT CASE, THE ASSESSEE WAS ABLE TO DEMONSTRATE WITH REASONABILITY THAT BO TH THE TRANSACTIONS WITH AES AND DOMESTIC SECTOR WERE REASONABLE AND COMPARABLE AND HENCE, THE PRICE DECLARED BY THE ASSESSEE SHOULD BE ACCEPTED. HE STRESSED THAT UNDER THE PROVISIONS OF SECTION 92 C (1) OF THE ACT, THE ENDEAVOUR WAS TO CORRECTLY DETERMINE THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE AND WHERE THE INCOME COMPONENT IS TAXABLE, IT SHOULD BE A GENUINE ENDEAVOUR. HE FURTHER STRESSED THAT SINCE THE NATURE OF SERVICES WERE SIMILAR, THE PROCESS OF CUP METHOD SHOU LD BE APPLIED. HE PLACED RELIANCE ON VARIOUS DECISIONS FOR THE PROPOSITION THAT THE CHANGE IN METHOD AS ADOPTED IN THE TP STUDY OR AS ARGUED DURING THE COURSE OF ASSESSMENT PROCEEDINGS, SHOULD BE ACCEPTED AND THERE SHOULD NOT ANY ESTOPPEL AGAINST THE ASSE SSEE. HE FURTHER POINTED OUT THAT THE DRP PROCEEDINGS WERE IN CONTINUATION TO THE ASSESSMENT PROCEEDINGS AND HENCE, THE SUBMISSIONS MADE BEFORE THE DRP THOUGH AT VARIANCE, SHOULD HAVE BEEN APPLIED. RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS: - I) ACIT VS. M/S. C HEMTEX GLOBAL ENGINEERS P. LTD., ITA NO.3590/MUM/2010, ORDER DATED 12.06.2013 II) CIT VS. C. PARAKH & CO. (INDIA) LTD. (1956) 29 ITR 661 (SC) III) DCIT VS. QUARK SYSTEMS (P.) LTD. (2010) 38 SOT 307 (CHD.) (SB) IV) TRANSWITCH INDIA PVT. LTD. VS. DCIT, ITA NO.6083/DEL/2010, ORDER DATED 30.03.2012 12 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. 14. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN FAIRNESS SUBMITTED THAT THE GROUND OF APPEAL NO.1 IS NOT PRESSED AND THE GROUND OF APPEAL NO.2 WAS GENERAL I.E. IN RESPECT OF ADDITION. THE GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE WAS FOR APPLYING INTERNAL CUP METHOD TO DETERMINE THE BENCHMARKING OF INTERNATIONAL TRANSACTION. THE GROUND OF APPEAL NO.7 WAS TO APPLY THE INTERNAL TNMM METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTION . HE FURTHER STRESSED THAT BECAUSE THE METHODOLOGY OF HIS BUSINESS WAS AT ARMS LENGTH, THEN THE SAME PERSONIFIES IN P ROFITS WHICH ARE AT ARMS LENGTH. SINCE THE BUSINESS PERSONIFIES BOTH IN PROFITS AND MARGINS ARE AT ARM'S LENGTH PRICE, NO ADJUSTMENT IS WARRANTED. FOR APPLYING THE INTERNAL TNMM METHOD, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SIZE IN THE CASE OF INTERNAL COMPARABLES, WAS NOT IMPORTANT. RELIANCE IN THIS REGARD WAS PLACED ON THE DECISION IN LUMMUS TECHNOLOGY HEAT TRANSFER BV VS. DCIT IN ITA NO.6227/DEL/2012, RELATING TO ASSESSMENT YEAR 2008 - 09, ORDER DATED 21.02.2014 , WHEREIN OUT OF TOTAL TURNOVER OF RS. 1424.93 LAKHS, NON - AES TURNOVER WAS ONLY RS. 13.52 LAKHS , H OWEVER, INTERNAL TNMM METHOD WAS APPLIED. FURTHER, RELIANCE WAS PLACED ON THE FOLLOWING DECISION S: - I) EATON FLUID LTD. VS. ACIT, ITA NO.1623/PN/2011, ORDER DATED 27.02.2015 II) M/S. TECHNIMONT ICB PVT. LTD. VS. ADDL.CIT IN ITA NO.4608/MUM/2010, ADDL.CIT VS. M/S. TECHNIMONT ICB PVT. LTD. IN ITA NO.5085/MUM/2010 AND M/S. TECHNIMONT ICB PVT. LTD. VS. ADDL.CIT IN CO NO.78/MUM/2011, ORDER DATED 17.07.2012 III) TASTY BITE EATABLES LTD. VS. ACIT IN ITA NO.1682/PN/2011, ORDER DATED 10.06.2015 I V ) ARISTON THERMO INDIA LTD. VS. DCIT IN ITA NO.1455/PN/2010, ORDER DATED 25.06.2013 15. THE LEARNED AUTH ORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT INTERNAL CUP METHOD WAS THE MOST APPROPRIATE METHOD AND IF MORE VALIDATION WAS REQUIRED, THEN INTERNAL TNMM METHOD COULD BE APPLIED. ANOTHER PLEA RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT IN VIEW OF 13 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. SECTION 10B(E) OF THE AC T, INCOME OF THE INTERNATIONAL TRANSACTION AND NOT ENTITY SHOULD BE CONSIDERED. THE THIRD PLEA RAISED BY THE ASSESSEE WAS IN RESPECT OF CARVING OUT EXPENSES WHICH WERE NOT RELATABLE TO INTERNATIONAL TRANSACTION. IN THIS REGARD, THE LEARNED AUTHORIZED REP RESENTATIVE FOR THE ASSESSEE POINTED OUT THAT OUT OF RS.9.95 CRORES, CARVED OUT EXPENSES SHOULD BE RS.6.19 CRORES, WHEREAS THE TPO ACCEPTED CARVING OUT EXPENSES OF RS.1.80 CRORES AND FINANCIAL COST OF RS.3.82 CRORES. FURTHER, REFERENCE WAS MADE TO THE DET AILED WORKING AT PAGE 118 OF THE PAPER BOOK, WHEREIN THE MARGINS OF ASSESSEE IN RELATION TO EXPORTS MADE TO THE AES WERE 21.35% AND THE ENTITY LEVEL MARGINS WE RE AT 20.11% I.E. WITHIN +/ - 5%. 16. NOW, COMING TO THE COMPARABLES PICKED UP BY THE ASSESSEE AND ALSO REFERRING TO THE PARA 10 OF THE ORDER OF TPO, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAME WAS A FINAL LIST OF COMPARABLES SUPPLIED BY TPO, WHEREIN SERIAL NOS.1 TO 5 WERE S ELECTED BY THE ASSESSEE. IT WAS FURTHER POINTED OUT BY HIM THAT THE COMPARABLES AT SERIAL NOS.6 TO 12 WERE NOT FUNCTIONALLY POINTED OUT BY HIM THAT THE COMPARABLES AT SERIAL NOS.6 TO 12 WERE NOT FUNCTIONALLY COMPARABLE AS ALL WERE IN ITE S SEGMENT AND THE ASSESSEE WAS ENGAGED IN ENGINEERING DEVICE SERVICES. OUR ATTENTION WAS DRAWN TO THE TP STUDY REPORT, UNDER WHICH THE ASSESSEE HAD SELECTED COMPANIES WHICH WERE CLASSIFIED UNDER ENGINEERING DESIGN SERVICES IN THE SYSTEM PRO WE SS. FURTHER, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO TWO OF THE COMPANIES, WHICH WERE S ELECTED BY THE TPO I.E. KPIT CUMMINS GLOBAL BUSINESS SOLUTIONS LTD. AND KIRTI SOFT TECHNOLOGIES LTD. , WHICH WERE REJECTED BY THE TPO BECAUSE OF LOSSES. HOWEVER, ON THE OTHER HAND, THE TPO HAS NOT GIVEN ANY BASIS FOR PICKING UP THE COMPARABLE COMPANIES AND EVEN THE METHODOLOGY WAS ERRONEOUS. 1 7 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE TRANSFER PRICING PROVISIONS WERE APPLICABLE W.E.F. 01.04.2002. HE FURTHER POINTED OUT THAT BEFORE THE TPO, THE ASSESSEES CLAIM WAS THAT TNMM METHOD IS TO 14 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. BE APPLIED. HOWEVER, BEFORE THE DRP, THE ASSESSEE CHANGED HIS PLEA THAT CUP METHOD SHOULD BE APPLIED, BUT NEITHER THE TPO N OR DRP HAD VERIFIED THE CLAIM OF ASSESSEE AND IN THIS REGARD, THE MATTER MAY BE SENT BACK TO THE TPO. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE FURTHER PO INTED OUT THAT BOTH THE DRP AND TPO HAD NOT GONE THROUGH THE DETAILS, SO MATTER BE REMANDED BACK TO CONSIDER WHETHER THE CONDITIONS OF CUP METHOD WERE FULFILLED. HE FUR TH ER POINTED OUT THAT EVEN PROPER TP STUDY REPORT WAS ALSO NOT AVAILABLE WITH THE ASSESSEE. ANOTHER CONTENTION RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE WAS THAT THE ASSESSEES SA LES WITH ITS NON - ITES COMPANIES, THEN IN SUCH CASES TH E COMPARABLES SELECTED I.E. MAXIMIZE CANNOT BE APPLIED AS IT WAS IN ITE S SERVICES. 1 8 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN REJOINDER POINTED OUT THAT NO PREJUDICE WAS CAUSED TO THE REVENUE BY APPLYING ANY OF THE METHODS TO DETERMIN E THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION WITH ITS ASSOCIATE DETERMIN E THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION WITH ITS ASSOCIATE ENTERPRISES. HE FURTHER REFERRED TO THE SUBMISSIONS MADE BEFORE THE DRP AND VARIOUS EVIDENCES FILED AND REMAND REPORT RECEIVED FROM THE TPO DURING THE PENDENCY OF PROCEEDINGS BEFORE THE DRP AND STATED THAT THE TPO WAS AWARE OF EVERYTHING. HE FURTHER STRESSED THAT BOTH THE DRP AND TPO COULD NOT GET A SECOND INNINGS, WHERE THE ASSESSEE HAD DEMONSTRATED THAT THE AUTHORITIES HAD NOT CONSIDERED THE ARGUMENTS MADE BEFORE THE DRP . FURTHER, WHERE ALL INFORMATION WAS ON RECORD, THERE WAS NO MERIT IN SENDING BACK THE MATTER TO THE FILE OF DRP / TPO. 1 9 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE GROUND OF APPEAL RAISED BY THE ASSESSEE WITH REGARD TO THE REFERE NCE TO TPO IS NOT PRESSED AND HENCE, THE SAME IS DISMISSED AS NOT PRESSED. THE GROUND OF APPEAL NO.2 BEING GENERAL GROUND, IS ALSO DISMISSED. NOW, COMING TO THE ISSUE RAISED VIDE 15 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. GROUND OF APPEAL NO.3 I.E. AGAINST APPLICATION OF CUP METHOD AS THE MOST AP PROPRIATE METHOD FOR DETERMINING THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. THE ASSESSEE BEFORE US WAS ENGAGED IN PROVIDING ENGINEERING DESIGN SERVICES TO AUTOMOTIVE INDUSTRIES. THE ASSESSEE CLAIMS TO HAVE PROVIDED T HE SAID SERVICES BOTH TO ASSOCIATE ENTERPRISES AS WELL AS TO DOMESTIC ORIGINAL EQUIPMENT MANUFACTURERS (DOEMS) I.E. NON - AES . THE SCOPE OF ENGINEERING DESIGN SERVICES PROVIDED BY THE ASSESSEE INCLUDES THE DESIGN SERVICES IN RELATION TO AUTOMOTIVE S E ATING S YSTEMS, ENGINEERS , ETC. THE CLAIM OF THE ASSESSEE BEFORE US IN THIS REGARD WAS THAT THE PROCESS OF PROVIDING ENGINEERING DESIGN SERVICES ACROSS BOTH AES AND NON - AES WERE SIMILAR. IN THIS REGARD, THE ASSESSEE BEFORE US HAS FURNISHED ON RECORD THE METHODOL OGY ADOPTED TO PROVIDE THE ENGINEERING DESIGN SERVICES TO BOTH AES AND NON - AES, WHICH IS AS UNDER: - 1 . UNDERSTANDING CUSTOMER REQUIREMENTS - E.G. SOLUTION TO THEIR EXISTING PROBLEMS OR NEW DEVELOPMENT OF COMPONENTS / PARTS / ASSEMBLIES / BODIES; 2 . CONCEPT DESIGN - PROVIDING PRELIMINARY 3D MODEL FOR PROPOSED SOLUTIONS / DEVELOPMENTS AND SHOW TO CUSTOMERS FOR THEIR ACCEPTANCE; DEVELOPMENTS AND SHOW TO CUSTOMERS FOR THEIR ACCEPTANCE; 3 . DETAILED DESIGNING - FINALISING 3D MODELS AND CREATING 2D DRAWINGS; 4 . SIMULATION - VIRTUAL VERIFICATION OF PROPOSED SOLUTIONS BY CAE TECHNIQUES; 5 . UPDATING THE DESIGNS BASED OF SIMULATION RESULTS AND RELEASE OF 3D MODELS AND 2D DRAWING FOR 'PROTOTYPES'; 6 . SUPPORT CUSTOMERS DURING PROTOTYPE DEVELOPMENT; 7 . SUPPORT CUSTOMER DUR ING PHYSICAL PROTOTYPE VALIDATION / TESTING; 8 . UPDATE THE DESIGNS BASED OF PHYSICAL PROTOTYPE VALIDATION / TESTING RESULTS AND RELEASE OF 3D MODELS AND 2D DRAWING FOR 'PRODUCTION' 20 . THE ISSUE ARISING BEFORE US IS IN RELATION TO THE INTERNATIONAL TRANSA CTION UNDERTAKEN BY THE ASSESSEE AND WHETHER THE SAME WAS AT ARM'S LENGTH PRICE. UNDER THE PROVISIONS OF SECTION 92C OF THE ACT, THE COMPUTATION OF ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION IS TO BE DETERMINED WITH REGARD TO THE NATUR E OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELATED FACTORS AS THE BOARD 16 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. MAY PRESCRIBE. UNDER THE PROVISIONS OF SECTION 92C(1) OF THE ACT, THE METHODS WHICH MAY BE APPLIED AR E PRESCRIBED AND THE SAME ARE AS UNDER: - (A) COMPARABLE UNCONTROLLED PRICE METHOD; (B) RESALE PRICE METHOD; (C) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTIONAL NET MARGIN METHOD; (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. 2 1. THE MOST APPROPRIATE METHOD IS TO BE APPLIED FOR DETERMINING THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE, IN VIEW OF SECTION 92C(2) OF THE ACT. THE PROVISO THEREUNDER PROVIDES THAT WHERE MORE THAN ONE PRICE IS DETERMINE D BY MOST APPROPRIATE METHOD, THE ARM'S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES. IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD DECLARED TOTAL SALES OF RS.4,31,38,739/ - , WHICH INCLUDED EX PORT SALES OF RS.3,90,59,391/ - . THE DOMESTIC SALES UNDERTAKEN BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION WAS SALES UNDERTAKEN BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION WAS RS.40,79,348/ - . THE YEAR UNDER CONSIDERATION I.E. ASSESSMENT YEAR 2008 - 09 WAS THE YEAR WHEN THE ASSESSEE HAD UNDERTAKEN THE EXPANSION OF ITS BUSINESS IN TERMS OF AREA OF OPERATION AND ALSO THE MAN POWER . T HIS BEING THE FIRST YEAR OF EXPANSION, THE CLAIM OF THE ASSESSEE BEFORE US WAS THAT IT HAD UNDER - UTILIZED ITS CAPACITY. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US HAS FURNISHED THE FINANCIAL SUMMARY OF PROFIT & LOSS ACCOUNT OVER THE YEARS I.E. STARTING FROM FINANCIAL YEARS 2007 - 08 TO 2013 - 14 AND HAS ALSO FURNISHED ON RECORD THE BREAK - UP OF SALES BETWEEN E XPORT SALES AND DOMESTIC SALES. THE CASE PUT UP BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT THE SERVICES PROVIDED BOTH TO AES AND NON - AES WERE AT PAR THOUGH IN THE INSTANT ASSESSMENT YEAR, THERE WAS DIFFERENCE IN THE VOLUME OF SALES TO AES AND NON - AES. HOWEVER, IF THE FIGURES OF FINANCIAL YEAR 2013 - 14 ARE CONSIDERED, THEN THE EXPORT SALES TO AES IS RS.38.68 CRORES AND THE DOMESTIC SALES TO NON - AES IS RS.18.92 CRORES. THE ASSESSEE CLAIMS 17 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. THAT THE SERVICES WHICH IT IS PROVIDING BOTH TO AES AND NON - AE S WERE AT PAR AND SINCE THE INTERNAL COMPARABLE WAS AVAILABLE, INTERNAL CUP METHOD SHOULD BE APPLIED AND AT BEST INTERNAL TNMM METHOD COULD BE APPLIED. HOWEVER, THE FACTS OF THE CASE REVEAL THAT THE ASSESSEE HAS BEEN CHANGING ITS STAND VI S - - VIS THE APPLICATION OF PARTICULAR METHOD AS MOST APPROPRIATE METHOD FROM PROCEEDINGS TO PROCEEDINGS. IN THE INITIAL STAGE I.E. DURING THE COURSE OF FILING THE RETURN OF INCOME, THE ASSESSEE HAD APPLIED COST PLUS METHOD AS MOST APPROPRIATE METHOD SINCE IT HAD PUT UP THE CASE THAT IT WAS HAVING COST PLUS MARK - UP AND HENCE, CPM WAS MOST APPROPRIATE METHOD. THE TPO DID NOT AGREE WITH THE SUBMISSIONS OF THE ASSESSEE AND MADE A PROPOSITION FOR APPLICATION OF TNMM METHOD. THE ASSESSEE DURING THE COURSE OF TP PROCEEDINGS PROPOSED A SET OF COMPARABLES, WHICH ACCORDING TO IT, WERE THE MOST FUNCTIONALLY SIMILAR AND PROPOSED THAT THE MARGINS OF THE COMPARABLES WERE LOWER TH AN THE MARGINS SHOWN BY THE ASSESSEE AND HENCE, NO MERIT IN ANY ADJUSTMENT ON ACCOUNT OF ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. HOWEVER, THE TPO DID NOT ADOPT THE COMPARABLES PICKED UP BY THE ASSESSEE AND REJECTED SOME OF THEM AND PICKED UP CER TAIN OTHER COMPARABLES IN ORDER TO DETERMINE THE ARM'S LENGTH PRICE OF THE SAID COMPARABLES AND ON COMPARISON, FOUND THAT THE ASSESSEE HAD NOT CARRIED ON ITS EXPORTS AT ARM'S LENGTH PRICE AND MADE AN ADJUSTMENT OF RS. 4,93,89,573/ - AGAINST THE EXPORT SALES OF RS.3.90 CRORES. BEFORE THE DRP, THE ASSESSEE FURNISHED ADDITIONAL OBJECTIONS AND ALSO EVIDENCES AND POINTED OUT THAT THE CUP METHOD WAS THE MOST APPROPRIATE METHOD. IN THIS REGARD, THE ASSESSEE FURNISHED THE PRICING METHODOLOGY ADOPTED BY IT AND ALSO ITS BUSINESS DESCRIPTION AND THE DRP REJECTED THE CLAIM OF THE ASSESSEE SINCE NO SUCH PLEA WAS RAISED BEFORE THE TPO. HOWEVER, WHERE THE PROCEEDINGS BEFORE THE DRP ARE IN CONTINUATION OF ASSESSMENT PROCEEDINGS, SUCH ADDITIONAL PLEAS OR EVIDENCES CAN BE CO NSIDERED BY THE DRP AS PROVIDED UNDER SECTION 144C(6) OF THE ACT, WHICH PROVIDES THE DRP , THE RIGHT TO COLLECT INFORMATION OR CAUSE AN ENQUIRY TO BE MADE GIVING DIRECTIONS TO THE ASSESSING OFFICER UNDER 18 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. SECTION 144C(5) OF THE ACT. THE ASSESSEE IS AGGRIEVE D BY THE ORDER OF DRP IN NOT APPLYING CUP METHOD AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION AND HENCE, THE GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE. BY WAY OF GROUND OF APPEAL NO.4, THE ASSESSEE IS AGGRIEVED BY THE A PPLICATION OF TNMM METHOD ON AN ARBITRARY BASIS I.E. FIRST NOT DISCLOSING THE BASIS FOR SEARCH AND ALSO FOR SELECTING CERTAIN COMPANIES WHICH WERE ITE S COMPANIES AND WERE NOT FUNCTIONALLY COMPARABLE. ANOTHER OBJECTION RAISED BY THE ASSESSEE VIDE GROUND OF APPEAL NO.5 IS TO CARVE OUT THE EXTRAORDINARY COST FOR UNDER - UTILIZATION OF THE CAPACITY. IN THIS REGARD, THE CLAIM OF THE ASSESSEE IS THAT ITS PROFITS SHOULD BE GIVEN BENEFIT OF UNDER - UTILIZATION OF CAPACITY. BY WAY OF GROUND OF APPEAL NO.6, THE ASSESS EE HAS RAISED ANOTHER OBJECTION I.E. ONLY THE SEGMENTAL ACCOUNTS OF AES SHOULD BE CONSIDERED AN D AFTER CARVING OUT, THE MARGINS SHOULD BE COMPARED WITH NON - AES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE EXTENSIVELY ARGUED THE ISSUE BEFORE US AND STRESSED THAT INTERNAL CUP METHOD WAS THE MOST APPROPRIATE METHOD TO BE APPLIED AND AT BEST OR IN THE ALTERNATE, INTERNAL TNMM METHOD MAY BE APPLIED. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE OBJECTED TO THE SUBMISSIONS OF THE ASSESSEE A ND POINTED OUT THAT AT EACH STAGE, THE ASSESSEE WAS RAISING NEW PLEA FOR PICKING UP APPROPRIATE METHOD FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION. THE PLEA OF THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE BEFORE US THAT INITIALLY IT WAS CP M METHOD, FOR WHICH THE ASSESSEE HAD NOT FURNISHED COMPLETE DETAILS AND EVEN THE TP STUDY REPORT WAS NOT AVAILABLE BEFORE THE TPO . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE FURTHER POINTED OUT THAT THE TPO PROPOSED APPLICATION OF TNMM METHOD AND THE ASSESSEE REVISED ITS FIGURES FOR THAT. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US FAIRLY ADMITTED THAT NO PREJUDICE IS CAUSED TO THE REVENUE AS THE FIGURES WE RE SQUARELY RECONCILED THOUGH THERE WERE CERTAIN ERRORS IN THE TP S TUDY. 19 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. 22. IN THE ENTIRETY OF THE ABOVE FACTS AND CIRCUMSTANCES, WHERE THE ASSESSEE IS CHANGING ITS STAND WITH REGARD TO THE APPLICATION OF MOST APPROPRIATE METHOD FROM STAGE TO STAGE I.E. FROM TP STUDY REPORT TO PROCEEDINGS BEFORE ASSESSING OFFICER AND DRP, EVEN BEFORE US AND IN VIEW OF VARIOUS CROSS PLEADINGS RAISED BY THE ASSESSEE, WE THINK IT IS A FIT CASE TO BE SENT BACK TO THE TPO IN ORDER TO ADJUDICATE THE ISSUE OF APPLICATION OF THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSA CTION UNDERTAKEN BY THE ASSESSEE. THE CLAIM OF THE ASSESSEE BEFORE US IS THAT INTERNAL CUP METHOD IS THE MOST APPROPRIATE METHOD IRRESPECTIVE OF THE FACT THAT THE QUANTUM OF DOMESTIC TRANSACTIONS WERE VERY LOW VIS - - VIS THE QUANTUM OF EXPORT SALES MADE TO ITS AES. IN THIS REGARD, RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE DELHI BENCH OF TRIBUNAL IN LUMMUS TECHNOLOGY HEAT TRANSFER BV VS. DCIT (SUPRA) . FURTHER, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS PLACED RELIANCE ON SERIES OF D ECISIONS, WHICH WE HAVE REFERRED TO IN THE ARGUMENTS OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE , BUT ARE NOT DECIDING THE APPLICABILITY OF THE SAID DECISIONS TO THE FACTS OF THE PRESENT CASE, IN VIEW OF OUR SETTING ASIDE THE MATTER BACK TO T HE FILE OF TPO . THE APPLICATION OF TRANSFER PRI CING PROVISIONS HAS UNDERGONE DEVELOPMENT AND IN THE INTEREST OF JUSTICE, WE ARE OF THE VIEW THAT THIS ISSUE NEEDS TO BE LOOKED INTO DE NOVO BY THE TPO / AO IN ORDER TO CORRECTLY DETERMINE THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE. WE ARE NOT ADJUDICATING THE ISSUE AS TO WHICH METHOD IS TO BE APPLIED AND THE ASSESSING OFFICER IS AT LIBERTY TO DECIDE THE I SSUE AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE AS TO THE MOST APPROPRIATE METHOD FOR BENCHMARKING INTERNATIONAL TRANSACTION AND AFTER CONSIDERING THE VARIOUS ASPECTS RAISED BY THE ASSESSEE WITH REGARD TO THE CARVING OUT THE EXPENSES ON ACCOUNT OF UNDER - UTILIZATION OF CAPACITY AND MANPOWER. THE ASSESSING OFFICER SHALL CONSIDER THE VARIOUS OBJECTIONS RAISED BY THE ASSESSEE BEFORE US BEFORE DECIDING THE ISSUE AND THE ASSESSEE IS DIRECTED TO PUT UP ITS CASE BEFORE THE ASSESSING OFFICER VIS - - VIS ITS STAND IN RESPECT OF MOST APPROPRIATE 20 ITA NO. 297 /PN/201 3 M/S. MAGNA STEYR INDIA PVT. LTD. METHOD TO BE APPLIED FOR DETERMINING THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION AND THE ALLIED ISSUES . CONSEQUENTLY, THE ISSUE RAISED BY THE ASSESSEE VIDE GROUND OF APPEAL NO S .3 TO 8 ARE SENT BACK T O THE FILE OF TPO / AO. SINCE WE ARE REMITTING THE ISSUE BACK TO THE FILE OF TPO / AO, WE ARE NOT ADJUDICATING THE ISSUE ON MERITS. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, ALLOWED FOR STATISTICAL PURPOSES. 2 3 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 14 TH DAY OF DECEMBER , 2015. SD/ - SD/ - ( R.K. PANDA ) ( SUSHMA CHOWLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 14 TH DECEMBER , 2015 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : / COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT ; 2. THE RESPONDENT; 3. THE DIT (INTL. TAXATION), PUNE ; 4. THE DRP, PUNE ; 5. THE DR A , ITAT, PUNE; 6. GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE