General Motors (I) Pvt.Ltd., Panchmahal V. The Dy.CIT.,Panchmahal Circle, Godhra

ITA 3096/AHD/2010

• Counselvise Citation: 309620514 RSA 2010
• Duration Of Justice: 2 year(s) 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 04-10-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 19-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D P GUPTA; S C TIWARI TPO
• Keywords: Related party transaction; Gift; Transfer pricing; Principle of natural justice; International transaction; Additional evidence; Working capital adjustments; Wholly owned subsidiary
• Section: 92C; 143(3); 92B; 37(1); 10B; 92

Judgement Text

ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 1 1 IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH AHMEDABAD (BEFORE SHRI G. C. GUPTA, VP AND SHRI A. MOHAN ALAN KAMONY, AM) I.T.A. NOS. 3096/AHD/2010 AND 3308/AHD/2011 A.YS. 2006-07 AND 2007-08 GENERAL MOTORS INDIA PVT. LTD., CHANDRAPURA INDUSTRIAL ESTATE, DIST. PANCHMAHAL, HALOL 389 350 P. A. NO. AAACG 8371 P VS THE D. C. I. T. / A. C. I. T., PANCHMAHAL CIRCLE, GODHARA APPELLANT RESPONDENT APPELLANT BY SHRI S. N. SOPARKAR, AR RESPONDENT BY SHRI S. C. TIWARI, TPO AND SHRI D. P. GUPTA, CIT - DR DATE OF HEARING: 27-06-2013 DATE OF PRONOUNCEMENT: 02-08-2013 O R D E R PER A. MOHAN ALANKAMONY: 1. THESE TWO APPEALS OF THE ASSESSEE COMPANY ARE D IRECTED AGAINST THE ORDERS OF THE AOS U/S 143(3) R.W.S. 144 C OF THE ACT DATED 20.9.2010 AND 28.10.2011 FOR THE ASSESSMENT YEARS 2 006-07 AND 2007-08 RESPECTIVELY. THE ABOVE ORDERS OF THE AOS WERE BAS ED ON THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL [DRP] DATED 27.8.2010 AND 27.9.2011 FOR THE AYS 2006-07 AND 2007-08 RESPECTIVELY. I. ITA NO.3096/A/10 AY 2006-07: 2. FOR THIS ASSESSMENT YEAR, THE ASSESSEE COMPANY [THE ASSESSEE IN SHORT] HAD, IN FACT, RAISED SIX GROUND S IN AN ELABORATE AND ILLUSTRATIVE MANNER. HOWEVER, THE ASSESSEE HAS, SU BSEQUENTLY, COME UP ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 2 2 WITH ITS CONCISE GROUNDS ALONG WITH AN ADDITIONAL G ROUND VIDE ITS LETTER DATED 5.9.2012, ACCORDING TO WHICH, GROUND NO.1 BEING GENERAL IN NATURE; IT DOES NOT SURVIVE FOR ADJUDICATION. THE REMAININ G GROUNDS ARE REFORMULATED AS UNDER: THAT THE AO/TPO ERRED: (2) IN DISALLOWING RS.3,14,830/- BEING PROPORTIONAT E LEASE CHARGES IN RESPECT OF LEASE- HOLD LAND; (3) IN DISALLOWING RS.4,16,978/- BEING EXPENDITURE INCURRED ON GIFTS; (4) IN DISALLOWING RS.2,50,68,560/- ON ACCOUNT OF P ROVISION FOR SLOW MOVING AND OBSOLETE INVENTORY MADE BY THE ASSESSEE IN RESPECT OF S OME ITEMS IN ACCORDANCE WITH THE METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY IT; (5) WITHOUT PREJUDICE, THE AO/DRP ERRED IN NOT ALLO WING A DEDUCTION OF RS.3,67,03,644/- BEING PROVISION FOR SLOW MOVING AND OBSOLETE INVENTORY REVERSED DURING THE YEAR AND CREDITED TO P & L ACCOUNT; (6) IN MAKING AN AD-HOC DISALLOWANCE OF RS.10,60,00 0/- OUT OF ACCOUNT OF WORKMEN AND STAFF WELFARE EXPENSES; (7, 8, 9 & 11) IN MAKING A TRANSFER PRICING ADJUSTM ENT OF RS.152,44,00,000/- [RS.140.26 CRORES + RS.12.18 CRORES]; - BY REDUCING AN EXPENDITURE OF RS.140,26 ,00,000/- ON PURCHASE OF CKD KITS; - BY MAKING AN ADDITION OF RS.12,18,00,000/- IN RES PECT OF ITS TECH. CENTRE OPERATIONS; ADDITIONAL GROUND: - BY MAKING THE TRANSFER PRICING ADDITION T O THE ENTIRE VALUE OF TRANSACTIONS ENTERED INTO BY THE ASSESSEE AND HAD NOT MADE ADJUSTMENTS O NLY TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE (I.E., PROPORTIONATE ADJUSTMENTS) AND IGNORING ESTABLISHED JURISPRUDENCE IN THIS REGARD; & (10) BY NOT PROVIDING THE BENEFIT OF 5 PER CENT RANGE AS PROVIDED BY THE PROVISO TO S. 92C (2) OF THE ACT. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 3 3 II. ITA NO.3308/A/10 AY 2007-08: 2.1. LIKEWISE, FOR THE AY 2007-08 ALSO, THE ASSESS EE HAS RAISED FIFTEEN GROUNDS IN AN EXHAUSTIVE MANNER AND, SUBSEQUENTLY, VIDE ITS LETTER DATED 12.9.2012 SUBSTITUTED THE SAME WITH THIRTEEN CONCISE GROUNDS. 2.2. GROUND NOS.1 & 6 BEING GENERAL AND NO SPECIFIC ISSUES ARE INVOLVED; THEY DO NOT SURVIVE FOR ADJUDICATION. TH E REMAINING CONCISE GROUNDS ARE REFORMULATED AS UNDER: THAT THE AO/TPO ERRED: (2) IN DISALLOWING RS.2,91,258/- BEING PROPORTIONAT E LEASE CHARGES IN RESPECT OF LEASE HOLD-LAND; (3) IN DISALLOWING RS.5,15,876/- BEING EXPENDITURE INCURRED ON GIFTS; (4 & 5) IN DISALLOWING RS.2,44,28,818/- ON ACCOUNT OF PROVISION FOR SLOW MOVING AND OBSOLETE INVENTORY MADE BY THE ASSESSEE IN RES PECT OF SOME ITEMS IN ACCORDANCE WITH THE METHOD OF ACCOUNTING CONSISTENTLY FOL LOWED BY IT; - IN DISALLOWING THE SAID AMOUNT WHICH WAS THE CO ST OF INVENTORY FOR WHICH PROVISION HAD BEEN MADE; (7, 8, 9 & 10) IN MAKING A TRANSFER PRICING ADJUSTM ENT OF RS.227,21,60,504/- [RS.206 CRORES + 16.32 CRORES]; - BY REDUCING THE EXPENDITURE OF RS.206 CRORES ON P URCHASE OF CKD KITS BY THE ASSESSEE FROM ITS AES; - BY MAKING AN ADDITION OF RS.16,32,00,000/- WI TH RESPECT TO ITS TECH. CENTRE OPERATIONS; (11) BY MAKING AN ADDITION OF RS.4,89,60,504/- TO T HE TAXABLE INCOME WITH RESPECT TO ROYALTY TRANSACTION; (12) BY NOT PROVIDING RELIEF ON ACCOUNT OF WORKING CAPITAL ADJUSTMENT TO REFLECT THE DIFFERING LEVELS OF TRADE RECEIVABLES, TRADE PAYABLES AND INVENTORIES (WORKING CAPITAL ADJUSTMENTS) BETWEEN THE ASSESSEE AN D THE POTENTIAL COMPARABLES; & (13) BY NOT PROVIDING THE ASSESSEE THE BENEFIT OF 5 PER CENT RANGE AS PROVIDED BY THE PROVISO TO S. 92 C(2) OF THE ACT. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 4 4 3. AS THE FACTS OF THE ISSUES INVOLVED IN THESE AP PEALS BEING ALMOST SIMILAR AND IDENTICAL, FOR THE SAKE OF CONVE NIENCE AND CLARITY, THEY WERE HEARD, CONSIDERED TOGETHER AND DISPOSED OF IN THIS CONSOLIDATED ORDER. 4. FOR RECORD, WE WOULD LIKE TO POINT OUT THAT THE FINAL ARGUMENTS OF THE CASES WERE CONCLUDED BY THE RIVAL PARTIES ON 15 .3.2013. SUBSEQUENTLY, ON 15.5.2013, THE REVENUE CAME UP WITH THE COPIES O F FINDINGS OF THE HONBLE MUMBAI BENCHES IN THE CASES OF (I) M/S. ONW ARD TECHNOLOGIES LIMITED IN ITA NO.7985/MUM/2010 AND (II) M/S. AURIO NPRO SOLUTIONS LIMITED IN ITA NO.7872/MUM/2001 WITH A PLEA THAT SI NCE THE ISSUE OF DETERMINING OF THE TESTED PARTY UNDER DISPUTE IS COVERED BY THE ABOVE FINDINGS AND IN FAVOUR OF THE REVENUE, THE SAME REQ UIRES TO BE CONSIDERED WHILE DECIDING THE PRESENT APPEALS. IN ORDER TO FA CILITATE THE ASSESSEE TO HAVE ITS COMMENTS, IF ANY, ON THE CASE LAWS ON WHIC H THE REVENUE HAS PLACED ITS RELIANCE (SUPRA), THE CASES WERE SCHEDUL ED FOR FINAL HEARING ON 7.6.2013 AND FINALLY THE CASE WAS RE-HEARD ON 27.06 .2013. 5. REVERTING BACK TO THE MAIN ISSUE, DURING THE CO URSE OF HEARING, THE ASSESSEE VIDE ITS APPLICATION DATED 2.11.2012 S OUGHT THE PERMISSION OF THIS BENCH TO PRODUCE ADDITIONAL EVIDENCE ON THE PR EMISE THAT DURING THE HEARINGS BEFORE THE TPO & DRP, UN-AUDITED ANALYSIS OF THE PRODUCT LINE PROFITABILITY SCHEDULES PREPARED BY THE ASSESSEE IN CLUDING THE FIGURES OF YEARLY SALES AND OPERATING PROFIT WERE SUBMITTED. ONE OF THE OBJECTIONS RECORDED BY THE TPO AND THE DRP WERE THAT THE SAID ACCOUNTS WERE UN- AUDITED. IN VIEW OF THE ABOVE, THE ASSESSEE PLACES THE FOLLOWING ADDITIONAL EVIDENCE ON RECORD: ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 5 5 AUDITED ANALYSIS OF PLP BY GENERAL MOTORS INDIA (G MI) WITH THE TRANSFER PRICING CALCULATION OF GENERAL MOTOR DAEWO O AUTO & TECHNOLOGY [GMDAT] FOR THE PERIOD FROM 1.4.2006 TO 31.3.2007. 5.1. AFTER HEARING THE RIVAL PARTIES AND ALSO HAVI NG CONSIDERED THE REASONING OF THE ASSESSEE IN NON-FURNISHING OF THE AUDITED ACCOUNTS BEFORE THE AUTHORITIES BELOW EARLIER, THE ADDITIONAL EVIDE NCE NOW SOUGHT TO BE FURNISHED WAS DIRECTED TO BE PLACED ON RECORD. 6. WE SHALL NOW PROCEED TO ADJUDICATE THE ISSUES C HRONOLOGICALLY AS UNDER: BRIEFLY STATED, THE ISSUES INVOLVED ARE THAT A.Y. 2006-07 : 7. THE ASSESSEE IS ENGAGED IN MANUFACTURE AND TRAD ING OF AUTOMOBILES AND ITS PARTS. THE ASSESSEE HAD, FOR T HE ASSESSMENT YEAR 2006-07 FURNISHED ITS RETURN OF INCOME ADMITTING N IL INCOME. THE AO HAD MADE A REFERENCE U/S 92CA (1) OF THE ACT TO THE TPO FOR COMPUTATION OF ALP IN RELATION TO THE INTERNATIONAL TRANSACTION AS DETAILED IN THE AUDIT REPORT IN FORM NO.3CEB. THE TPO HAD PASSED AN ORDER U/S 92 CA (3) OF THE ACT, PROPOSING AN ADJUSTMENT OF RS.152.44 CRORES THEREBY ENHANCING THE INCOME OF THE ASSESSEE BY THE SAID SUM. IN THE TP PROCEEDINGS, THE ASSESSEE HAD MADE VARIOUS SUBMISSIONS WITH REGARD T O REDUCTION IN THE EXPENDITURE ON PURCHASE OF CKD KITS AND SERVICES, C HANGE OF TESTED PARTY, PARTIAL/TOTAL DISALLOWANCE OF EXTRAORDINARY EXPENSE S ON ACCOUNT OF ADJUSTMENTS MADE TO COMPENSATE FOR LOWER CAPACITY U TILIZATION, REDUCTION OF COST ON ACCOUNT OF LOWER LEVEL OF INDIGENIZATION, R EDUCTION IN THE QUANTUM OF ADDITIONAL MARKETING, ADVERTISEMENT, SELECTION O F COMPANIES WHICH ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 6 6 RELATED TO PARTY TRANSACTIONS ETC. IN RESPECT OF TE CH. CENTRE OPERATIONS ALSO, VARIOUS SUBMISSIONS WERE MADE WITH RESPECT TO SELECTION OF COMPARABLE COMPANIES WITH DIFFERENT BUSINESS PROFIT S, USE OF SINGLE YEAR DATA FOR THE PURPOSE OF COMPARISON, CLAIM OF BENEFI T OF 5% RANGE AND OTHER OBJECTIONS. THE TPO DEALT WITH EACH ISSUE AND OTHE R OBJECTIONS IN HIS ORDER AND MADE AN ADJUSTMENT OF RS.33.49 CRORES IN PURCHASE OF CKD KITS AND SERVICES AND RS.19.66 CRORES IN TECH. CENTRE OP ERATIONS. 7.1. AFTER DUE CONSIDERATION OF THE ASSESSEES SUB MISSIONS AND FOR THE REASONS RECORDED THEREIN, THE DRP DIRECTED THE AO TO ENHANCE THE INCOME OF THE ASSESSEE. ACCORDINGLY, THE AO HAD, I N HIS ORDER U/S 143(3) R.W.S. 144C OF THE ACT DATED 20.9.2010 WORKED OUT T HE GROSS TOTAL INCOME OF THE ASSESSEE AT RS.191.69 CRORES WHICH CONSISTED OF, AMONG OTHERS, THE FOLLOWING ADDITIONS: (I) ADJUSTMENT ON ACCOUNT OF ALP IN INTL. TRANSACTI ONS [INCLUDING RS.140.26 CRORES BEING EXPENDITURE ON PURCHASE OF CKD KITS AND RS.12.18 CRORES UNDER TECH CENTRE OPERATIONS] RS.152,44,00,000 (II) AMORTIZATION OF LEASE HOLD-LAND RS. 3,14,830 (III) OUT OF GIFT EXP. RS. 4,16,978 (IV) OUT OF WORKMEN & STAFF WELFARE EXP. RS. 10,60 ,000 (V) OUT OF COST OF WASTAGE & OBSOLETE MATERIAL ETC ., RS. 2,50,68,560 A.Y. 2007-08 : 7.2. LIKEWISE, FOR THIS ASSESSMENT YEAR TOO, THE A O HAD, U/S 143 (3) R.W.S. 144C OF THE ACT DATED 28.10.2011, MADE THE F OLLOWING ADDITIONS, AS PER THE DIRECTIONS OF THE DRP AND FOR THE DETAILED REASONS RECORDED IN THE ASSESSMENT ORDER, NAMELY: ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 7 7 (I) ADJUSTMENT ON ACCOUNT OF ALP IN INTL. TRANSACTI ONS [INCLUDING RS.206 + 4.9 + 16.32 CRORES] BEING EXPENDITURE ON PURCHASE OF CKD KITS, ROYALTY AND TECH CENTRE OPERATIO NS RS.227,21,60,504 (II)AMORTIZATION OF LEASE HOLD-LAND RS. 2,91,258 (III) OUT OF GIFT EXP. RS. 5,15,876 (IV) OUT OF COST OF WASTAGE & OBSOLETE MATERIALS RS. 2,44,28,818 7.3. AGGRIEVED, THE ASSESSEE HAS COME UP BEFORE US WITH THE PRESENT APPEALS. 8. THOUGH THE ASSESSEE HAS, IN ITS GROUNDS OF APPE ALS FOR BOTH THE AYS, RAISED VARIOUS ISSUES, THE MAIN AND FOREMOST I SSUE [ GROUND NOS.7, 8, 9 & 11 FOR THE AY 2006-07 AND GR. NOS. 7, 8, 9 & 10 FOR THE AY 2007-08 ] FOCUSED WAS THAT THE CASE OF THE ASSESSEE WAS MORE COMPARABLE TO GMDAT AND NOT WITH MAHINDRA & MAHINDRA (M & M) AS A TTRIBUTED BY THE TPO/DRP. 8.1. THEREFORE, THE MAIN ISSUE RAISED IN GROUND NO S. 7, 8, 9 & 11 AND GR. NOS.7, 8, 9 & 10 FOR THE AYS. 2006-07 AND 2 007-08 RESPECTIVELY ARE TAKEN UP FOR ADJUDICATION, AS UNDER: 9. IT WAS THE CONTENTION OF THE ASSESSEE BEFORE T HE TPO/DRP THAT THE FUNCTIONS PERFORMED BY GMDAT INCLUDE DESIGNING AND DEVELOPING OF CKD KITS AND COMPONENTS, RESEARCH AND DEVELOPMENT F ROM TIME TO TIME, PRODUCTION OF THE CKD KITS AND COMPONENTS REQUIRED BY CKD ASSEMBLERS, PROCURING CKD KITS AND COMPONENTS FROM THIRD PARTIE S, QUALITY CONTROL AND TESTING AS NECESSARY IN RESPECT OF MANUFACTURED AND PROCURED CKD KITS AND COMPONENTS, PACKING, STORING AND SHIPPING OF TH E CKD KITS AND COMPONENTS TO CKD ASSEMBLERS BASED ON THE PURCHASE ORDERS. GMDAT OWNS ROUTINE TANGIBLE ASSETS LIKE FIXED ASSETS, INV ENTORY AND ACCOUNTS ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 8 8 RECEIVABLES. IT HAS THE REQUISITE INFRASTRUCTURE S UCH AS LAND AND BUILDINGS, MACHINERY AND TOOLS FOR MANUFACTURING OF KITS. IT ALSO OWNS MANUFACTURING FACILITIES SUCH AS NECESSARY MANUFACTURING EQUIPMEN T AND TOOLS. 9.1.1. A COMPARATIVE CHART GIVING FUNCTIONS PERFOR MED BY THE ASSESSEE AND GMDAT WAS PRODUCED TO MAKE AN IMPACT T HAT THE ASSESSEE CARRIES THE ENTREPRENEURIAL ROLE IN RELATION TO SAL E OF GM CARS IN INDIA BY LOCALIZING CARS, BUILDING DEALER NETWORK AND OVERAL L SALES AND MARKETING FUNCTION. DEVELOPING MARKET IS AN IMPORTANT AND DI FFICULT TASK TO BE PERFORMED IN BUSINESS. THE PRODUCT FAILURE RISK AF TER ASSEMBLING OF A VEHICLE AND OBSOLESCENCE RISK DUE TO CHANGING TECHN OLOGY AND DYNAMIC MARKET CONDITIONS ARE ALSO BORNE BY THE ASSESSEE. THE ASSESSEE IS RESPONSIBLE FOR DEVELOPING LOCAL MARKETING INTANGIB LES FOR COMPETING IN THE INDIAN MARKET. THE FUNCTIONS AND RISKS OF THE ASSE SSEE ARE MORE COMPLEX IN NATURE. 9.1.2. UNDER TNMM, VARIOUS SUITABLE ADJUSTMENTS WE RE MADE TO MITIGATE THE MATERIAL DIFFERENCES ON ACCOUNT OF VAR IOUS EXTRA-ORDINARY FACTORS EXPERIENCED BY THE ASSESSEE VIS--VIS COMPA RABLE COMPANIES. ATTENTION WAS DRAWN TO THE DECISION IN THE CASE OF MENTOR GRAPHICS (NOIDA) PVT. LTD V. DCIT (2007) 109 ITD 101 (DEL). 9.1.3. DESCRIPTION OF VARIOUS PRODUCES MANUFACTURE D BY COMPARABLE COMPANIES PROPOSED BY THE TPO/ASSESSEE ALONG WITH C OMPANIES SELECTED AS COMPARABLES IN THE TRANSFER PRICING DOCUMENTS WA S AS UNDER: ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 9 9 NAME OF THE COMPANY SELECTED BY THE ASSESSEE SELECTED BY THE TPO PRODUCT PROFILE FORCE MOTORS LIMITED X ON-ROAD AUTOMOBILES HAVING 4 OR MORE WHEELS SUCH AS LIGHT, MEDIUM AND HEAVY COMMERCIAL VEHICLES, JEEP TYPE VEHICLES AND PASSER CARS, AGRICULTURAL TRACTOR AND DIESEL ENGINES FOR OTHER PURPOSES HINDUSTAN MOTORS LTD X PASSENGER CARS IN THE MID SIZE PREMIUM SEGMENT, SPORTS UTILITY VEHICLE, UTILITY VEHICLES, MULTI-PURPOSE VEHICLES AND TOTAL PASSENGER VEHICLES [MITSUBISHI LANCER, MITSUBISHI PAJERO, LANCER CEDIA, AMBASSADOR] MAHINDRA & MAHINDRA LIMITED FOUR OR MORE WHEELS SUCH AS LIGHT, MEDIUM AND HEAVY COMMERCIAL VEHICLES, JEEP TYPE VEHICLES AND PASSENGER CARS (SCORPIO, BALERO, CARGO THREE WHEELER CHAMPION ALFA) 9.1.4. IT WAS, FURTHER, SUBMITTED THAT AS PER ANNU AL REPORT OF MAHINDRA AND MAHINDRA LIMITED, THE COMPANY IS ENGAGED IN THE MANUFACTURING MULTI UTILITY VEHICLE [MUV], LCV AND THREE WHEELER SEGMEN TS AND THAT THE FUNCTIONS PERFORMED BY FORCE MOTORS LIMITED ARE BRO ADLY SIMILAR TO THE FUNCTIONS PERFORMED BY M & M AND, HENCE, FORCE MOTO RS LIMITED SHOULD BE CONSIDERED AS COMPARABLE. IT WAS POINTED OUT THAT DURING THE YEAR, FORCE MOTOR LIMITED UTILIZED 57.89% CAPACITY WITH RESPECT TO ON-ROAD AUTOMOBILES HAVING 4 OR MORE WHEELS, IMPORTED CERTAIN TECHNOLOG Y FOR MANUFACTURE OF CARS AND SPENT CONSIDERABLE SUM ON R & D. 9.1.5. HINDUSTAN MOTORS LIMITED IS THE WELL KNOWN BRAND IN THE INDIAN MARKET AND DURING THE PERIOD UNDER CONSIDERATION, H INDUSTAN MOTORS LTD HAS IMPORTED CERTAIN TECHNOLOGY FOR MANUFACTURE OF CARS, HAS REPORTED EXPORT EARNINGS, LAUNCHED NEW PRODUCTS AND MADE A P ROFIT OF RS.12.78 CRORES BEFORE TAX. MERELY ON ACCOUNT OF LOSSES, IT CANNOT BE REJECTED. 9.1.6. IT WAS ARGUED BEFORE THE AUTHORITIES BELOW THAT IF STRINGENT COMPARABILITY ANALYSIS AS ADOPTED BY THE TPO WERE T O BE ADOPTED, M & M SHOULD ALSO BE PUT TO SUCH STRINGENT COMPARABILITY CRITERION. M&M IS ALSO ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 10 10 INVOLVED IN THE MANUFACTURE OF MULTI UTILITY VEHICL ES, LIGHT COMMERCIAL VEHICLES AS WELL AS THREE WHEELERS APART FROM PASSE NGER CARS. IF FORCE MOTOR LIMITED IS TO BE REJECTED ON THE BASIS OF DIF FERENT PRODUCT PROFILE, M&M SHOULD ALSO BE REJECTED ON THE SAME BASIS. A COMPARATIVE CHART IS AS UNDER: COMPANY NAME (MAR-07) 12 MONTHS % PROFIT SELECTED BY TURNOVER (MAR 07) 12 MONTHS (RS. IN CRORES) FORCE MOTORS LIMITED -5.29 ASSESSEE 1138.96 HINDUSTAN MOTOR LIMITED 4.92 ASSESSEE 625.18 MAHINDRA & MAHINDRA LTD 9.70 ASSESSEE/TPO 6490.38 ARITHMETIC MEAN (2 COMPARABLES EXCLUDING HINDUSTAN) 2.20 ARITHMETIC MEAN (3 COMPARABLES 3.11 GMI MARGIN (BEFORE ADJUSTMENT) -0.62 1844.10 GMI MARGIN (AFTER ADJUSTMENT CONSIDERING 2 COMPARABLES) 4.16 GMI MARGIN (AFTER ADJUSTMENT CONSIDERING 3 COMPARABLES) 2.88 9.1.7. IT WAS, FURTHER, ARGUED BY THE ASSESSEE THA T BASED ON THE PRIOR YEARS APPROACH, THE TPO SELECTED ONLY ONE COMPANY AS COMPARABLE AND NO FRESH ANALYSIS WAS UNDERTAKEN FOR THE SAME COMPA RABLES. STRINGENT COMPARABILITY FILTERS WERE APPLIED TO REJECT TWO CO MPANIES SELECTED BY THE ASSESSEE. TPO WAS NOT CONSISTENT WHILE APPLYING FI LTERS AND SELECTING THE FINAL COMPARABLE COMPANIES. TPO HAD FINALLY PROPOS ED ONE COMPANY (M&M AS A COMPARABLE WITH A PROFIT MARGIN OF 9.7 PE RCENT ON REVENUE). 9.1.8. IT WAS SUBMITTED THAT THE ASSESSEE CARRIED OUT ADJUSTMENTS TO THE OPERATION MARGIN ON ACCOUNT OF IDLE CAPACITY AD JUSTMENT; INDIGENIZATION ADJUSTMENT AND EXCESSIVE MARKETING SPEND. THE NORM ALIZED PROFITABILITY FOR ASSESSEE WAS WORKED OUT TO BE 5.9 PER CENT WHIC H WAS REJECTED BY THE TPO STATING THAT ADJUSTMENT SHOULD BE MADE IF THE D IFFERENCE EXISTS IN ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 11 11 RESPECT OF DETAILS OF THE COMPARABLES VIS--VIS THE ASSESSEE. IT WAS ALSO CONTENDED BY THE ASSESSEE THAT ADJUSTMENT SHOULD BE APPLIED IN RELATION TO THE COST PRICE PERTAINING TO THE IMPORTED GOODS. R ELIANCE WAS PLACED ON THE DECISION IN THE CASE OF IL JIN ELECTRONICS (I) PVT. LTD. [438/DEL/2008]. 9.2. AFTER TAKING INTO CONSIDERATION OF THE SUBMIS SION OF THE ASSESSEE, THE DRP HAD RECORDED ITS FINDINGS [FOR TH E AY 2007-08 UNDER DISPUTE] AS UNDER: (ON PAGE 19) 11..THE TESTED PARTY HAS TO BE PARTICIPANT IN THE CONTROLLED TRANSACTION WHOSE OPERATING PROFIT ATTRI BUTABLE TO THE CONTROLLED TRANSACTIONS CAN BE VERIFIED USING THE MOST RELIABL E DATA AND REQUIRING THE FEWEST AND MOST RELIABLE ADJUSTMENT AND FOR WHICH RELIABLE DAT A REGARDING UNCONTROLLED COMPARABLES CAN BE LOCATED. CONSEQUENTLY, IN MOST CASES THE TESTED PARTY WILL BE THE LEAST COMPLEX OF THE CONTROLLED TAX PAYERS AND WILL NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSETS THAT DISTINGUISH IT FROM POTENTIAL UNCONTROLLED COMPARABLES. AS GMDAT IS NOT ONLY A COMPLEX ENTITY OWING VALUABL E INTANGIBLES, THE DATA FOR COMPARABILITY OF GMDAT OR THE COMPARABLES IS ALSO N OT AVAILABLE. IT WAS STATED THAT IN CASE MAHINDRA & MAHINDRA LTD IS TAKEN AS A COMPARABLE THEN FORCE MOTORS LTD., BEING FUNCTIONALLY SIMILAR, SHOU LD ALSO BE TAKEN AS A COMPARABLE WITH GENERAL MOTORS AS ITS SALES GROWTH IS ALMOST N IL WHEREAS GENERAL MOTORS IS SHOWING GROWTH WELL ABOVE THE INDUSTRY STANDARD IN THE LAST FEW YEARS. FOR F Y 2007, 2008 AND 2009, FORCE MOTORS IS SHOWING NET LOSSES. THE COMPANY IS NOT FINANCIALLY STABLE; IT IS NOT TREATED AS COMPARABLE. FORCE MOT ORS IS NEVER CONSIDERED AS A PART OF INDUSTRY WHEREAS MAHINDRA & MAHINDRA LTD IS MANUFAC TURING MOTOR VEHICLES BESIDES TRACTORS AND IS ALWAYS CONSIDERED AS PART OF THE MO TOR INDUSTRY. FROM THE COMPANIES SELECTED BY THE TPO AND THE ASSE SSEE, MAHINDRA & MAHINDRA LTD IS A COMPANY SELECTED BY BOTH. ALSO WITH RESPE CT TO PRODUCT RANGE BEING SIMILAR BRAND COMMAND, SCALE OF OPERATION/MARKET SHARE, GRO WTH RATE IN LAST PAST SEVERAL YEARS IN INDIA, EXPORT, NON-RELATED PARTY TRANSACTI ONS BEING LESS THAN 25%, NEW PRODUCTS/MODELS LAUNCHED AND PRODUCTION SCALE BEING PLANT CAPACITY UTILIZATION ABOVE 50% MAHINDRA & MAHINDRA LTD IS ALMOST SIMILAR TO TH E ASSESSEE. THE ASSESSEE HAD ARGUED THAT FORCE MOTORS WERE PLAN NING TO LAUNCH NEW SUV AND THAT FORCE MOTORS WERE ONE OF THE MAJOR PLAYERS IN THE AUTOMOBILE INDUSTRY. ABOUT MAHINDRA & MAHINDRA, IT WAS CONTENDED THAT THE TOTA L TURNOVER OF THE COMP ANY WAS MORE THAN RS.20,323 CRORES WHICH IS MUCH HIGHER THA N THE ASSESSEE COMPANY. HOWEVER, AS PER THE INFORMATION AVAILABLE, FORCE MO TORS ARE PLANNING TO LAUNCH SUV IN THE YEAR 2011 WHICH HAS NO RELEVANCE WITH THE FI NANCIAL DATA FOR ASSESSMENT YEAR 2007-08. THE TURNOVER OF MAHINDRA & MAHINDRA IN THE JEEPS SEGMENT IS APPROXIMATELY RS.6500 CRORES WHICH IS COMPARABLE WI TH THAT OF THE ASSESSEE. IN VIEW OF THE FACTS NARRATED ABOVE, THE RESULTS OF ASSESSEE HAVE TO BE COMPARED WITH MAHINDRA & MAHINDRA ONLY.. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 12 12 10. AGGRIEVED BY THE STAND OF THE TPO/DRP IN THE I SSUE OF TESTED PARTY, AMONG OTHERS, THE ASSESSEE HAS COME UP BEFO RE US. 10.1. DURING THE COURSE OF HEARING, THE LENGTHY AN D ELABORATE SUBMISSIONS MADE BY THE LEARNED SENIOR COUNSEL ARE SUMMARIZED AS UNDER: 10.1.1. IN REBUTTING THE LEARNED DRS ACCUSATION TH AT THE ASSESSEE HAD NOT PRODUCED THE ENTIRE FUNCTIONAL ANALYSIS OF THE ASSESSEE - GENERAL MOTORS INDIA PRIVATE LIMITED THE LEARNED COUNSEL DREW OUR ATTENTION TO THE TRANSFER PRICING REPORT [PAGES 13 TO 19] WHEREI N A DETAILED RECORD OF FUNCTIONS PERFORMED BY THE ASSESSEE AND GENERAL MOT ORS DAEWOO & AUTO TECHNOLOGY LIMITED [GMDAT] WERE RECORDED. IT WAS, FURTHER, SUBMITTED THAT THE LEARNED DR IN HIS SUBMISSION HAD CONFINED ONLY A PART OF THE FUNCTIONS PERFORMED BY THE ASSESSEE WHEREAS FOR GMD AT, HE HAD REPRODUCED THE ENTIRE LIST OF FUNCTIONS PERFORMED [ COURTESY: ANNEXURE EXHIBIT II OF DRS SUBMISSION] THEREBY, ACCORDING T O THE LEARNED SR. COUNSEL, A SYSTEMATIC ATTEMPT WAS MADE TO UNDERPLAY THE FUNCTIONS ACTUALLY PERFORMED BY THE ASSESSEE VIS--VIS GMDAT. 10.1.2. THE FUNCTIONS PERFORMED BY THE ASSESSEE AND GMDAT WITH RESPECT TO PURCHASE OF CKD KITS AND COMPONENTS ARE PROVIDED AS UNDER: 10.1.3. GMDAT IS THE SUCCESSOR TO DAEWOO MOTOR COMP ANY WHICH WAS ORIGINALLY ESTABLISHED IN 1965 AS SHINJIN MOTOR S AND IN 1972; SHINJIN MOTORS ENTERED INTO A JOINT VENTURE WITH GM AND CHA NGED ITS NAME TO GENERAL MOTORS KOREA AND LATER ON IN 1976 TO SAEHAN MOTOR. IN 1982, WHEN THE DAEWOO GROUP GAINED CONTROL OVER THE COMPA NY, THE NAME WAS CHANGED TO DAEWOO MOTOR COMPANY. IT WAS, FURTHER, SUBMITTED THAT THE ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 13 13 DAEWOO GROUP OF COMPANIES WHICH INCLUDED MANY BUSIN ESSES OF WHICH DAEWOO MOTOR COMPANY WAS ONE, WENT BANKRUPT IN ASIA N FINANCIAL CRISIS AND IN 2002, THE TRADE AND ASSETS OF DAEWOO MOTOR C OMPANY WERE PURCHASED BY GENERAL MOTORS. GMDAT AT THAT TIME WA S OWNED 55.4 PER CENT BY THIRD PARTIES AND 44.6 PER CENT BY GM. 10.1.4. THE COMPANY DEVELOPS, MANUFACTURES AND MARK ETS PASSENGER VEHICLES AND ASSOCIATED REPLACEMENT PARTS AND ACCES SORIES. IT OWNS AND OPERATES FOUR MANUFACTURING FACILITIES, A R & D CEN TRE AND A DESIGN CENTRE IN KOREA. THE SHAREHOLDING PATTERN OF THE COMPANY FOR THE FY 2006-07 WAS AS UNDER: NAME OF SHAREHOLDER HOLD ING (%) 1. GENERAL MOTORS INVESTMENT PTY LTD, AUSTRALIA 48.19 2. SUZUKI MOTOR CORPORATION, JAPAN 11.24 3. KOREAN DEVELOPMENT BANK. KOREA 27.97 4. SHANGHAI AUTOMOTIVE INDUSTRY CORPORATION, CHINA 09.89 5. GENERAL MOTORS ASIA PACIFIC HOLDINGS LLC, AUSTRA LIA 02.71 10.1.5. WITH REGARD TO THE MARKET PRESENCE AND PROD UCT PROFILE FOR GMDAT, IT WAS SUBMITTED THAT (I) GMDAT PROVIDES GM WITH IMMEDIATE ACCESS TO THE KOREAN MARKET AND A RANGE OF COST-COMPETITIVE PRODUCTS WITH GLOBA L APPEAL AND WORLD- CLASS PRODUCT ENGINEERING AND DIE MANUFACTURING CAP ABILITIES. GMDAT HAS ITS HEADQUARTERS IN BUPYOENG-KU, INCHEON. IT IS AL SO RESPONSIBLE FOR PRODUCTION AND SALES AT HOME AND ABROAD; (II) THAT IT SELLS VEHICLES IN MORE THAN 150 MARKET S WORLDWIDE AND THE SALES IN THE DOMESTIC MARKET ARE MADE THROUGH DAEWO O MOTOR SALES CORPORATION WHEREAS IN THE OVERSEAS MARKET, IT IS T HROUGH THE ASSOCIATED ENTERPRISES (AE); ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 14 14 (III) THAT GMDATS VEHICLES ARE SOLD UNDER GM BRAN DS IN MOST MARKETS AND THIS ALLOWS GMDAT TO CAPITALIZE ON BRANDS THAT GM HAS ALREADY ESTABLISHED WITHOUT THE NEED FOR GMDAT TO BUILD UP ITS OWN BRANCH. THE COMPANY FOCUSES ON SMALLER SIZED VEHICLES TO COMPLE MENT GMS PRODUCT OFFERINGS WHICH ARE FOCUSED ON THE LARGER SIZED PAS SENGER CARS, SUVS AND PICK-UP TRUCKS. THE SMALL SIZE CARS HAVE BEEN ONE OF GMDATS MOST POPULAR PRODUCTS GLOBALLY; (IV) THAT THE COMPANY PRODUCES AND SELLS FINISHED V EHICLES [INTERNALLY REFERRED TO AS COMPLETE BUILT-UP UNITS [CUBS] TO IT S ASSOCIATED ENTERPRISES FOR DISTRIBUTION IN THE LOCAL MARKETS. THE COMPANY ALSO PRODUCES AND SELLS FINISHED VEHICLE KITS [INTERNALLY REFERRED AS CKD K ITS] TO ITS ASSOCIATED ENTERPRISES WHO IN TURN ASSEMBLE THE CKD KITS TO PR ODUCE FINISHED VEHICLES; (V) THAT IN ADDITION TO CKD KITS, GMDAT ALSO PRODUC ES AND PURCHASES PARTS AND ACCESSORIES FOR USE IN ITS VEHICLES. THE COMPANY SELLS PARTS AND ACCESSORIES TO ITS ASSOCIATED ENTERPRISES FOR RESAL E IN LOCAL MARKETS; (VI) THAT CKD KITS MAY INCLUDE ESSENTIALLY A COMPLE TE KIT TO BUILD AN AUTOMOBILE I.E., ENGINE, TRANSMISSION, BODY PANELS ETC., OR MAY INCLUDE ONLY THE KEY COMPONENTS WHERE THE SIGNIFICANT PORTION OF THE AUTOMOBILE PARTS ARE INDIGENIZED; (VII) THAT AT A START OF EACH FINANCIAL YEAR, A PRI CE-WALK IS PERFORMED AND A PRICING APPROACH IS THEN ESTABLISHED BASED ON BUDGE TED COSTS AND REVENUES OF THE PARTIES INVOLVED. PRICING OF CKD K ITS FOLLOW COST PLUS MARK- UP BASED APPROACHES INTERNALLY REFERRED TO AS FULL Y COSTED PRICES; ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 15 15 (VIII) THAT UNDER THIS METHOD, THE TRANSFER PRICES OF CKD KITS CONSIST OF THE FOLLOWING COMPONENTS: (A) COST OF SUPPLYING IN-HOUSE PARTS PLUS A 8 PE RCENT MARKUP; (B) COST OF PURCHASING PARTS FROM OUTSIDE VENDORS P LUS A 4 PERCENT MARK- UP; (C) COST OF CONSOLIDATING AND PACKAGING INTO CKD KI TS PLUS 5 PERCENT MARK-UP; & (D) MARKET ADJUSTED PRICES; (IX) THAT IN CASES WHERE THE FULLY COSTED PRICING C ANNOT BE ADOPTED, THEN THE MARKET ADJUSTED PRICES WERE USED. THIS WAS A M ARKET BASED APPROACH SINCE MARKET CONDITIONS WERE ALSO CONSIDERED FOR DE TERMINING THE TRANSFER PRICES. IN SUCH A SCENARIO, GMDAT AND CKD ASSEMBLE RS NEGOTIATE THE FINAL TRANSFER PRICE HAVING REGARD TO THE MARKET CO NDITIONS AND OTHER MACRO ECONOMIC FACTORS IN THE CKD ASSEMBLERS JURISDICTIO N; (X) AS REGARDS TO THE TRANSACTIONS WITH THE ASSESSE E, GIVEN THE FACT INDIA IS UNIQUE IN TERMS OF MARKET COMPETITION AND DEMAND VARIABLES AND THE FACT THAT THE ASSESSEE WAS RE-ESTABLISHING ITSELF WITH A NEW BRAND, FLEXIBILITY IN THE TRANSFER PRICES WERE REQUIRED. HAVING REGARD TO THIS, A MARKET ADJUSTED PRICE WAS CONSIDERED TO BE MORE SUITABLE; (XI) THAT GMDAT WAS PERFORMING THE FOLLOWING FUNCTI ONS, NAMELY: (A) DESIGNING AND DEVELOPING CKD KITS AND COMPONENT S FROM TIME TO TIME; (B) UNDERTAKING RESEARCH AND DEVELOPMENT FROM TIME TO TIME; (C) PRODUCTION OF THE CKD KITS AND COMPONENTS THAT ARE REQUIRED BY CKD ASSEMBLERS; ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 16 16 (D) PROCURING CKD KITS AND COMPONENTS FROM THIRD PA RTIES; (E) QUALITY CONTROL AND TESTING AS NECESSARY IN RES PECT OF MANUFACTURED AND PROCURED CKD KITS AND COMPONENTS; & (F) PACKING, STORING AND SHIPPING THE CKD KITS AND COMPONENTS TO CKD ASSEMBLERS BASED ON PURCHASE ORDERS; (XII) THAT THE FUNCTIONS PERFORMED BY GMI (THE ASSE SSEE) ARE - (A) THAT THE ASSESSEE PURCHASES CKD KITS AND COMPON ENTS FROM GMDAT FOR ASSEMBLING CARS; AND THAT THESE KITS ARE IN ADDITION TO LOCALLY PURCHASED COMPONENTS WHICH ARE ALSO USED IN THE CARS MANUFACTURED; (B) THAT TO EFFECTIVELY MEET THE AFTER SALES SERVIC ING NEEDS OF ITS CUSTOMERS, THE ASSESSEE IMPORTS SPARE PARTS AND ACC ESSORIES FROM GMDAT IN ADDITION TO LOCAL PROCUREMENT FOR THE IR RESALE IN INDIA; AND THAT THE ASSESSEE IMPORTS SPARE PARTS AN D ACCESSORIES AS FINISHED GOODS AND DO NOT UNDERTAKE ANY FURTHER VALUE ADDITION AND THE ASSESSEE ALSO DISTRIBUTES THE IMPORTED SPAR E PARTS AND ACCESSORIES THROUGH ITS DEALERSHIP NETWORK; 10.1.6. WITH REGARD TO THE SELECTION OF GMDAT AS TH E TESTED PARTY BY THE ASSESSEE, IT WAS SUBMITTED THAT: (I) GMDAT IN RELATION TO SALE OF CKD KITS AND COMPO NENTS TO GMI ACTS AS A CONTRACT MANUFACTURER UNDERTAKING LIMITED FUNC TIONS. ON THE OTHER HAND, THE ASSESSEE CARRIES THE ENTREPRENEURIAL ROLE IN RELATION TO SALE OF GM CARS IN INDIA; A. THAT GMDAT CARRIES THE LIMITED FUNCTION FOR MANU FACTURING OF CKD KITS AND COMPONENTS; ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 17 17 B. THE GMDAT ASSUMES LIMITED RISKS IN THIS REGARD; C. GMDAT IS SIMPLER OF THE TWO ENTITIES AND, HENCE, CONSIDERED AS THE TESTED PARTY; D. ADEQUATE AND RELIABLE DATE IS AVAILABLE FOR GMDA T AND ITS COMPARABLE COMPANIES; AND E. CHOICE OF GMDAT AS THE TESTED PARTY IS IN LINE W ITH THE OECD TRANSFER PRICING GUIDELINES; 10.1.7. IN RESPECT OF NON-SELECTION OF GMI (THE ASS ESSEE) AS THE TESTED PARTY, THE LEARNED SR. COUNSEL SUBMITTED THAT - (I) GMI ACTS AS AN ENTREPRENEUR IN RELATION TO SALE OF GM CARS IN INDIA UNDERTAKING FULL RISKS IS IN THIS REGARD. ON THE O THER HAND, GMDAT ACT AS A CONTRACT MANUFACTURER UNDERTAKING LIMITED RISKS AND OWNING ROUTINE INTANGIBLES; (II) GMI IS ENTIRELY RESPONSIBLE FOR THE SALE OF CA RS ASSEMBLED BY IT IN INDIA. TOWARDS THIS END, GMI MARKETS THE CARS THROU GH ITS EXTENSIVE NETWORK OF DEALERS THROUGHOUT THE COUNTRY; (III) GMI IS ALSO INVOLVED IN SUPPLY CHAIN MANAGEME NT INCLUDING IDENTIFYING THE MARKET OPPORTUNITIES, PURCHASING, D ESIGNING, LOGISTICS, PRODUCTION, RESEARCH AND DEVELOPMENT, ASSEMBLING, D ISTRIBUTION, MARKETING, FINANCE AND SALE OF FINISHED PRODUCTS; (IV) GMIS PROFITABILITY IS IMPACTED BY A NUMBER OF FACTORS INCLUDING EXTERNAL MARKET CONDITIONS, MARKET COMPETITION ETC. , IT IS DIFFICULT TO ACCURATE ADJUSTMENTS TO MAKE SUCH DATA COMPARABLE TO THAT OF THE COMPARABLES; ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 18 18 (V) INDIAN TRANSFER PRICING REGULATIONS DO NOT STIP ULATE USE OF ONLY INDIAN COMPANY AS THE TESTED PARTY; (VI) THUS BASED ON THE ABOVE, IT WAS CONCLUDED THAT GMDAT CARRIES OUT LIMITED FUNCTIONS IN RELATION TO SALE OF CKD KITS A ND COMPONENTS WHEREAS GMI CARRIES THE ENTREPRENEURIAL ROLE IN RELATION TO SALE OF GM CARS IN INDIA; 10.1.8. FURTHER, TESTING THE PROFITABILITY OF GMI ( WHICH IS SUBJECT TO VARIOUS EXTERNAL FACTORS) WOULD REQUIRE A NUMBER OF ADJUSTMENTS GIVEN THAT THERE WERE CERTAIN PECULIAR CIRCUMSTANCES THAT WERE AFFECTING THE NET OPERATING PROFIT OF GMI. THUS, IN ORDER TO MAKE A COMPARISON AS REQUIRED U/S 92C(1) AND 92C(2) OF THE ACT READ WITH RULE 10B (1)(E) AND RULE 10B(3), CERTAIN APPROPRIATE ADJUSTMENTS NEEDED TO BE CARRIE D OUT, NAMELY: (I) IDLE CAPACITY ADJUSTMENT; (II) INDIGENIZATION A DJUSTMENT & (III) MARKETING ADJUSTMENT. 10.1.9. HENCE, BASED ON THE ABOVE CONSIDERATION IT WAS APPROPRIATE TO SELECT GMDAT AS THE TESTED PARTY FOR ANALYZING THE INTER-COMPANY TRANSACTIONS. RESEARCH AND DEVELOPMENT ACTIVITIES [R&D] UNDERTAKE N BY GMI AND GMDAT: DENYING THE REVENUES ALLEGATION THAT THE GMDAT CAR RIES OUT ALL THE RESEARCH AND DEVELOPMENT ACTIVITIES (R&D) WHEREAS G MI DOES NOT UNDERTAKE ANY R&D ON ITS OWN ACCOUNT, IT WAS SUBMIT TED THAT GMI HAD INCURRED EXPENDITURE OF RS.16.11 CRORES ON R&D WHIC H HAS BEEN REPORTED IN THE FINANCIAL STATEMENT OF GMI AND THAT AS PER T HE FINANCIAL STATEMENTS OF GMDAT, THE COMPANY DOES NOT OWN SIGNIFICANT INTANGI BLES. IN FACT, THE ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 19 19 COMPANY HAS NEGATIVE GOODWILL AMOUNT TO KOREAN WON [14,87,013] IN ITS BOOKS OF ACCOUNTS. THIS MAKES IT ABSOLUTELY CLEAR THAT GMIS OPERATIONS RELATING TO MANUFACTURE AND SALE OF CARS AND COMPON ENTS ARE MUCH COMPLEX THAN THAT OF GMDAT WHICH IS ONLY ENGAGED IN MANUFACTURING AND SUPPLY OF CERTAIN COMPONENTS USED IN MANUFACTURING THE CAR ITSELF. ALSO, WITH RESPECT TO MANUFACTURE AND SALE OF CARS AND CO MPONENTS, GMI INCURS SIGNIFICANT TIME AND COST IN CONDUCTING LOCAL RESEA RCH AND DEVELOPMENT ACTIVITIES IN RELATION TO ITS CARS THAT IT ASSEMBLE S. THE NEED FOR UNDERTAKING SUCH RESEARCH AND DEVELOPMENT ACTIVITIES ARISES OWI NG TO THE FOLLOWING REASONS: (I) GMI CONSTANTLY ENDEAVORS TO INDIGENIZE THE CARS BY REPLACING IMPORTED COMPONENTS WITH ALTERNATIVE LOCAL SUPPLIES ; & (II) FROM TIME TO TIME, THERE IS A NEED TO ADOPT TH E CARS BASIC TECHNOLOGY TO SUIT THE INDIAN ENVIRONMENT. THE ADO PTION COULD BE DRIVEN BY FACTORS SUCH AS CHANGES IN THE INDIAN AUT OMOBILES REGULATORY ENVIRONMENT, CUSTOMER FEEDBACK ETC., 10.1.10. DISPROVING THE LEARNED D.RS ALLEGATION TH AT THE ASSESSEE IN ITS TRANSFER PRICING DOCUMENTATION HAD SELECTED GMDAT A S THE TESTED PARTY AS GMDAT WITH RESPECT TO ITS TRANSACTION WITH GMI I S ENGAGED IN MANUFACTURING AND SUPPLYING CKD KITS AND COMPONENTS AND IN OTHER WORDS, GMDAT ACTS AS AN ORIGINAL EQUIPMENT MANUFACT URER [OEM] FOR GMI AND, THEREFORE, THE FUNCTIONAL PROFILE OF THE COMPA RABLES SHOULD ALSO BE SAME AS THAT OF GMDAT ETC., IT WAS SUBMITTED THAT ALL THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE WERE FUNCTIONIN G AS OEM OF AUTOMOBILE COMPONENTS, SPARES AND ACCESSORIES AND, THEREFORE, THEY WERE COMPARABLE TO GMDAT WITH RESPECT TO THE INTERNATION AL TRANSACTION RELATING TO MANUFACTURE AND SUPPLY OF CKD KITS AND COMPONENT S. HENCE, BASED ON THE ABOVE, IT IS REASONABLE TO CONCLUDE THAT THE AR GUMENT PUT-FORTH BY THE REVENUE IS ERRONEOUS AND WITHOUT ANY RATIONALE WHAT SOEVER. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 20 20 10.1.11. WITH REGARD TO THE REVENUES CONCERN OVER THE GEOGRAPHICAL VARIANCES BETWEEN THE COMPARABLE COMPA NIES SELECTED WHICH WERE OPERATING OUT OF ASIA PACIFIC REGION AND THE TESTED PARTY WHICH IS OPERATING OUT OF SOUTH KOREA REGION, THE ASSESSE E CONTENDED THAT IT HAD SUBMITTED A SET OF 27 COMPARABLE COMPANIES OPERATIN G OUT OF SOUTH KOREA REGION, ONLY WHICH WERE ENGAGED IN MANUFACTURING AN D SUPPLYING OF AUTOMOBILE COMPONENTS, SPARES AND ACCESSORIES. IT WAS MADE CLEAR BY THE ASSESSEE THAT WHILE FURNISHING THE ABOVE, IT DID NO T PROPOSE ANY ADDITIONAL COMPARABLE WHICH WAS NOT FILED DURING THE ASSESSMEN T PROCEEDINGS, BUT, ONLY PRESENTED SOMETHING WHICH WAS ALREADY AVAILABL E WITH THE TPO. 10.1.12. WITH REGARD TO THE REVENUES ALLEGATION T HAT THE ASSESSEE HAD NOT FURNISHED ANY FINANCIAL INFORMATION OF COMP ARABLE COMPANIES, THE LEARNED SR. COUNSEL DREW THE ATTENTION OF THE BENCH TO THE EFFECT THAT THE FINANCIAL DETAILS INCLUDING OPERATING MARGIN OF COM PARABLE COMPANIES ALONG THE BACK-UP COMPUTATIONS HAD BEEN FURNISHED TO THE TPO IN THE TRANSFER PRICING DOCUMENTATION [COURTESY: PAGES 113 210 OF TRANSFER PRICING STUDY]. 10.1.13. IN RESPECT OF THE REVENUES (TPOS) AVERM ENT THAT GMDAT SHOULD NOT BE SELECTED AS THE TESTED PARTY AS THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE DOES NOT COME UN DER HIS JURISDICTION AND, THUS, HE CAN NEITHER CALL FOR ANY ADDITIONAL I NFORMATION NOR SCRUTINIZE THEIR BOOKS OF ACCOUNTS ETC., IT WAS CONTENDED ON B EHALF OF THE ASSESSEE THAT ON THE ONE HAND THE DRP/TPO HAD REJECTED THE A SSESSEES APPROACH OF SELECTING GMDAT AS THE TESTED PARTY BY ARGUING T HAT THERE WAS NO RELIABLE DATA AVAILABLE FOR BOTH GMDAT AND COMPARAB LES AND, THEREFORE, GMDAT CANNOT BE TAKEN AS THE TESTED PARTY, HOWEVER, THE TPO HIMSELF HAD TAKEN GMDAT AS THE TESTED PARTY WHILE MAKING AD JUSTMENT TO ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 21 21 TRANSACTION RELATING TO PAYMENT OF ROYALTY BY THE A SSESSEE TO GMDAT. IT WAS ARGUED THAT THE TPO HAD REJECTED INTERNAL CUP U SED BY THE ASSESSEE, INSTEAD, ADOPTED EXTERNAL CUP TAKING GMDAT AS THE T ESTED PARTY AND RELYING ON ADGAR ONLINE DATA-BASE. THIS APPROACH O F THE REVENUE, ACCORDING TO THE LEARNED SR. COUNSEL, AS GOOD AS TO ENHANCE THE ADJUSTMENT MADE TO THE ASSESSEE. 10.1.14. IT WAS, FURTHER, SUBMITTED THAT THE TPO W AS NOT FRAMING AN ASSESSMENT ON THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE, INSTEAD, WAS ASSESSING AS TO WHETHER THE ASSESSEE H AD IN ANY WAY OVER PAID FOR PURCHASE OF CKD KITS AND COMPONENTS TO ITS AE, GMDAT. THE FINANCIAL STATEMENT OF COMPARABLE COMPANIES WAS AUD ITED BY INDEPENDENT AUDITORS AND, HENCE, IT SHOULD BE APPROPRIATE TO PL ACE RELIANCE ON THE SAME. IT WAS, FURTHER, ARGUED THAT THE TPO, WHILE APPLYING TNMM WAS EXPECTED TO COMPUTE THE PROFIT LEVEL INDICATOR/OPER ATING MARGINS FROM THE FINANCIAL INFORMATION SUBMITTED FOR THE COMPARABLE COMPANIES AND TILL THE TIME THOSE FINANCIAL STATEMENTS ENABLE THE TPO TO R ELIABLY COMPUTE THE PROFIT LEVEL INDICATOR AND THERE SHOULD NOT BE ANY CONCERN WHATSOEVER. 10.1.15. REJECTING THE REVENUES ALLEGATION THAT S UFFICIENT FINANCIAL DATA WAS NOT AVAILABLE FOR THE TESTED PARTY, IT WAS SUBMITTED THAT THE SEGMENTAL FINANCIAL DATA FOR BENCHMARKING A PART OF GMDATS BUSINESS WHICH RELATES TO MANUFACTURING AND SALE OF CKDS TO THE ASSESSEE WAS FURNISHED TO THE TPO AND ON HIS REQUEST, THE FINANC IAL STATEMENT OF GMDAT (AT COMPANY LEVEL) WAS ALSO FURNISHED. 10.1.16. WITH REGARD TO THE AVERMENT OF THE TPO AS WELL AS THE DR DURING THE COURSE OF HEARING PROCEEDINGS THAT THE S EGMENTAL FINANCIAL STATEMENT OF GMDAT WAS NOT RELIABLE, THE LEARNED SR . COUNSEL REITERATED ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 22 22 THAT THE SEGMENTAL DATA RELIED UPON FOR BENCHMARKIN G INTERNATIONAL TRANSACTIONS RELATING TO IMPORT OF ACKD KITS AND CO MPONENTS WAS COMPLETELY RELIABLE AND WAS BASED ON SOUND ALLOCATI ON KEYS. IN THIS REGARD, IT WAS SUBMITTED THAT A REVIEW WAS DONE FOR GMDATS SEGMENTAL PROFITABILITY IN RELATION TO EXPORT OF CKD KITS AND COMPONENTS TO THE ASSESSEE AND THE SAME HAS BEEN FOUND REASONABLY ACC URATE. [SOURCE: REPORT OF FACTUAL FINDINGS OF DELOITTE ANJIN LLC, K OREA - ON PAGE 40 PB]. 10.1.17. IT WAS URGED THAT GMDATS SEGMENTAL PROFI TABILITY IN RELATION TO EXPORT OF CKD KITS AND COMPONENTS TO TH E ASSESSEE WAS COMPLETELY RELIABLE AND, THUS, IT WAS UNJUSTIFIED O N THE PART OF THE REVENUE TO REJECT GMDAT AS THE TESTED PARTY FOR ANALYZING T HE INTER-COMPANY TRANSACTIONS. 10.1.8. PREFERENCE OF TRANSACTION BY TRANSACTION AP PROACH OVER AGGREGATION APPROACH : THE ASSESSEE BASED ON THE DETAILED FUNCTIONAL ANALY SIS, SELECTED GMDAT AS THE TESTED PARTY IN ITS TRANSFER PRICING DOCUMEN TATION, FOR THE FOLLOWING REASONS: (I) THE ABOVE APPROACH SELECTED BY THE ASSESSEE IS ALSO MORE RELEVANT AS BY SELECTING GMDAT AS THE TESTED PARTY, WE WOULD BE BENCHMARKING ONLY THE INTERNATIONAL TRANSACTION OF MANUFACTURING OF CKD KITS AND COMPONENTS BY GMDAT WITH INDEPENDEN T COMPANIES INVOLVED IN SIMILAR BUSINESS; (II) ON THE OTHER HAND, IF ONE CHOOSES TO SELECT GM I AS THE TESTED PARTY, THE WHOLE BUSINESS OF GMI WILL NEED TO BE TE STED AGAINST THE INDEPENDENT COMPARABLE COMPANIES. THEREFORE, APART FROM THE RELEVANT INTERNATIONAL TRANSACTION I.E., PURCHASE OF COMPONENTS AND SPARES, OTHER THIRD PARTY COSTS INCLUDING MANUF ACTURING EXPENSES, EMPLOYEE REMUNERATION, SELLING AND GENERA L GET TESTED; ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 23 23 (III) THAT ONLY A PART OF THE TOTAL EXPENSES I.E., 17.55 PER CENT PERTAINS TO INTERNATIONAL TRANSACTION WITH AES AND OUT OF TH IS, ONLY 15 PER CENT PERTAINS TO IMPORT OF CKD AND COMPONENTS. THU S, WHILE SELECTING GMI AS THE TESTED PARTY, THE BALANCE 82 P ER CENT WHICH PERTAINS TO THIRD PARTY COST WILL NEED TO BE BENCHM ARKED THE RISK OF TRANSFER PRICING ADJUSTMENT (AS ALREADY DONE BY THE TPO IN THIS CASE); (IV) THEREFORE, WHILE SELECTING GMI AS THE TESTED P ARTY, WHOLE BUSINESS OF GMI WILL GET AGGREGATED AND WILL BE BENCHMARKED AGAINST INDEPENDENT COMPARABLE COMPANIES. 10.1.9. THIS VIEW OF THE ASSESSEE OF BENCHMARKING ONLY THE RELEVANT INTERNATIONAL TRANSACTION WHILE ADOPTING T RANSACTION-BY-TRANSACTION APPROACH ALSO GETS SUPPORT FROM INDIAN TP REGULATIO NS, OECD GUIDELINES AND INDIAN JUDICIAL DECISIONS. 10.1.10. PLACING EMPHASIS ON S. 92(1) OF THE ACT, RELEVANT I.T. RULES AND ALSO PARA 3.9 OF O.E.C.D. GUIDELINES, THE LEARNED SR. COUNSEL HAD PLACED RELIANCE ON THE FOLLOWING CASE LAWS: (I) M/S. RANBAXY LABORATORIES LTD V. ADDL CIT (299 ITR 175); (II) DEVELOPMENT CONSULTANTS PVT LTD V. DCIT (115 T TJ 577); (III) STAR INDIA (P) LTD V. ACIT [ITA NO.3585/M/200 6]; (IV) ANKIT DIAMONDS V. DCIT [8 ITR (TRIB) 487]; (V) TECHNIMOUNT ICB PVT. LTD V. ACIT [ITA NO.7098/M UM/2010]; (VI) DESTINATION OF THE WORLD (SUB-CONTINENT) PVT. LTD [ITA NO.534 (DELHI TRIB) 2010 AY 06-07]; (VII) TEJ DIAM [(2010 37 SOT 341 (MUM)]; & (VIII) TWINKLE DIAMOND [ITA NO.5033/MUM/07] ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 24 24 10.1.11. IN CONCLUSION, IT WAS EMPHASIZED THAT IN VIEW OF THE SPECIFIC REQUIREMENTS OF INDIAN TP REGULATIONS, OEC D GUIDELINES AND EXISTING JUDICIAL PRECEDENTS ON THE ISSUE, TRANSACT ION-BY-TRANSACTION APPROACH SHOULD BE PREFERRED OVER AGGREGATION APPRO ACH. THEREFORE, BASED ON THE ABOVE CONSIDERATIONS, IT IS REASONABLE TO CONCLUDE THAT GMDAT SHOULD BE SELECTED AS THE TESTED PARTY FOR AN ALYZING THE INTER- COMPANY TRANSACTIONS. 10.1.12. TO DRIVE HOME HIS POINTS, THE LEARNED SR. COUNSEL SOUGHT TO PLACE RELIANCE ON THE FOLLOWING CASE LAWS: (I) MASTEK LIMITED V. ADDL. CIT IN ITA NO.3120/AHD/ 2010 DATED 29.2.2012; (II) AIA ENGG. LTD V. ADDL. CIT 2012 50 SOT 134; (III) DEVELOPMENT CONSULTANTS PVT. LTD V. DCIT (200 8) 23 SOT 455 10.2. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT NO SPECIFIC REFERENCE IS IN THE ACT TO DETERMINE WHO SHOULD BE THE TESTED PARTY. HOWEVER, RULE 10B OF I.T. RULES SPECIFIES THE CRITE RIA TO BE FOLLOWED BETWEEN THE TESTED PARTY AND COMPARABLES. A TESTED PARTY SHOULD BE AS PARTY FOR WHICH THESE CRITERIA CAN BE REASONABLY DE TERMINED AND FOLLOWED. FURTHER, IT WAS ARGUED THAT THE RELIABILITY OF DATA IS ONE OF THE MOST IMPORTANT FACTORS GOVERNING SELECTION OF TESTED PAR TY. 10.2.1. GUIDANCE ON TESTED PARTY SELECTION COMES FR OM OECD. EXTENSIVELY QUOTING THE GUIDELINES, THE LEARNED D R SUBMITTED THAT FOR SELECTION OF THE TESTED PARTY, THE FOLLOWING CRITER IA ARE TO BE KEPT IN VIEW, NAMELY: (A) TESTED PARTY TO BE ONE WITH LESS COMPLEX FUNCTI ONAL ANALYSIS; ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 25 25 (B) RELIABILITY OF DATA OF THE PARTY SELECTED AS TE STED PARTY; & (C) SELECTION OF THE PARTY REQUIRING MINIMUM ADJUST MENTS. 10.2.2. IT WAS, FURTHER, SUBMITTED THAT THE FUNCTIO NAL DESCRIPTION OF GMDAT AS DETAILED IN THE TRANSFER PRICING DOCUMENTA TION, IT IS SEEN THAT GMDAT IS AN ENTREPRENEUR ENGAGED IN MANUFACTURING O F COMPLETELY KNOCKED DOWN [CKD] KITS IN ITS PLANTS ACROSS MANY C OUNTRIES, MANUFACTURING OF CARS AND ALSO INVOLVED IN R & D. T HE COMPANY HAS COMPLEX BUSINESS ACTIVITIES AND A HIGH LEVEL OF INT ANGIBLE ASSETS. COMPARED TO THE ACTIVITIES OF GMDAT, IT WAS ARGUED THAT THE ASSESSEE COMPANY IS A MANUFACTURER OF AUTOMOBILES BUT HAS NO R & D ACTIVITY AND NO TECHNOLOGICAL INTANGIBLES. ITS PRODUCE LINE IS SIMILAR TO OTHER MANUFACTURERS IN THE COUNTRY AND THERE IS NO GEOGRA PHICAL ADJUSTMENT REQUIRED. 10.2.3. ADMITTEDLY, IT WAS ARGUED BY THE LEARNED D R, ALL THE INTANGIBLES ARE OWNED BY GMDAT WHICH HAS BEEN SPECI FICALLY MENTIONED IN TP DOCUMENTATION AT PARA 3.1. GMDAT IS THE TECHNOL OGY OWNER WHO IS SUPPLYING CKDS AND INTANGIBLES (FOR WHICH ROYALTY I S ALSO PAID) AND ON WHOSE SPECIFICATIONS, THE MANUFACTURING ACTIVITY IS BEING CARRIED OUT BY THE ASSESSEE. EVEN IN DEVELOPMENT OF LOCAL CONTENT, TH E APPROVAL OF THE FOREIGN PARTY IS A MUST BEFORE THE CHANGES ARE INCO RPORATED. THE CASE OF THE ASSESSEE FAILS ON THE FIRST COUNT AS GM DAT IS MORE COMPLEX OF THE TWO PARTIES AND WOULD REQUIRE LARGE NUMBER OF ADJUSTMEN TS IN CASE OF BEING SELECTED AS COMPARABLE. IT WAS, FURTHER, SUBMITTED THAT THE MECHANISM OF CULLING OUT THE DATA PERTAINING TO THE TRANSACTION UNDER REFERENCE FROM THE FINANCIAL STATEMENT OF AE HAS NOT BEEN PRODUCED BEF ORE THE TPO. THE ASSESSEE HAS NOT BEEN ABLE TO SUBMIT ANY RELIABLE S EGMENTAL DATA OR ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 26 26 RELIABLE BASIS ON WHICH THE GLOBAL ACCOUNTS HAVE BE EN SEGREGATED AND THE ACCOUNTS WITH RESPECT TO INDIAN TRANSACTIONS HAVE B EEN PREPARED. HENCE, IT WAS CLAIMED, THE DATA UTILIZED BY THE ASSESSEE I N RESPECT OF THE TESTED PARTY IS UNRELIABLE AND UNSUBSTANTIATED. IF THE AS SESSEE IS TO CHOOSE ITS TESTED PARTY, IT HAS TO MAKE AVAILABLE CORRECT, VER IFIABLE AND VALIDATED DATA IN RESPECT OF SUCH TESTED PARTY. FROM THE FUNCTIONA L ANALYSIS OF THE ASSESSEE AS WELL AS GMDAT, IT IS CLEARLY BROUGHT OU T THAT GMDAT IS A FAR MORE COMPLEX ENTITY CATERING TO A NUMBER OF SUBSIDI ARIES, HAVING PLANTS AT MULTIPLE LOCATIONS, INTANGIBLES ON WHICH ROYALTY IS BEING PAID EVEN BY THE INDIAN COMPANY. THE ANNUAL ACCOUNTS FILED BY THE A SSESSEE REVEAL THE COMPLEX NATURE OF OPERATION OF THE AE AS AGAINST TH E SIMPLE MANUFACTURING FUNCTION OF THE INDIAN PARTY WITHOUT OWNING ANY DIS TINCT INTANGIBLES. WITH OPERATIONS ACROSS MULTIPLE GEOGRAPHIES AND SUBSTANT IAL RELATED PARTY TRANSACTIONS, GMDAT NOT ONLY FAILS THE TEST OF MINI MUM ADJUSTMENTS BUT IS CLEAR THAT IT IS NOT POSSIBLE TO ESTIMATE THE DEGRE E OF ADJUSTMENT NEEDED TO ENSURE COMPARABILITY OF GMDAT WITH THE COMPARABLES SELECTED. SUFFICIENT DATA RELATING TO COMPARABLES IF THIS COMPANY IS SEL ECTED AS TESTED PARTY IS ALSO NOT AVAILABLE. THUS, IT WAS SUBMITTED THAT GM DAT IS MORE COMPLEX OF THE TWO PARTIES AND WOULD REQUIRE LARGE NUMBER OF A DJUSTMENTS IN CASE OF IT BEING SELECTED AS COMPARABLE. 10.2.4. IT WAS, FURTHER, ARGUED THAT THE TP STUDY CONDUCTED BY THE ASSESSEE CONTAINS BRIEF DESCRIPTION OF THE COMPANIE S SELECTED. ALL OF THEM ARE FUNCTIONALLY DIFFERENT FROM THE TESTED PARTY SE LECTED BY THE ASSESSEE. THE TESTED PARTY IS ENGAGED IN MANUFACTURING AND SA LE OF AUTOMOBILES AND CKDS. THE SECOND COMPARABLE IS ENGAGED IN IRON, GR AVITY AND ALUMINUM CASTINGS, THE THIRD IS ENGAGED IN PRODUCTION OF BOD Y PARTS LIKE FLOORS, CENTER PILLARS, HOODS AND SO ON. PERUSAL OF THE COMPANIES AND THE DESCRIPTION ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 27 27 MENTIONED BY THE ASSESSEE IS SUFFICIENT TO COME TO CONCLUSION THAT THESE COMPANIES CANNOT BE COMPARED WITH TESTED PARTY OF T HE ASSESSEE. NO DETAILS RELATING TO GEOGRAPHICAL SALE OR SOURCING I S AVAILABLE. IT WAS SUBMITTED THAT COMPANIES LIKE TOYOTA CORPORATION WI TH A TURNOVER OF RS.36,000 CRORES AND SUMITOMO ELECTRIC INDUSTRIES L IMITED WITH TURNOVER OF RS.42,000 CRORES HAVE BEEN INCLUDED IN THE STUDY. NO RELIABLE DATA IS AVAILABLE ON ANY OF THE COMPANIES WHICH HAVE MULTIF ARIOUS OPERATIONS AROUND THE GLOBE. RULE 10B (2) SETS OUT THE BROAD PARAMETERS OF COMPARABILITY WHICH DECIDE THE KIND OF COMPARABLES CAN BE SELECTED. FAR, RISK AND RESPONSIBILITIES, LAWS OF DIFFERENT GOVERN MENTS, GEOGRAPHICAL LOAN AND SIZE OF MARKET ETC., ARE THE KEY ISSUES IN SELE CTION OF COMPARABLES, IF THE COMPARABLES HAPPEN TO BE SPREAD ACROSS MULTIPLE GEOGRAPHIES. IT WAS SUBMITTED THAT THERE IS HUGE FUNCTIONAL AND GEOGRAP HICAL VARIATION IN SELECTION OF COMPARABLES. THE MARKET FOR THE PRODUC TS OF THESE COMPARABLES IS NOT KNOWN. THE LOCAL LAWS IN DIFFERE NT COUNTRIES IN WHICH THESE ENTITIES OPERATE IS NOW KNOWN. IT IS ALSO NO T KNOWN WHETHER SEGMENTAL DATA FOR SPECIFIC AREA OF ASSESSEES FUNC TION IS AVAILABLE OR NOT. NO DETAILS WHATSOEVER ARE AVAILABLE RELATING TO FIN ANCIAL ASPECT OF THESE COMPANIES. THE ASSESSEE HAS NOT ATTEMPTED COMPUTAT ION FOR FUNCTIONAL OR GEOGRAPHICAL DIFFERENCES IN THE STUDY. IT IS KNOWN FACT THAT THE JAPANESE, CHINESE, MALAYSIAN, INDIAN MARKETS OR FINANCIAL BAC KGROUND IS TOTALLY DIFFERENT AND CANNOT CONSTITUTE A SINGLE SET OF DAT A FOR COMPARISON WITH A KOREAN COMPANY WITHOUT ANY ADJUSTMENT IN MARGINS. IT IS CLEAR THAT SUFFICIENT FINANCIAL DATA IS NOT AVAILABLE EITHER I N THE CASE OF THE TESTED PARTY OR IN THE CASE OF SELECTED COMPARABLES. 10.2.5. TO STRENGTHEN HIS STAND, HE HAD PLACED STR ONG RELIANCE ON THE FOLLOWING CASE LAWS, NAMELY: ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 28 28 (I) M/S. ONWARD TECHNOLOGIES LIMITED V. DCIT IN ITA NO.7985/MUM/2010 DATED: 30.4.2013 AY 2006-07; & (II) AURIONPRO SOLUTIONS LTD. V. ADDL. CIT IN ITA NO.7872/MUM/2011 DATED: 20.4.2013 AY 2007-08. 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS, PERUSED THE RELEVANT MATERIALS ON RECORD AND ALSO VOLUMINOU S EVIDENCES PRODUCED BY EITHER PARTY IN THE SHAPE OF PAPER BOOKS. 11.1. WE SHALL NOW PROCEED TO PERUSE THE JUDICIAL VIEWS ON THE ISSUE. THE CASE LAWS RELIED ON BY THE ASSESSEE IS AS UNDER : (I) MASTEK LIMITED V. ADDL. CIT IN ITA NO.3120/AHD/2010 DT.29.02.2012 : IN THIS CASE, THE QUESTION CAME UP FOR CONSIDERAT ION BEFORE THE EARLIER BENCH OF THIS TRIBUNAL WAS AS TO WHETHER A MINUTE EXAMINATION OF FUNCTIONAL PROFILE IS NECESSARY FOR THE SELECTION O F COMPARABLES AND THE ANSWER GIVEN WAS THAT FUNCTIONAL PROFILE MUST BE FI RST EXAMINED AND AFTER THAT PROCEED TO SELECT THE COMPARABLE. IN THIS CAS E, THE COMPARABLES CHOSEN BY THE ASSESSEE WERE DISCUSSED BY THE TPO AN D THOSE WERE DISCARDED FOR THE BASIC REASON THAT THE COMPANIES T HOSE QUOTED BY THE ASSESSEE WERE DEALING IN PRODUCT DISTRIBUTION WHERE AS THE TPO WAS OF THE VIEW THAT THE AE WAS NOTHING BUT FRONT OFFICE OF THE ASSESSEE AND SIMPLY ENGAGED IN MARKETING ACTIVITY. AFTER DUE CONSIDERA TION OF THE ISSUE, THE HONBLE BENCH HAD OBSERVED THUS: 16.1 (ON PAGE 47) IT IS CLEAR THAT ARMS LENGTH P RICE IS TO BE DETERMINED BY TAKING RESULT OF COMPARABLE TRANSACTIONS AND THOSE TRANSAC TIONS MUST BE IN COMPARABLE CIRCUMSTANCES. IT IS THEREFORE REQUIRED TO HAVE A PROPER STUDY OF SPECIFIC CHARACTERISTICS OF CONTROLLED TRANSACTION. IT IS A LSO REQUIRED THAT THERE SHOULD BE PROPER STUDY OF FUNCTIONS PERFORMED SO AS TO MATCH THE IDENTICAL SITUATIONS UNDER WHICH FUNCTIONS HAVE BEEN PERFORMED. THEN RISK PRO FILE IS ALSO REQUIRED TO BE COMPARED. WE MAY LIKE TO ADD THAT THERE ARE SO MAN Y PERSPECTIVES WHICH WERE REQUIRED TO BE COMPARED AND IN THIS CONNECTION THE HONBLE COURTS HAVE ALSO ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 29 29 SUGGESTED SO, SUCH AS, COMPARISON OF FUNCTIONAL PRO FILE, SIMILARITY IN RESPECT OF ASSETS EMPLOYED AND A THOROUGH SCREENING OF THE COMPARABLE S ETC. HENCE, IN THE PRESENT CASE, IT IS NECESSARY TO CONSIDER AN ANALYSIS THAT WHETHER THE COMPARABLES SELECTED BY THE TPO HAD ANALOGOUS FUNCTIONAL PROFILE TO THAT OF FUNCTIONAL PROFILE OF THE ASSESSEE. IT IS TRUE THAT FUNCTIONAL PROFILE AND ASSETS AND R ISK ANALYSIS WAS MADE AVAILABLE BUT THAT IS TO BE CORRECTLY UNDERSTOOD IN THE LIGHT OF THE NATURE OF INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE WITH THE SA ID AE. A SIMILAR PROBLEM WAS CONSIDERED BY ITAT DELHI BENCH IN THE CASE OF BECHT EL INDIA PVT. LTD V. DCIT (2011- TII-07-ITAT-DEL-TP) WHERE THE ASSESSEE STATED TO BE ENGAGED IN THE BUSINESS OF PROVIDING ELECTRONIC DATA SUPPORT SERVICE TO AE AND THE DIFFICULTY AROSE THAT THE SAID FUNCTION WAS COMPARED WITH THE COMPANIES ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE. SO THE QUESTION WAS THAT WHETHER A MIN UTE EXAMINATION OF FUNCTIONAL PROFILE IS NECESSARY FOR THE PURPOSE OF SELECTION O F COMPARABLES AND THE ANSWER GIVEN WAS THAT FUNCTIONAL PROFILE MUST BE FIRST EXAMINED AND AFTER THAT PROCEEDS TO SELECT THE COMPARABLES. INTERESTINGLY, IN THE PRESENT CASE NO W BEFORE US, COMPARABLES CHOSEN BY THE ASSESSEE WERE DISCUSSED BY THE TPO AND THOSE WERE DISCARDED. THE BASIC REASON FOR REJECTION OF THOSE COMPARABLES WAS THAT THE COMPANIES THOSE WERE QUOTED BY THE ASSESSEE WERE DEALING IN PRODUCT DISTRIBUTIO N WHEREAS THE TPO WAS OF THE VIEW THAT THE AE WAS NOTHING BUT FRONT OFFICE OF THE A SSESSEE AND SIMPLE ENGAGED IN MARKING ACTIVITY. IN THIS CONTEXT, WE ARE OF THE VI EW THAT IN ORDER TO DETERMINE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS L ENGTH PRICE, FIRST IT IS NECESSARY TO SELECT THE TESTED PARTY AND SUCH A SELECTED PA RTY SHOULD BE LEAST COMPLEX AND SHOULD NOT BE UNIQUE, SO THAT PRIMA FACIE CANNOT BE DISTINGUISHED FROM POTENTIAL UNCONTROLLED COMPARABLES. WE ARE IN AGREEMENT WITH THE FI NDINGS OF THE EARLIER BENCH (SUPRA) THAT SUCH A SELECTED PARTY SHOULD BE LEAST COMPLEX AND S HOULD NOT BE UNIQUE. (II) DEVELOPMENT CONSULTANTS (P) LTD V. ACIT 136 TTJ 129 & FOLLOWED BY SONY INDIA (P) LTD V. DCIT 114 ITD 448: 315 I TR 150 (CAL) : THE ISSUE BEFORE THE TRIBUNAL WAS THAT THE CIT (A) HAD CONFIRMED THE ADJUSTMENTS TO THE INTERNATIONAL TRAN SACTIONS OF THE ASSESSEE WITH ITS AES BASED AT BAHAMAS, USA WITHOUT CONSIDER ING THE SUBMISSIONS AND THE FINANCIAL OF THE AES EXPLAINING THE FACTS E TC. IN CASE OF THE MERITS OF THE CASE FOR INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH TKC, THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE WAS A S UNDER: 26. 1. 2 ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 30 30 3. 4. TKS IS THE ENTREPRENEUR COMPANY AND HAS CREATED SIGNIFICANT MARKETING INTANGIBLES OVER THE YEARS. IT USES ITS MARKETING INTANGIBLES TO GENERATE THE WORK AND ASSUMES ALL THE MARKET, PRICE AND PRODUCT RISKS. T KC CAME OUT THE WORK ON ITS OWN, ONLY PARTS OF THE JOB ARE SUB-CONTRACTED TO THE ASS ESSEE FOR ITS CONVENIENCE. FUTHER, BEING AN ENTREPRENEUR COMPANY, IT IS DIFFICULT TO D ETERMINE THE PROFITS OF ATKC WITH RESPECT TO WORK DOWNLOADED TO INDIA (AS THE REVENUE RECEIVED FOR WORK OFF-SHORED TO INDIA CANNOT BE SEPARATELY IDENTIFIED). FURTHER, T HE REVENUE GENERATED FROM THE SERVICES PROVIDED BY THE ASSESSEE WOULD FORM ONLY A SMALL PART OF THE ENTIRE OPERATIONS. THE VALUE OF ENGINEERING DRAWING AND D ESIGN SERVICES RENDERED BY THE ASSESSEE TO TKC FOR AY 2002-04 WAS RS.1,58,43,923/- AND FOR AY 2004-05 IT WAS RS.1,45,77,704/-. THE VALUE OF SERVICE FORMS APPRO XIMATELY 6% TO 7% OF THE COST OF SALES TO TKC. HENCE, THIS SHRI RAHUL MITRA ARGUED, SHOWS THAT TESTING THE MARGINS OF TKC WOULD NOT SERVE THE PURPOSE OF DETER MINING THE ARMS LENGTH NATURE OF THE TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH TKC. HENCE, THE RECOURSE AVAILABLE TO TEST THE ARMS LENGTH PRICE OF THE SER VICES RENDERED BY THE ASSESSEE TO TKC IS TO TEST THE MARGINS FROM THE INDIAN SIDE. IN VI EW OF THE DISCUSSION ON TESTED PART EARLIER, THE ASSESSEE WAS SELECTED AS THE TESTED PA RTY BEING LEAST COMPLEX OF THE TWO ENTITIES. HENCE, THE TRANSFER PRICING ANALYSIS IN THIS CASE WAS DONE FROM THE INDIAN SIDE, WHEREIN, THE MARGINS OF THE ASSESSEE WITH RES PECT TO SERVICES PROVIDED TO TKC WERE COMPARED INTERNALLY WITH SERVICES PROVIDED TO OTHER THIRD PARTIES IN FOREIGN MARKET. TAKING INTO ACCOUNT THE DIVERGENT SUBMI SSIONS, THE HONBLE TRIBUNAL HAD RECORDED ITS FINDINGS THAT 33. BASED ON FACTS AND OUR FINDINGS OF THE CASE, A FTER DUE CONSIDERATION OF ALL THE FACTS, WE CONCLUDE THAT THE ANALYSIS UNDERTAKEN BY THE ASSESSEE TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION WITH DATACORE USA IS CORRECT AND ON THE BASIS OF THE ANALYSIS IT IS SEEN THAT TRANSA CTION UNDERTAKEN BY THE TAXPAYER WITH DATACORE US IS AT ARMS LENGTH FOR BOTH THE ASSESSM ENT YEARS. (III) IN THE CASE OF RANBAXY LABORATORIES LIMITE D V. ADDITIONAL CIT REPORTED IN 110 ITD 428, THE HONBLE DELHI TRIBUNAL HAD RECORDED ITS FINDINGS THAT - 58. .. THE TESTED PARTY NORMALLY SHOULD BE THE PARTY IN RESPECT OF WHICH RE LIABLE DATA FOR COMPARISON IS EASILY AND READILY AVAILABLE AND FEWEST ADJUSTMENTS IN COM PUTATIONS ARE NEEDED. IT MAY BE LOCAL OR FOREIGN ENTITY, I.E., ONE PARTY TO THE TRA NSACTION. THE OBJECT OF TRANSFER PRICING EXERCISE IS TO GATHER RELIABLE DATA, WHICH CAN BE C ONSIDERED WITHOUT DIFFICULTY BY BOTH THE PARTIES, I.E., TAXPAYER AND THE REVENUE. IT IS ALSO TRUE THAT GENERALLY LEAST OF THE COMPLEX CONTROLLED TAXPAYER SHOULD BE TAKEN AS A TE STED PARTY. BUT WHERE COMPARABLE ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 31 31 OR ALMOST COMPARABLE, CONTROLLED AND UNCONTROLLED T RANSACTIONS OR ENTITIES ARE AVAILABLE, IT MAY NOT BE RIGHT TO ELIMINATE THEM FR OM CONSIDERATION BECAUSE THEY LOOK TO BE COMPLEX. IF THE TAXPAYER WISHES TO TAKE FOREIGN AE AS A TEST ED PARTY, THEN IT MUST ENSURE THAT IT IS SUCH AN ENTITY FOR WHICH THE RELEVANT DATA FOR COMPARISON IS AVAILABLE IN PUBLIC DOMAIN OR IS FURNISHED TO THE T AX ADMINISTRATION . THE TAXPAYER IS NOT THEN ENTITLED TO TAKE A STAND THAT SUCH DATA CANNOT BE CALLED FOR OR INSISTED UPON FROM THE TAXPAYER. IN SUBSTANCE, A FOREIGN ENTITY (A FOREI GN AE) COULD ALSO BE TAKEN AS A TESTED PARTY FOR COMPARISON. 11.2. AT THIS JUNCTURE, WE WOULD LIKE TO REFER TO THE UNITED NATIONS PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES WHEREIN THE SELECTION OF THE TESTED PARTY HAS BEEN DEALT WITH. THIS MANUAL HAS BEEN THE WORK OF MANY AUTHORS WHICH INCLUDED INDIA , NORWAY, NIGERIA, ITALY, USA, NETHERLANDS, BRAZIL, CHINA, OECD, JAPAN ETC. FOR READY REFERENCE, THE RELEVANT PORTION OF IT OBSERVATION IS EXTRACTED AS UNDER: 5.3.3. SELECTION OF THE TESTED PARTY: 5.3.3.1. WHEN APPLYING THE COST PLUS METHOD, RESALE PRICE METHOD OR TRANSACTIONAL NET MARGIN METHOD (SEE FURTHER CHAPTER 6) IT IS NEC ESSARY TO CHOOSE THE PARTY TO THE TRANSACTION FOR WHICH A FINANCIAL INDICATOR (MARK-U P ON COSTS, GROSS MARGIN, OR NET PROFIT INDICATOR) IS TESTED. THE CHOICE OF THE TES TED PARTY SHOULD BE CONSISTENT WITH THE FUNCTIONAL ANALYSIS OF THE CONTROLLED TRANSACTION. ATTRIBUTES OF CONTROLLED TRANSACTION(S) WILL INFLUENCE THE SELECTION OF THE TEST PARTY (WHERE NEEDED). THE TESTED PARTY NORMALLY SHOULD BE THE LESS COMPLEX PARTY TO THE CONTROLLED TRANSACTION AND SHOULD BE THE PARTY IN RESPECT OF WHICH THE MOST RE LIABLE DATA FOR COMPARABILITY IS AVAILABLE. IT MAY BE THE LOCAL OR THE FOREIGN PARTY. IF A TAXPAYER WISHES TO SELECT THE FOREIGN ASSOCIATED ENTERPRISE AS THE TESTED PARTY, IT MUST ENSURE THAT THE NECESSARY RELEVANT INFORMATION ABOUT IT AND SUFFICIENT DATA O N COMPARABLES IS FURNISHED TO THE TAX ADMINISTRATION AND VICE VERSA IN ORDER FOR THE LATTER TO BE ABLE TO VERIFY THE SELECTION AND APPLICATION OF THE TRANSFER PRICING M ETHOD. WITH REGARD TO THE CHALLENGES EME RGING IN TRANSFER PRICING IN INDIA, IT HAS BEEN OBSERVED AS UNDER: 10.4. EMERGING TRANSFER PRICING CHALLENGES IN INDI A 10.4.1. TRANSFER PRICING REGULATIONS IN INDIA 10.4.1.1.. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 32 32 10.4.1.2 10.4.1.3.. THE INDIAN TRANSFER PRICING ADMINISTRATION PREFERS INDIAN COMPARABLES IN MOST CASES AND ALSO ACCEPTS FOREIGN COMPARABLES IN CASES WHERE THE FOREIGN ASSOCIATED ENTERPRISE IS THE LESS OR LEAST COMPLEX ENTITY AND REQUISITE INFORMATION IS AVAILABLE ABOUT THE TESTED PARTY AND COMPARABLES. 11.2.1. IT WAS ALSO VOUCHED DURING THE COURSE OF HE ARING BY THE LEARNED SR. COUNSEL THAT THE FINANCIAL DETAILS INCLUDING OP ERATING MARGIN OF COMPARABLE COMPANIES ALONG WITH THE BACK-UP COMPUTA TIONS WERE FURNISHED BEFORE THE TPO IN THE TRANSFER PRICING DO CUMENTATION [SOURCE: PAGES 113 TO 210 OF THE TRANSFER PRICING STUDY]. T HIS CONTRADICTS THE ASSERTION OF THE LEARNED DR THAT THE ASSESSEE HAD N OT FURNISHED ANY FINANCIAL INFORMATION OF THE COMPARABLE COMPANIES. 11.2.2. THE UNITED NATIONS PRACTICAL MANUAL ON TRA NSFER PRICING ALSO CONTRADICTS THE TPOS ARGUMENT THAT GMDAT SHOULD N OT BE SELECTED AS THE TESTED PARTY AS THE COMPARABLE COMPANIES SELECT ED BY THE ASSESSEE DOESNT FALL WITHIN HIS JURISDICTION AND HE CAN NEI THER CALL FOR ANY ADDITIONAL INFORMATION NOR SCRUTINIZE THEIR BOOKS OF ACCOUNTS ETC., 11.2.3. HOWEVER, WE FIND INCONSISTENCY IN THE STAND OF THE TPO TO THE EFFECT THAT WHILE REJECTING THE ASSESSEES APPROACH FOR SELECTING GMDAT AS THE TESTED PARTY BY CITING A REASON THAT THERE WAS NO RELIABLE DATA AVAILABLE FOR BOTH GMDAT AND COMPARABLES AND, THEREFORE, GMDA T CANNOT BE TAKEN AS THE TESTED PARTY, HOWEVER, ON THE SAME BREATH , AS RIGHTLY HIGHLIGHTED BY THE ASSESSEE, THE TPO HAD TAKEN GMDAT AS THE TESTED PARTY WHILE MAKING ADJUSTMENT TO TRANSACTION RELATING TO PAYMEN T OF ROYALTY BY GMI TO GMDAT. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 33 33 11.2.4. REBUTTING THE REVENUES ALLEGATION MADE DUR ING THE COURSE OF PROCEEDINGS THAT THE SEGMENTAL FINANCIAL STATEMENT OF GMDAT WAS NOT RELIABLE, THE ASSESSEE REITERATES THAT THE SEGMENTA L DATA RELIED UPON FOR BENCHMARKING INTERNATIONAL TRANSACTIONS RELATING TO IMPORT OF CKD KITS AND COMPONENTS WAS COMPLETELY RELIABLE AND WAS BASED ON SOUND ALLOCATION KEYS. TO SUBSTANTIATE ITS CLAIM, THE ASSESSEE HAS ALSO FURNISHED A REPORT ON FACTUAL FINDINGS CERTIFIED BY THE STATUTORY AUDI TORS DELOITTE ANJIN LLC. 11.2.5. MOREOVER, WE FIND THAT THE DRP HAD NOT CONS IDERED IN GREAT DETAIL THE PLEA OF THE ASSESSEE AS TO WHY GMDAT SHO ULD NOT BE SELECTED AS THE TESTED PARTY FOR ANALYZING THE INTER-COMPANY TRANSACTIONS. INSTEAD, THE DRP HAD, IN A CRYPTIC MANNER, CONCLUDED THAT THE RESULTS OF ASSESSEE HAVE TO BE COMPARED WITH THE STAND ALONE RESULTS OF MAHINDRA & MAHINDRA IN THE AUTOMOTIVE SEGMENT. 11.2.6. IN THIS CONNECTION, WE TEND TO RECALL THE R ULING OF THE HONBLE JURISDICTIONAL HIGH COURT [SPECIAL CIVIL APPLICATIO N NO.8179 OF 2010 DATED 31.8.2010] IN THE CASE OF AIA ENGINEERING LTD. V. D ISPUTE RESOLUTION PATEL THROUGH SECRETARY-DRP & 1. AFTER DUE CONSIDERATION OF RIVAL SUBMISSIONS, THE HONBLE COURT HAD RULED THUS 16..IF THE DISPUTE RESOLUTIO N PANEL WAS OF THE OPINION THAT THE APPLICATION DATED 22.4.2010 COULD NOT HAVE BEEN ENTERTAINED, IT SHOULD HAVE CONSIDERED THE OBJECTIO NS FILED BY THE PETITION ON MERITS. AS A CONSEQUENCE OF THE IMPUGNED ORDER, FIRSTLY THE OBJECTIONS RAISED BY THE PETITIONER HAVE NOT BEEN DECIDED, SECONDLY, IN VIEW OF THE DIR ECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL, THE PETITIONER WOULD NOT BE IN A POSITION TO AVAIL OF THE REMEDY OF APPEAL BEFORE COMMISSIONER (APPEALS) AGAINST THE DR AFT ASSESSMENT ORDER; AND THIRDLY, IN THE LIGHT OF THE OBSERVATION MADE BY TH E DISPUTE RESOLUTION PANEL THAT THE PETITIONER HAS CHOSEN TO WITHDRAW THE OBJECTIONS, P REFERRING ANY APPEAL AGAINST THE IMPUGNED ORDER BEFORE ANY FORUM WOULD BE AN EXERCIS E IN FUTILITY, AS NO APPEAL WOULD BE ENTERTAINED AGAINST AN ORDER PASSED ON A CONCESS ION. THUS, THE DISPUTE RESOLUTION PANEL HAS VIRTUALLY CLOSED ALL DOORS FOR THE PETITI ONER. IN THE CIRCUMSTANCES, IMPUGNED ORDER OF THE DISPUTE RESOLUTION PANEL SUFFERS FROM THE VIDE OF BEING CONTRARY TO THE RECORD AS WELL AS NON-APPLICATION OF MIND, IN AS MU CH AS THE PETITIONER HAD NEVER SOUGHT WITHDRAWAL OF THE OBJECTIONS FILED BY IT. T HE IMPUGNED ORDER ALSO CAUSES ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 34 34 IMMENSE PREJUDICE TO THE PETITIONER AS RECORDED HER EINABOVE. IN THE CIRCUMSTANCES, THE IMPUGNED ORDER OF THE DISPUTE RESOLUTION PANEL, THEREFORE, CANNOT BE SUSTAINED. 11.3. WE SHALL NOW PERUSE THE CASE LAWS ON WHICH T HE LEARNED DR HAD PLACED RELIANCE IN THE FINDINGS OF THE HONBLE MUMBAI TRIBUNALS IN THE CASES OF (I) AURIONPRO SOLUTIONS LTD V. ADDL. CIT I N ITA NO.7872/MUM/2011 DATED 12.4.2013; AND (II) M/S ONWARD TECHNOLOGIES L TD V. DCIT (OSD) IN ITA NO.7985/MUM/2010 DATED 30.4.2013. (I) IN THE CASE OF AURIONPRO SO LUTIONS LTD (SUPRA), THE ISSUE BEFORE THE HONBLE BENCH WAS THAT THE ASSESSEE ENGA GED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND WEB DESIGNING SERVICES AND THAT THE ASSESSEE HAD LENT LOANS TO ITS AES STATIONED AT USA , SINGAPORE AND BAHRAIN. THE ASSESSEE HAD CLAIMED THAT THE SAID LO ANS AS WORKING CAPITAL ADVANCED TO ITS 100% SUBSIDIARY OUTSIDE INDIA. WHE N THE ISSUE WAS REFERRED TO TPO, THE TPO TOOK A VIEW THAT AS IN A T HIRD PARTY COMPARABLE SITUATION, ADVANCES WOULD BEAR INTEREST AND, THEREF ORE, NEED TO CHARGE A MARKUP AS PER CUP METHOD. ACCORDINGLY, THE TPO PRO POSED TO BENCHMARK THE LOANS AT DOLLAR DENOMINATED LIBO [LON DON INTER BANK OPERATIVE] RATE PLUS MARK UP OF 3%. WHEN THE ISSUE LANDED UP BEFORE THE DRP, THE DRP HAD, AFTER ANALYZING THE ISSUE, DIRECT ED THE AO/TPO TO COMPUTE THE INTEREST ON LOANS TO AE @ 14% PER ANNUM THEREBY ENHANCED THE TRANSFER PRICING ADJUSTMENT. AGGRIEVED ASSESSE E TOOK UP THE ISSUE WITH THE TRIBUNAL. THE HONBLE TRIBUNAL, AFTER DUE CONS IDERATION OF THE ISSUE IN DEPTH AND FOR THE REASONS RECORDED THEREIN, DIRECTE D THE AO/TPO TO DETERMINE THE ARMS LENGTH INTEREST AT LIBOR PLUS 2 % ON THE MONTHLY CLOSING BALANCE OF ADVANCES DURING THE FY. WE HAVE, WITH DUE REGARDS, PERU SED THE ISSUE AND THE FINDINGS OF THE HONBLE BENCH IN DETAIL. IRONICALLY, THE MA IN ISSUE BEFORE THE BENCH WAS THE PERCENTAGE OF THE INTEREST TO BE CALCULATED ON THE LOAN ADVANCED ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 35 35 BY THE ASSESSEE TO ITS FOREIGN AES. WE ARE, THEREF ORE, OF THE VIEW THAT THIS CASE IS NOT DIRECTLY APPLICABLE TO THE ISSUE UNDER DISPUTE. (II) IN THE CASE OF M/S. ONW ARD TECHNOLOGIES LTD (SUPRA) AS RELIED ON BY THE REVENUE, IT IS OBSERVED THAT THE A SSESSEE, A PARENT COMPANY HAD INTERNATIONAL TRANSACTION WITH ITS AES. WITH REGARD TO IT ENABLED SERVICES PROVIDE TO ITS AES, THE ASSESSEE H AD CHOSEN SIX COMPARABLES WITH ITS FOREIGN AES AS A TESTED PARTY. THE TPO HAD IGNORED THE WORKING OF THE ASSESSEE WHEREBY SELECTING 20 CO MPARABLE CASES. WHEN THE ISSUE REACHED BEFORE THE TRIBUNAL FOR RESO LVE, THE HONBLE BENCH HAD, AFTER HAVING CONSIDERED RIVAL SUBMISSIONS, REC ORDED ITS FINDINGS, AMONG OTHERS, AS UNDER: 11.2.2. (ON PAGE 12). SO, IT IS THE PROFIT ACTUALLY REALIZED BY THE INDIA N ASSESSEE FROM THE TRANSACTION WITH ITS FOREIGN AE WHICH IS COMPARED WITH THAT OF THE C OMPARABLES. THERE CAN BE NO QUESTION OF SUBSTITUTING THE PROFIT REALIZED BY THE INDIAN ENTERPRISE FROM ITS FOREIGN AE WITH THE PROFIT REALIZED BY THE FOREIGN AE FROM THE ULTIMATE CUSTOMERS FOR THE PURPOSES OF DETERMINING THE ALP OF THE INTERNATIONA L TRANSACTION OF THE INDIAN ENTERPRISE WITH ITS FOREIGN AE. THE SCOPE OF TP AD JUSTMENT UNDER THE INDIAN TAXATION LAW IS LIMITED TO TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN AE. IT CAN NEITHER CALL FOR ALSO ROPING IN AND TAXING IN INDIA THE MAR GIN FROM THE ACTIVITIES UNDERTAKEN BY THE FOREIGN AE NOR CAN IT CURTAIL THE PROFIT ARI SING OUT OF TRANSACTION BETWEEN THE INDIAN AND FOREIGN AE AT ARMS LENGTH. THE CONTENT ION OF THE LD. AR IN CONSIDERING THE PROFIT OF THE FOREIGN AE AS PROFIT A FOR THE PURPOSES OF COMPARISON WITH PROFIT OR COMPARABLES, BEING PROFIT B, TO DETERMINE THE ALP OF TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN AE, MISSES THE WOOD FROM T HE TREE BY MAKING THE SUBSTANTIVE SECTION 92 OTIOSE AND THE DEFINITION OF INTERNAL T RANSACTION U/S 92B AND RULE 10B REDUNDANT. THIS IS PATENTLY AN UNACCEPTABLE POSITI ON HAVING NO SANCTION OF THE INDIAN TRANSFER PRICING LAW. BORROWING A CONTRARY MANDATE OF THE TP PROVISIONS OF OTHER COUNTRIES AND READING IT INTO OUR PROVISIONS IS NOT PERMISSIBLE. THE REQUIREMENT UNDER OUR LAW IS TO COMPUTE THE INCOME FROM AN INTERNATIONAL TRANSACTION BETWEEN TWO AES HAVING REGARD TO ITS AL P AND THE SAME IS REQUIRED TO BE STRICTLY ADHERED TO AS PRESCRIBED. THIS CONTENTION IS, THEREFORE, REPELLED. WITH HAVE DULY PERUSED THE FINDI NGS OF THE HONBLE BENCH CITED SUPRA. IN THIS CONNECTION, WE WOULD LIKE TO POINT OUT THAT VARIOUS TRIBUNALS HAVE TAKEN DIVERGENT VIEWS IN RESPECT OF SELECTION OF TESTED PARTY. TO ILLUSTRATE, THE EARLIER BENCH OF THIS TRIBUNAL IN T HE CASE OF MASTEK LIMITED ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 36 36 (SUPRA) HAD STRESSED THAT (AT THE COST OF REPETITIO N) WE ARE OF THE VIEW THAT IN ORDER TO DETERMINE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE, FIRST IT IS NECESSARY TO SELECT THE TESTED PARTY AND SUCH A SELECTED PARTY SHOULD BE LEAST COMPLEX AND SHOULD NOT BE UNIQUE, SO THAT PRIMA FACIE CANNOT BE DISTINGUISHED FROM POTENTIAL UNCONTROLLED COMPARABLES. THE HONBLE CALCUTTA TRIBUNAL IN THE CASE OF DEVELOPMENT CONSULTANTS (P) LTD (SUPRA) HAD RECORDED ITS FINDIN GS THAT 33. BASED ON FACTS AND OUR FINDINGS OF THE CASE, AFTER DUE CONSIDERATI ON OF ALL THE FACTS, WE CONCLUDE THAT THE ANALYSIS UNDERTAKEN BY THE ASSESSEE TO DETERMINE TH E ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION WITH DATACORE USA IS CORRECT AND ON THE BASIS OF THE ANALYSIS IT IS SEEN THAT TRANSACTION UNDERTAKEN BY THE TAXPAYER WITH DATACOR E US IS AT ARMS LENGTH FOR BOTH THE ASSESSMENT YEARS. THIRDLY, THE HONBLE DELHI TRIB UNAL IN THE CASE OF RANBAXY LABORATORIES LIMITED (SUPRA) TOOK A STAND THAT IF THE TAXPAYER WISHES TO TAKE FOREIGN AE AS A TESTED PARTY, THEN IT MUST ENSURE THAT IT IS SUCH AN ENTITY FOR W HICH THE RELEVANT DATA FOR COMPARISON IS AVAILABLE IN PUBLIC DOMAIN O R IS FURNISHED TO THE TAX ADMINISTRATION. THEN, THE UNITED NATIONS PRACT ICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES HAD OBSERVED THAT 5.3.3.1 THE TESTED PARTY NORMALLY SHOULD BE THE LESS COMPLEX PARTY TO THE CO NTROLLED TRANSACTION AND SHOULD BE THE PARTY IN RESPECT OF WHICH THE MOST RELIABLE DATA FO R COMPARABILITY IS AVAILABLE. IT MAY BE THE LOCAL OR THE FOREIGN PARTY. IF A TAXPAYER WISHES TO SELECT THE FOREIGN ASSOCIAT ED ENTERPRISE AS THE TESTED PARTY, IT MUST ENSURE THAT THE NECESSARY RELEVANT INFORMATION ABOUT IT AND SUFFICIENT DATA ON COMPARABLES IS FURNISHED TO THE TAX ADMINIS TRATION. 11.4. CONSIDERING THE DIVERGENT VIEWS EXPRESSED B Y VARIOUS TRIBUNALS (SUPRA) AND MAJORITY OF THEM WERE IN FAVO UR OF SELECTING THE TESTED PARTY EITHER FROM LOCAL OR FOREIGN PARTY A ND THE UNITED NATIONS PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES HAD OBSERVED THAT IT MAY BE THE LOCAL OR THE FOREIGN PARTY, WE TEND TO AGREE WITH THE SAME. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 37 37 11.5. REVERTING BACK TO THE ISSUE, THE ASSESSEE SU BMITTED THAT IN THE TRANSFER PRICING DOCUMENTATION, IT HAD PROVIDED THE BUSINESS PROFIT OF ALL 101 COMPARABLES SELECTED BY THE ASSESSEE. 11.5.1. THE DRP IN ITS FINDINGS AT PARA 11 HA D STATED, AMONG OTHERS, THAT IN MOST CASES THE TESTED PARTY WILL BE THE LEA ST COMPLEX OF THE CONTROLLED TAX PAYERS, AND WILL NOT OWN VALUABLE IN TANGIBLE PROPERTY OR UNIQUE ASSETS THAT DISTINGUISH IT FROM POTENTIAL UN CONTROLLED COMPARABLES. AS GMDAT IS NOT ONLY A COMPLEX ENTITY OWNING VALUAB LE INTANGIBLES, THE DATA FOR COMPARABILITY OF GMDAT OR THE COMPARABLE I S ALSO NOT AVAILABLE. 11.5.2. THIS VIEW OF THE DRP HAS BEEN DENIED B Y THE LEARNED SR. COUNSEL DURING THE COURSE OF HEARING WHICH HAS NOT BEEN CONTRADICTED BY THE REVENUE WITH ANY DOCUMENTARY EVIDENCE. 11.6. TO SUM UP, IT WAS THE ARGUMENT OF THE ASSESSEE THAT IF STRINGENT COMPARABILITY ANALYSIS AS ADOPTED BY THE TPO WERE TO BE ADOPTED, AND THEN M&M SHOULD ALSO BE PUT TO SUCH A STRINGENT COMPARABILITY TEST. IT WAS, FURTHER, ARGUED THAT M &M IS ALSO INVOLVED IN THE MANUFACTURE OF MULTI UTILITY VEHICLES, LIGHT COMMER CIAL VEHICLES AS WELL AS THREE WHEELERS APART FROM PASSENGER CARS. IT WAS, FURTHER, COUNTERED BY THE ASSESSEE IF FORCE MOTOR LIMITED WERE TO BE REJE CTED ON THE BASIS OF DIFFERENT PROFIT PROFILE AND THEN M&M SHOULD ALSO B E AXED ON THE SAME LOGIC. WE FIND FORCE IN THE ABOVE ARGUMENT OF THE ASSESSEE. ACCORDING TO THE ASSESSEE, GMDAT IS ONLY ENGAGED IN MANUFACTURIN G AND SUPPLY OF CERTAIN COMPONENTS USED IN MANUFACTURING OF CARS ON LY. THIS HAS NOT BEEN DISPUTED BY THE REVENUE. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 38 38 11.6.1. WE ARE IN DISAGREEMENT WITH THE REVEN UES ARGUMENT THAT GMDAT SHOULD NOT BE SELECTED AS A TESTED PARTY AS THE COMPARABLE AS THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE D OESNT FALL WITHIN THE AMBIT OF TPOS JURISDICTION AND, THUS, HE CAN NEITH ER CALL FOR ANY ADDITIONAL INFORMATION NOR SCRUTINIZE THEIR BOOKS OF ACCOUNTS. THE REVENUE CAN GET ALL THE RELEVANT PARTICULARS AROUND THE GLOBE BY US ING THE LATEST TECHNOLOGY UNDER ITS THUMB OR DIRECT THE ASSESSEE TO FURNISH T HE SAME. 11.6.2. AS RIGHTLY HIGHLIGHTED BY THE ASS ESSEE, WE FIND INCONSISTENCY IN THE APPROACH OF THE TPO WITH REGARD TO THE ISSUE OF TESTED PARTY. ON THE ONE HAND, THE TPO AVERRED THAT THERE WAS NO REL IABLE DATA AVAILABLE FOR BOTH GMDAT AND COMPARABLES; HOWEVER, ON THE OTHER H AND, HE HAD CONVENIENTLY TAKEN GMDAT AS THE TESTED PARTY WHIL E MAKING ADJUSTMENT TO TRANSACTION RELATING TO PAYMENT OF ROYALTY BY TH E ASSESSEE TO GMDAT. THIS EXPOSES THE INCONSISTENCY APPROACH OF THE TPO. 11.6.3. THE FINANCIAL STATEMENTS OF COMPARA BLE COMPANIES HAVE SINCE BEEN AUDITED BY THE INDEPENDENT AUDITORS AND, THUS, THERE CAN BE NO RESERVATION IN PLACING A RELIANCE ON THE SAME. 11.6.4. HOWEVER, THE LEARNED SR. COUNSEL SUBMITT ED THAT SEGMENT FINANCIAL DATA FOR BENCHMARKING - A PART OF GMDATS BUSINESS - WAS MADE AVAILABLE TO THE TPO AND ALSO ON HIS REQUEST, THE F INANCIAL STATEMENTS OF GMDAT (AT COMPANY LEVEL) WAS FURNISHED TO THE TPO A ND THE SAME IS NOT DISPUTED. THEREFORE, THERE SHOULD BE NO GRIEVANCE O N THE PART OF THE REVENUE TO SAY THAT NO SUFFICIENT DATA WAS MADE AVA ILABLE. 11.6.5. TAKING ALL THE ABOVE FACTS AND CIRCUMSTANCES OF THE ISSUE AS DISCUSSED IN THE FOREGOING PARAGRAPHS, IN CONSON ANCE WITH THE ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 39 39 CASE LAWS QUOTED (SUPRA) AND ALSO THE UNITED NATION S PRACTICAL MANUAL ON TRANSFER PRICING, WE DIRECT THE TPO TO AD OPT GMDAT AS THE TESTED PARTY FOR ANALYZING THE INTER-COMPANY TRAN SACTIONS OF THE ASSESSEE FOR BOTH THE AYS UNDER CONSIDERATION. TO F ACILITATE THE TPO TO ANALYZE THE INTER-COMPANY TRANSACTIONS IN THE CA SE OF THE ASSESSEE BY SELECTING GMDAT AS TESTED PARTY AS DIRECTED AB OVE, THIS ISSUE IS RESTORED ON THE FILES OF THE TPO. IT IS ORDERED AC CORDINGLY. GR. NO.2 DISALLOWANCE OF RS.3,14,830/- AND RS.2,91, 258/- BEING PROPORTIONATE LEASE CHARGES IN RESPE CT OF LEASE-HOLD LAND FOR THE AYS 2006-07 & 07-08: 12. THE ASSESSEE HAD CLAIMED THE EXPENSES OF RS .3.14 LAKHS AND RS.2.91 LAKHS BEING AMORTIZED OVER THE PERIOD O F LEASE OF 99 YEARS IN RESPECT OF LEASE-HOLD LAND. THE LEASE-HOLD LAND WA S INITIALLY ACQUIRED UNDER A LEASE AGREEMENT BY HINDUSTAN MOTORS LIMITED FROM GUJARAT INDUSTRIAL DEVELOPMENT CORPORATION. SUBSEQUENTLY, THE LAND WA S ASSIGNED BY HML TO THE ASSESSEE VIDE ASSIGNMENT DEED. BY VIRTUE OF SUCH AN ASSIGNMENT, ACCORDING TO THE ASSESSEE, THE ASSESSEE HAS ONLY GO T RIGHT TO USE THE LEASE-HOLD LAND FOR THE PURPOSE OF ITS BUSINESS. T HE ASSESSEE HAS THE RIGHT FOR THE POSSESSION AND USE OF LAND TILL THE EXPIRY OF THE SAID LEASE PERIOD. HOWEVER, T HE AO HAD DISALLOWED THE AMOUNTS CLAIMED BY THE ASS ESSEE BY FOLLOWING THE DECISION OF THE EARLIER BENCH OF T HIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE AYS 1997-98 AND 98-99. THE DRP UPHELD THE DISALLOWANCE BY PLACING RELIANCE IN THE CASE OF UNITED PHOSPHORUS LTD V. CIT (81 ITD 553). 12.1. BEFORE US, THE LEARNED SR. COUNSEL SUBMITT ED THAT THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF SUN PHARMA CEUTICALS IND. LTD. [329 ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 40 40 ITR 479 (GUJ)] ON SIMILAR FACTS RULED IN FAVOUR OF THE ASSESSEE. A SLP FILED BY THE REVENUE AGAINST THE SAID RULING WAS ALSO DI SMISSED BY THE HONBLE SUPREME COURT VIDE SPL. LEAVE APPEAL (CIVIL) CC 190 02/2009 DATED 4.12.2009. IN VIEW OF THE ABOVE, IT WAS PLEADED TH AT THE DISALLOWANCES REQUIRE TO BE DELETED. 12.1.2. THE DR PRESENT WAS HEARD AND ALSO PERU SED THE CASE LAWS RELIED ON BY THE REVENUE. 12.1.3. AT THE OUTSET, WE WOULD LIKE TO POINT O UT THAT THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF SUN PHARMA CEUTICALS IND. LTD. (SUPRA) ON AN IDENTICAL ISSUE DISMISSED THE REVENUE S APPEAL BY AFFIRMING THE TRIBUNALS FINDINGS THAT MERELY BECAUSE THE DEED WAS REGISTERED, THE TRANSACTION IN QUESTION WOULD NOT ASSUME AS DIFFERE NT CHARACTER. THE LEASE RENT WAS NOMINAL. BY OBTAINING THE LAND ON LEASE, THE CAPITAL STRUCTURE OF THE ASSESSEE DID NOT UNDER GO ANY CHANGE. THE ASSE SSEE ONLY ACQUIRED A FACILITY TO CARRY ON BUSINESS PROFITABLY BY PAYING NOMINAL LEASE RENT. IN THE LIGHT OF THE AFORESAID FINDINGS OF FACT AND THE RAT IO OF THE APEX COURT DECISIONS, THE COURT DOES NOT FIND THIS TO BE A CAS E WHICH WARRANTS INTERFERENCE 12.1.4. IN CONSONANCE WITH THE RULING OF THE HONBLE COURT (SUPRA), THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE FOR BOTH THE AYS UNDER DISPUTE. IT IS ORDERED ACCORDINGLY. 12.1.5. BEFORE PARTING WITH, WE WOULD LIKE T O REITERATE THAT WE HAVE DULY PERUSED THE CASE LAWS ON WHICH THE REVENUE HAD PLAC ED STRONG RELIANCE. SINCE, THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF SUN ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 41 41 PHARMACEUTICALS IND. LTD. (SUPRA) RULED IN FAVOUR O F THE ASSESSEE, WE HAVE ALLOWED THE ASSESSEES GROUND(S) ON THIS POINT. GR.3 DISALLOWANCE OF GIFT EXPENSES OF RS.4,16,978/- & RS.5,15,876/- FOR THE AYS 2006-07 & 2007-08: 13. THE ASSESSEE HAD CLAIMED EXPENSES UND ER THE HEAD GIFT TO THE TUNE OF RS.4.16 LAKHS AND RS.5.15 LAKHS FOR THE AYS UNDER CONSIDERATION PERTAINING TO DIWALI, GIFTS MADE TO DEALERS, BUSINE SS ASSOCIATES, EMPLOYEES ETC., DURING THE COURSE OF BUSINESS. THE AOS HAVE, HOWEVER, DISALLOWED SUCH EXPENDITURE ON THE PREMISE THAT THE ASSESSEE M ANUFACTURES PASSENGER CARS AND THE SALE OF THE SAME IS BEING EF FECTED THROUGH ITS AUTHORIZED DEALERS AND, THUS, THERE IS NO NEED FOR INCURRING SUCH EXPENDITURE. 13.1. DRP HAD ALSO REJECTED THE ASSESSEES CLAIM O N THE GROUND THAT THE ASSESSEE HAD NOT SUBMITTED ANY EVIDENCE IN SUPP ORT OF THE CLAIMS THAT THE EXPENDITURE INCURRED ON GIFTS ETC., WAS ONLY FO R THE PURPOSE OF ITS BUSINESS AND NOT FOR DIRECTORS OR THEIR RELATIVES. 13.2. BEFORE US, IT WAS CLAIMED BY THE ASSESSEE TH AT THE EXPENSES INCURRED DULY SATISFY THE CONDITIONS STIPULATED IN S. 37(1) OF THE ACT AS THE SAME WERE NEITHER IN THE NATURE OF CAPITAL NOR PERS ONAL. IT WAS, FURTHER, CLAIMED THAT THE EXPENSES WERE INCURRED FOR MAINTAI NING AND FURTHERING GOOD AND CORDIAL BUSINESS RELATIONSHIP WITH ITS BUS INESS ASSOCIATES INCLUDING THE EMPLOYEES AND PROMOTING THE BUSINESS ACTIVITIES OF THE ASSESSEE ON AN ON-GOING BASIS. IT WAS, FURTHER, JU STIFIED THAT THE PRACTICE OF GIVING SUCH GIFTS IS CUSTOMARY AND UNAVOIDABLE HAVI NG REGARD TO THE COMPETITIVE ENVIRONMENT THE ASSESSEE OPERATES IN AN D THE SAME OF UTMOST REQUIREMENT TO ENABLE SMOOTH RUNNING OF ITS BUSINES S SO AS TO GENERATE ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 42 42 GOODWILL ETC. IT WAS ASSERTED THAT THE EXPENSES HAV E SINCE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSI NESS, THE ASSESSEE HAD SATISFIED THE CONDITIONS STIPULATED IN S. 37(1) OF THE ACT. TO STRENGTHEN ITS ARGUMENT, THE ASSESSEE SOUGHT TO PLACE RELIANCE ON THE VARIOUS JUDICIAL PRONOUNCEMENTS INCLUDING THE FOLLOWING CASE LAWS: (I) S.A. BUILDERS LTD V. CIT 288 ITR 1 (SC); (II) CIT V. S L M.MANEKLAL INDUSTRIES LTD (1977) 10 7 ITR 133 (GUJ); (III) KARJAN CO-OPERATIVE COTTON SALES GINNING AND PRESSING SOCIETY V. CIT 199 ITR 17 (GUJ); (IV) ACIT V. VODAFONE ESSAZR GUJARAT LTD (ITA NOS.1 361 & 1878/2009 (AHD) THE LEARNED DR PRESENT WAS HEARD. 13.3. AS RIGHTLY HIGHLIGHTED BY THE LEARNED S R. COUNSEL FOR THE ASSESSEE, IT IS RATHER CUSTOMARY IN THIS LINE OF BU SINESS TO PRESENT COMPLEMENTARY GIFTS TO THE VISITING DIGNITARIES, PA TRONS, DEALERS, BUSINESS ASSOCIATES SO AS TO MAINTAIN CORDIALITY, RAPPORT ET C., UNDER THESE CIRCUMSTANCES, THE AMOUNTS SPENT FOR GIVING PRESENT S TO THEM COULD BE SAID TO BE EXPENDITURE INCURRED WHOLLY AND EXCLUSIV ELY FOR THE PURPOSE OF ITS BUSINESS SINCE THIS AMOUNT WAS SPENT FOR KEEPING AL IVE ITS GOOD IMAGE AMONGST ITS PATRONS AND ENSURING THAT GOODWILL AND ENSURING THE CONTINUITY OF BUSINESS WITH THEM AS BEFORE. SINCE THESE KINDS OF GIFTS HAVE BEEN PRESENTED DURING THE COURSE OF BUSINESS, THE EXPEND ITURE INCURRED UNDER THIS HEAD WAS NOTHING BUT BUSINESS EXPEDIENCY WHICH FALLS WITHIN THE PURVIEW OF S. 37(1) OF THE ACT. WE ARE, THEREFORE, OF THE FIRM VIEW THAT THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN REJECTING T HE ASSESSEES LEGITIMATE ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 43 43 CLAIM ON THE ISSUE. IN ESSENCE, THIS ISSUE GOES IN FAVOUR OF THE ASSESSEE FOR BOTH THE AYS. IT IS ORDERED ACCORDINGLY. GR.4 & 5 : DISALLOWANCE OF RS.2,50,68,560/- & RS.2,44,28,8 18/-ON ACCOUNT OF PROVISION FOR SLOW MOVI NG AND OBSOLETE INVENTORY MADE BY THE ASSESSEE FOR THE AYS 2006-07 & 2007-08: 14. BRIEFLY, THE ASSESSEE HAD DEBITED [FOR THE A Y 2007-08] TOTAL PROVISION AMOUNTING TO RS.9,75,15,307/- TO THE P & L ACCOUNT ON ACCOUNT OF WASTAGE AND OBSOLETE MATERIAL. THE SAID PROVISIO N COMPRISED OF THE FOLLOWING: (I) RS.73,30,86,489/- ON ACCOUNT OF PROCESS REJECTS , MATERIAL SCRAPPED, CONTRACT CANCELLATION FOR OBSOLETE MATERI AL AND SHORTAGE ON PHYSICAL INVENTORY COUNT ETC., & (II) RS.2,44,28,818/- ON ACCOUNT OF PROVISION FOR S LOW MOVING AND OBSOLETE INVENTORY BEING NET INCREASE IN PROVISION DURING THE YEAR. 14.1. EVEN THOUGH, THE AO HAD ACCEPTED THE CLAIM OF THE ASSESSEE WITH REGARD TO EXPENSE OF RS.73.3 CRORES ON ACCOUNT OF PROCESS REJECTS, MATERIAL SCRAPPED, CONTRACT CANCELLATION FOR OBSOLE TE MATERIAL AND SHORTAGE ON PHYSICAL INVENTORY COUNT, HOWEVER, DISALLOWED TH E CLAIM OF RS.2.44 CRORES ON ACCOUNT OF PROVISION FOR SLOW MOVING AND OBSOLETE INVENTORY BEING NET INCREASE IN PROVISION DURING THE YEAR BY PLACING RELIANCE ON THE TRIBUNALS ORDER IN THE ASSESSEES OWN CASE FOR THE AYS 1997-98 & 98-99 WHEREIN IT WAS HELD THAT THE MARKET VALUE OF THE WA STAGE/OBSOLETE MATERIALS SHOULD BE INCLUDED FOR CALCULATING THE TOTAL INCOME . 14.2. THE DRP, ON ITS PART, REJECTED THE ASSESSEE S OBJECTION ON THE PREMISE THAT THE ASSESSEE HAD NOT LED ANY EVIDENCE THAT THE FINDINGS OF THE ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 44 44 JURISDICTIONAL TRIBUNAL HAS BEEN CHALLENGED OR REVE RSED BY THE HONBLE HIGH COURT. 14.3. DURING THE COURSE OF HEARING, THE SUBMISSION S OF THE LEARNED SR. COUNSEL ARE SUMMED UP AS UNDER: (A) THAT ACCORDING TO THE REGULAR ACCOUNTING METHO D FOLLOWED, THE CLOSING STOCK OF INVENTORIES IS VALUED AT COST OR M ARKET VALUE WHICHEVER IS LOWER; (B) THAT A PROVISION WAS, THEREFORE, CREATED FOR IN VENTORY WHICH IS IDENTIFIED AS SLOW MOVING OR OBSOLETE. THE SLOW MO VING/OBSOLETE INVENTORY LEVEL IS DETERMINED THROUGH SAP AS PER THE UNIFORM POLICY ADOPTED FOR IDENTIFICATION OF SUCH INVENTORY AND IT DOES NOT IN VOLVE MANUAL INTERVENTION. THERE ARE OVER 24000 DIFFERENT PARTS REQUIRED IN AS SEMBLY OF A SINGLE CAR AND IT IS PRACTICALLY NOT POSSIBLE TO DETERMINE THE MARKET VALUE OF EACH AND EVERY PART AS AND WHEN THE PARTS ARE IDENTIFIED AS OBSOLETE, WASTE OR SLOW MOVING; (C) HIGH LEVEL OF OBSOLESCENCE IN THE ASSESSEES LI NE OF BUSINESS IS FOR THE REASON THAT THOUSANDS OF DIFFERENT PARTS ARE RE QUIRED TO BE ASSEMBLED TO MANUFACTURE A CAR AND ALSO TO PROVIDE WARRANTY S ERVICES. THE ASSESSEE HAS TO MAINTAIN ADEQUATE INVENTORY TO ENSURE THAT T HE MANUFACTURING PROCESS OR WARRANTY SERVICES ARE NOT AFFECTED. THE REFORE, OWING TO ASSESSEES BUSINESS REQUIREMENT, IT HAS TO MAINTAIN HUGE STOCK. A PART OF THESE STOCKS BECOME OBSOLETE ON ACCOUNT OF SEVERAL REASONS, INCLUDING THE FACT THAT A MODEL MAY GET DISCONTINUED DURING THE Y EAR OR THE INVENTORY MAY BE OTHERWISE NON-USABLE; ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 45 45 (D) FURTHER, THE ASSESSEE REGULARLY REVIEWS THE PRO VISIONS MADE AND, IF UPON SUCH REVIEW, IT IS OBSERVED THAT SOME STOCKS H AVE BEEN UTILIZED OR CERTAIN STOCK IS NO MORE SLOWING MOVING OR OBSOLETE , THE ASSESSEE REVERSES THE PROVISION MADE IN THE EARLIER YEARS; (E) THAT THE AO HAD ERRED IN FOLLOWING THE ORDER OF THE HONBLE TRIBUNAL IN A MECHANICAL MANNER AND HAD FAILED TO EXAMINE TH E ISSUE ON MERITS BASED ON FACTS AND LAW APPLICABLE DURING THE YEARS UNDER ASSESSMENTS. THE AO HAD ALSO FAILED TO RECOGNIZE THAT THE LEGISL ATURE HAS INCLUDED SPECIFIC PROVISION UNDER THE ACT VIDE S. 145A WHICH WAS INSERTED BY THE FINANCE (NO.2) ACT, 1998 W. E. F. 1.4.1999 WITH REG ARD TO VALUATION OF CLOSING STOCK THAT ENABLES THE ASSESSEE TO VALUE IN VENTORY FOR THE PURPOSE OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD PROFIT AND GAINS OF BUSINESS AND PROFESSION IN ACCORDANCE WITH THE MET HOD OF ACCOUNTING REGULAR EMPLOYED BY THE ASSESSEE. THE HONBLE TRIB UNAL, ACCORDINGLY, DID NOT HAVE THE OCCASION TO EXAMINE THE ACCOUNTING POL ICY WHICH IS BEING CONSISTENTLY FOLLOWED BY THE ASSESSEE WITH RESPECT TO OBSOLETE AND SLOW MOVING INVENTORY IN LIGHT OF SPECIFIC PROVISIONS OF S 145A OF THE ACT INTRODUCED W.E.F. 1.4.1999. HENCE, THE DECISION OF THE HONBLE TRIBUNAL WILL HAVE LIMITED APPLICABILITY ONLY FOR AYS 1997-98 AND 1998-99 AND WILL NOT BE BINDING PRECEDENT FOR SUBSEQUENT YEARS INCLUDING TH E AYS UNDER DISPUTE. THE AO, INSTEAD OF CONSIDERING THE SUBMISSION OF TH E ASSESSEE, RELIED ON THE FINDINGS OF THE HONBLE TRIBUNAL WHICH WERE BIN DING ONLY FOR THE AYS 1997-98 AND 98-99; (F) WITHOUT PREJUDICE, THAT IN ANY EVENT THE DISALL OWANCE PROPOSED BY THE AO WAS ERRONEOUS AS THE ENTIRE COST OF THE INVENTOR IES HAS BEEN ADDED BACK. THE DISALLOWANCE HAS BEEN MADE ON THE GROUND THAT THE MARKET VALUE OF THE OBSOLETE STOCKS NEEDS TO BE ADDED AS D IRECTED BY THE HONBLE ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 46 46 TRIBUNAL FOR THE AYS. 1997-98 AND 98-99.THE AO HAD, ERRONEOUSLY ASSUMED THAT THE ENTIRE SUMS OF RS.2.5 CRORES AND R S.2.44 CRORES REPRESENT THE MARKET VALUES OF THE INVENTORY AND HA D FAILED TO APPRECIATE THAT THE ABOVE AMOUNTS REPRESENT THE COST OF INVENT ORIES TO THE ASSESSEE AND NOT THE MARKET VALUE THEREOF. EVEN IF ANY ADD ITION CAN BE MADE FOR THE MARKET VALUE OF SUCH OBSOLETE INVENTORIES, IT W AS EVIDENT THAT PROPOSED DISALLOWANCES OF RS.2.5 CRORES AND RS.2.44 CRORES W ERE UNJUSTIFIED AS THAT VALUES REPRESENT THE COST AND NOT THE REALIZABLE VA LUE/MARKET VALUE OF SUCH OBSOLETE STOCKS; (G) THAT THE HONBLE BENCH HAD HELD THAT THE MARKET /SCRAP VALUE OF OBSOLETE STOCK SHOULD BE INCLUDED FOR COMPUTING THE TOTAL INCOME AND, ACCORDINGLY, THE AO WAS DIRECTED TO ADJUDICATE THE ISSUE AFRESH. THE AO HAD GRANTED RELIEF TO THE ASSESSEE AS PER THE DIREC TIONS OF THE TRIBUNAL FOR THE AYS 1997-98 & 98-99 AFTER TAKING INTO CONSIDERA TION THE REALIZABLE VALUE ESTIMATED AND ASSIGNED TO SCRAP WHICH HAD ALR EADY BEEN ACCOUNTED FOR IN THE BOOKS OF ACCOUNT, AND, THUS, NO FURTHER ADJUSTMENTS WERE MADE WHILE GIVING EFFECT TO THE TRIBUNALS ORDER FOR THE SAID AYS; & (H) THAT THE DISALLOWANCES OF RS.2.5 CRORES AND RS. 2.44 CRORES WERE THEREFORE ERRONEOUS AND REQUIRE TO BE DELETED. 14.4. THE LEARNED DR PRESENT SUPPORTED THE STAND O F THE AUTHORITIES BELOW ON THIS COUNT. 14.5. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMI SSIONS AND ALSO PERUSED THE FINDINGS OF THE EARLIER BENCH OF THIS T RIBUNAL IN THE ASSESSEES OWN CASE FOR THE AYS 1997-98 AND 1998-99 AND ALSO T HE SPECIFIC PROVISION OF S. 145A WHICH WAS INSERTED BY THE FINANCE (NO.2) ACT, 1998 W. E. F. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 47 47 1.4.1999 WITH REGARD TO VALUATION OF CLOSING STOCK WHICH ENABLES THE ASSESSEE TO VALUE INVENTORY FOR THE PURPOSE OF DETE RMINING THE INCOME CHARGEABLE UNDER THE HEAD PROFIT AND GAINS OF BUSI NESS AND PROFESSION IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. DURING THE COURSE OF HEARING, THE LEARNED SR. COUNSEL HAD CATEGORICALLY STATED THAT NO FURTHER ADJUSTMENT WAS MADE BY THE AO WHILE GIVING EFFECT TO THE FINDINGS OF THE EARLIER BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE AYS 1997-98 AND 1998-99 [COURTESY: PAGE 10 OF WRITTEN SUBMISSION OF THE AR DATED 19.6.2012]. 14.6. IN VIEW OF THE FACTS AND CIRCUMST ANCES OF THE ISSUE AND ALSO KEEPING THE PRINCIPLES OF NATURAL JUSTICE AND EQUIT Y IN VIEW, THIS ISSUE IS RESTORED ON THE FILES OF THE AO WITH A DIRECTIONS T O LOOK INTO THE MATTER AFRESH AND TO TAKE APPROPRIATE ACTION AFTER DUE VER IFICATION OF THE ASSERTION OF THE ASSESSEE IN THE MATTER AS RECORDED IN HEREIN ABOVE. IN SUBSTANCE, THESE GROUNDS FOR BOTH THE AYS UNDER CONSIDERATION ARE TREATED AS ALLOWED IN FAVOUR OF THE ASSESSEE. 15. FOR THE AY 2006-07, IN GROUND NO.5, THE ASSESSEE RAISED AN ISSUE TO THE EFFECT THAT WITHOUT PREJUDICE, THE AO/DRP ERRED IN NOT ALLOWIN G A DEDUCTION OF RS.3,67,03,644/- BEING PROVISION FOR SLOW MOVING AND OBSOLETE INVENTORY REVERSED DURING THE YEAR AND CRE DITED TO THE P & L ACCOUNT WHICH HAD ALREADY BEEN DISALLOWED IN EARLIE R YEAR(S) IN SPITE OF THE SAME HAVING BEEN VERIFIED AND ACCEPTED BY THE AO HI MSELF IN THE REMAND REPORT FURNISHED BEFORE THE DRP. 15.1. ON A PERUSAL OF THE DIRECTIONS OF THE DRP DA TED 27.8.2010; IT IS OBSERVED THAT THE ISSUE HAS BEEN DEALT WITH BY THE DRP. FOR READY ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 48 48 REFERENCE, THE RELEVANT PORTIONS OF THE DIRECTIONS OF DRP ARE EXTRACTED AS UNDER: 73.4.11. FURTHER, VIDE SUPPLEMENTARY SUBMISSIONS F ILED ON 10 TH JUNE, 2010 WITH THE PANEL, THE ASSESSEE HAS SUBMITTED A CHART SHOWING M OVEMENT OF SLOW MOVING/OBSOLETE INVENTORY UNDER VARIOUS HEADS FOR THE PREVIOUS YEAR S ENDED MARCH 31, 2005 AND MARCH 31, 2006 INDICATING THAT THERE HAS BEEN A NET REVERSAL OF PROVISION AMOUNTING TO RS.1,16,35,084/- DURING THE FINANCIAL YEAR 2005- 06 AS SUMMARIZED BELOW. INCREASE IN PROVISION AMOUNTING TO RS.2,50,68,560/- UNDER THE SUB-HEAD INVENTORY VEHICLES-EXCESS & OBSOLETE BASIC REDUCTION OF PROVISION AMOUNTING TO RS.3,67,03,644/ - UNDER THE SUB-HEAD INVENTORY P&A EXCESS AND OBSOLETE. IT HAS BEEN SUBMITTED THAT THE AO HAS PROPOSED TO D ISALLOW THE INCREMENTAL PROVISION, WITHOUT CONSIDERING THE REVERSAL OF PROVISION AMOUN TING TO RS.3,67,03,644/- ON OTHER ITEMS. IT HAS BEEN SUBMITTED THAT IN CASE THE ADDI TION IN RESPECT OF SLOW MOVING/OBSOLETE STOCK IS SUSTAINED IN PRINCIPLE, TH EN WITHOUT PREJUDICE TO THE CLAIM OF THE ASSESSEE, A FURTHER DEDUCTION OF RS.3.67 CRORES (BEING PROVISION REVERSED DURING THE YEAR WHICH HAVE BEEN DISALLOWED IN EARLIER YEAR (S) SHOULD BE ALLOWED. 73.4.12. THE ASSESSEES ARGUMENTS HAVE BEEN CONSIDE RED CAREFULLY, BUT THE SAME ARE FOUND NOT ACCEPTABLE. IT IS ADMITTED FACT THAT IDE NTICAL ISSUE CAME UP FOR CONSIDERATION BEFORE THE HONBLE ITAT IN THE ASSESS EES OWN CASE FOR AY 1997-98 AND 1998-99. THE ITAT, AHMEDABAD, BENCH D VIDE O RDER NO.1392 & 1393/AHD/2004 DATED 23.12.2008 HAS HELD THAT THE MA RKET VALUE OF THE SCRAP OF SUCH WASTAGE/OBSOLETE MATERIALS AS ON THE 31 ST MARCH OF THE FINANCIAL YEAR SHOULD BE ADDED TO TOTAL INCOME. THE ASSESSEE HAS NOT LED ANY EVID ENCE THAT THE SAID DECISION OF THE HONBLE ITAT IN THE ASSESSEES OWN CASE HAS BEEN RE VERSED BY THE HIGH COURTS. THE ASSESSEE HAS NOT SUBMITTED ANY DETAILS/EVIDENCE TO SHOW THAT IT HAS EVEN CHALLENGE DTHE SAID FINDING OF THE HONBLE ITAT. HENCE, RESP ECTFULLY FOLLOWING THE ABOVE DECISION OF THE HONBLE ITAT IT IS HELD THAT, THE M ARKET VALUE OF SUCH OBSOLETE MATERIAL AS ON THE 31 ST MARCH 2006 IS TO BE TAKEN AND ADDED TO THE TOTAL I NCOME. THE AO HAS DETERMINED THE MARKET VALUE OF SUCH OBSOLETE STOCK IS RS.2,50,68,560/- BEING THE NET INCREASE IN THE PROVISION MADE DURING THE Y EAR FOR SLOW MOVING AND OBSOLETE INVENTORY. THE SAID FACT HAS NOT BEEN CONTROVERTED BY THE ASSESSEE AND NO EVIDENCE HAS BEEN LED EITHER BEFORE THE AO OR BEFORE US TO S UBSTANTIATE THAT THE MARKET VALUE OF SUCH OBSOLETE STOCK WAS DIFFERENT AS DETERMINED BY THE AO. HENCE, THE SAID PROPOSED ADDITION OF RS.2,50,68,560/- IS CONFIRMED. 15.2. HOWEVER, DURING THE COURSE OF HEARING BEFORE US, THE LEARNED SR. COUNSEL DREW OUR ATTENTION TO THE EFFECT THAT [AT THE COST OF REPETITION] THE HONBLE BENCH HAD HELD THAT THE MARKET/SCRAP V ALUE OF OBSOLETE STOCK SHOULD BE INCLUDED FOR COMPUTING THE TOTAL INCOME A ND, ACCORDINGLY, THE AO ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 49 49 WAS DIRECTED TO ADJUDICATE THE ISSUE AFRESH. THE A O HAD GRANTED RELIEF TO THE ASSESSEE AS PER THE DIRECTIONS OF THE TRIBUNAL FOR THE AYS 1997-98 & 98-99 AFTER TAKING INTO CONSIDERATION THE REALIZABL E VALUE ESTIMATED AND ASSIGNED TO SCRAP WHICH HAD ALREADY BEEN ACCOUNTED FOR IN THE BOOKS OF ACCOUNT, AND, THUS, NO FURTHER ADJUSTMENTS WERE MAD E WHILE GIVING EFFECT TO THE TRIBUNALS ORDER FOR THE SAID AYS. FURTHER, THE LEARNED SR. COUNSEL HAD ASSERTED THAT THE DEDUCTION OF RS.3,67,03,644/- BEI NG PROVISION FOR SLOW MOVING AND OBSOLETE INVENTORY REVERSED DURING THE Y EAR AND CREDITED TO THE P & L ACCOUNT HAD ALREADY BEEN DISALLOWED IN E ARLIER YEAR(S) AND THE SAME HAVING BEEN VERIFIED AND ACCEPTED BY THE AO HI MSELF IN THE REMAND REPORT FURNISHED BEFORE THE DRP. 15.2.1 THE LEARNED DR PRESENT WAS ALSO HEARD. 15.3. WE HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE LEARNED SR. COUNSEL ON THE ISSUE. IRONICALLY, THE DRP TOOK A S TAND BY CITING THE FINDINGS OF THE EARLIER BENCH OF THIS TRIBUNAL FOR THE AYS 1997-98 AND 98-99 (SUPRA) THAT THE MARKET VALUE OF SUCH OBSOLETE MATE RIAL AS ON 31 ST MARCH 2006 IS TO BE TAKEN AND ADDED TO THE TOTAL INCOME. HOWEVER, THE LEARNED SR. COUNSEL FOR THE ASSESSEE STATED THAT THE AO GRANTED RELIEF TO THE ASSESSEE AS PER THE DIRECTIONS OF THE ITAT FOR THE AYS 1997-98 AND 98-99 AFTER TAKING INTO CONSIDERATION THE REALIZABLE VALU E ESTIMATED AT RS.2,38,549/- AND RS.82,120/- ASSIGNED TO SCRAP FOR AYS 97-98 & 98-99 RESPECTIVELY WHICH HAD ALREADY BEEN ACCOUNTED FOR I N THE BOOKS OF ACCOUNT AND NO FURTHER ADJUSTMENT WAS MADE WHILE GIVING EFF ECT TO THE ORDER OF THE ITAT FOR THOSE ASSESSMENT YEARS ETC. [REFER: ARS WRITTEN SUBMISSION DATED: 19.6.2012 ON PAGE 10] THIS FACT HAS NOT BEEN DISPUTED BY THE REVENUE. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 50 50 15.4. TAKING INTO CONSIDERATION OF THE ABOVE SCENA RIO AND THE FACT THAT THE DISALLOWANCES OF THE PROVISIONS FOR SLOW MOVING AND OBSOLETE INVENTORY MADE FOR THE AYS 2006-07 AND 2007-08 HAV E SINCE BEEN RESTORED ON THE FILES OF THE AO AND ALSO THAT THE A O HAD, ACCORDING TO THE ASSESSEE, CONCEDED IN HIS REMAND REPORT FURNISHED B EFORE THE DRP THAT THE DEDUCTION OF RS.3,67,03,644/- BEING PROVISION F OR SLOW MOVING AND OBSOLETE INVENTORY REVERSED DURING THE YEAR AND CRE DITED TO THE P & L ACCOUNT WHICH HAD ALREADY BEEN DISALLOWED IN THE EA RLIER YEAR(S) ETC., WE ARE OF THE CONSIDERED VIEW THAT THIS ISSUE ALSO REQ UIRES TO BE LOOKED INTO BY THE AO. TO FACILITATE THE AO TO DO THE EXERCISE, T HIS ISSUE IS RESTORED ON THE FILE OF THE AO FOR NEEDFUL. IT IS ORDERED ACCORDIN GLY. GR. NO.6 [FOR AY 06-07] : DISALLOWANCE OUT OF WORKMEN AND STAFF WELFARE EXPENSES ACCOUNT RS.10.6 LAKHS: 16. BRIEFLY, THE ASSESSEE HAD CLAIMED AN EXPENDITU RE OF RS.10,89,67,670/- UNDER THE HEAD WORKMEN AND STAFF WELFARE. ACCORDING TO THE AO, SINCE SOME OF THE EXPENSES HAVE INCREASE D DISPROPORTIONATELY FROM THE PREVIOUS YEAR, THE ASSESSEE WAS REQUIRED T O EXPLAIN THE SAME. IT WAS SUBMITTED BY THE ASSESSEE THAT THE INCREASE WAS PRIMARILY DUE TO AN EXCEPTIONAL PROVISION FOR PF LIABILITY OF RS.5.44 C RORES BOOKED UNDER THE HEAD ADMN. EMPLOYEE WELFARE AND RECREATION. EXCL UDING THE SAID SUM, THERE WAS AN INCREASE OF RS.1.06 CRORES. IT WAS EX PLAINED BY THE ASSESSEE THAT THERE HAS BEEN AN INCREASE IN THE EMPLOYEES S TRENGTH FROM 1649 TO 1882 DURING THE YEAR UNDER CONSIDERATION. IT WAS, FURTHER, EXPLAINED THAT AS WORKMEN AND STAFF WELFARE EXPENSES WERE LARGELY A F UNCTION OF THE EMPLOYEE HEAD COUNT, THE INCREASE IN HEAD COUNT COU PLED WITH THE GENERAL INFLATION HAD RESULTED IN INCREASE IN COSTS OVER TH E PREVIOUS YEAR. IN ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 51 51 CONCLUSION, IT WAS SUBMITTED THAT THE MERE FACT OF INCREASE IN COSTS OVER THE PREVIOUS YEAR CANNOT BE A GROUND FOR DISALLOWANCE. 16.1. THE AO HAD, HOWEVER, TOOK A STAND THAT THE ASPECT OF INCREASE IN WORKMEN AND STAFF WELFARE EXPENSES WAS EXAMINED IN THE AY 2002-03 ALSO AND THE SAME WAS PARTLY FOUND TO BE UN VERIFIABLE AND CONSIDERING THE SAME AND ALSO IN VIEW OF THE POSSIB ILITY OF INCLUSION OF CERTAIN EXPENDITURE FOR NON-BUSINESS PURPOSES, A DI SALLOWANCE OF RS.10.6 LAKHS BEING 10% OF RS.1.06 CRORES WAS MADE. 16.2. AGGRIEVED, THE ASSESSEE TOOK UP THE ISSUE W ITH THE DRP FOR RELIEF. THE DRP HAD, AFTER DUE CONSIDERATION OF TH E ASSESSEES CONTENTION AS RECORDED IN ITS DIRECTION, CONFIRMED THE ADDITIO N FOR THE REASONING THAT - 73.3.7.THE ASSESSEE HAS NOT SUBMITTED ANY COGE NT REASON AS TO WHY THERE IS SUCH ABNORMAL INCREASE IN SAID EXPENSE AS COMPARED TO LAST YEAR. FURTHER, THE AO HAS GIVEN A FINDING THAT THE ENTIRE EXPENSE ON THIS ACCOUNT IS NOT VERIFIABLE 16.3. WE HAVE CAREFULLY CONSIDERED THE SUBMISS IONS MADE BY THE RIVAL PARTIES DURING THE COURSE OF HEARING. 16.3.1. AT THE OUTSET, WE WOULD LIKE TO P OINT OUT THE PRIME REASONING FOR THE AO TO RESORT TO MAKE AN AD-HOC DISALLOWANCE OF 10% WAS THAT HE HAD COMPARED THE EXPENSES CLAIMED FOR THE AY UNDER DISPUTE WITH THAT OF THE EXPENSES INCURRED FOR THE AY 2002-03 AND CAME T O A CONCLUSION THAT THERE MAY BE A POSSIBILITY OF INCLUSION OF CERTAIN EXPENDITURE FOR NON- BUSINESS PURPOSES TOO. THE LOGIC ADOPTED BY THE AO IN MAKING SUCH AN AD-HOC DISALLOWANCE, IN OUR CONSIDERED VIEW, WAS NO T ON A SOUND FOOTING. THE ASSESSEE HAD, IN FACT, ATTRIBUTED THE INCREASE IN EXPENDITURE DUE TO ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 52 52 INCREASE IN THE WORK FORCE [PRECISELY FROM 1649 TO 1882 EMPLOYEES] DURING THE YEAR UNDER CONSIDERATION. THIS CRUCIAL ASPECT HAS NOT BEEN GIVEN DUE WEIGHT-AGE. 16.3.2. THE DRP HAD RECORDED IN ITS DIRECTIONS THA T THE ASSESSEE HAD NOT SUBMITTED ANY COGENT REASON FOR SUCH AN INC REASE AS COMPARED TO THE LAST YEAR. IT HAD, FURTHER, RECORDED THAT THE AO HAS GIVEN A FINDING THAT THE ENTIRE EXPENSES ON THIS ACCOUNT IS NOT VERIFIAB LE. HOWEVER, ON A PERUSAL OF THE AOS FINDING, IT IS OBSERVED THAT NO SUCH AN OBSERVATION IS FINDING A PLACE. IN A NUT-SHELL, THE AO HAD NOT CO ME OUT WITH ANY DOCUMENTARY EVIDENCE TO REMOTELY SUGGEST THAT AN AD -HOC DISALLOWANCE WAS WARRANTED IN THIS CASE. IN JUDICIAL PARLANCE, AN AD-HOC DISALLOWANCE DOESNT STAND THE TESTIMONY OF LAW. AS A MATTER OF FACT, NO DISALLOWANCE CAN BE RESORTED TO FOR THE SAKE OF MAKING A DISALLO WANCE. WHILE MAKING ANY DISALLOWANCE, IT MUST BE ENSURED THAT SUCH A DI SALLOWANCE SHALL WITHSTAND FURTHER SCRUTINY. 16.3.3. IN VIEW OF THE ABOVE, WE ARE OF THE FIRM V IEW THAT THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN DISALLOWING A SUM OF RS.10,60,000/- ON THIS COUNT THAT TOO AN AD-HOC BASIS. THEREFORE, WE HEREBY DELETE THE ADDITION OF RS.10,60,000/- BEING DISALLOWANCE OF WO RKMAN & STAFF WELFARE EXPENSE. GR. NO.9: ADDITIONS OF RS.12.18 CRORES & RS.16.32. CRORES IN RESPECT GR.NO.10 OF TECH. CENTRE OPERATIONS FOR THE AYS. 2006-07 & 2007-08 RESPECTIVELY: 17. DURING THE YEARS UNDER CONSIDERATION, THE ASSE SSEE HAD PROVIDED CERTAIN ENGINEERING AND R & D SERVICES TO ITS AES AND EARNED A NET OPERATING PROFIT OF 10.22% OVER TOTAL COSTS. T HE TPO HAD OBJECTED TO ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 53 53 THE ALP MARGIN COMPUTED FOR PROVISION OF ENGINEERIN G SERVICES. HE HAD ALSO REJECTED FOUR COMPARABLE COMPANIES AND FINALLY PROPOSED FOUR FOLLOWING COMPANIES AS COMPARABLES: (I) ROLTA INDIA LIMITED, (II) ACE SOFTWARE E XPORTS LIMITED, (III) KLG SYSTEL LIMITED, & (IV) POWERSOFT GLOBAL SOLUTIONS LIMITED. 17.1. THE DRP HAD, IN ITS DIRECTIONS, AGREED WITH THE TPOS STAND. DURING THE COURSE OF HEARING, THE ASSESSEE HAD OBJE CT TO THE COMPARABLES SELECTED BY THE TPO ON THE FOLLOWING GROUNDS: (I) ROLTA INDIA LIMITED: DURING THE YEAR UNDER CONSIDERATION, THE COMPANY HAD UNDERGONE BUSINESS RESTRUCTURING AS PER ITS ANN UAL REPORT AND, THUS, THIS COMPANY CANNOT BE A COMPARABLE ON THE GROUND O F FUNCTIONAL DISSIMILARITY. RELIES ON THE FOLLOWING CASE LAWS: (A) PETRO ARALDITE PRIVATE LIMITED V. DCIT ITA NO .6217/MUM/2012; & (B) CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD V. DICT ITA NO.6961/HYD/2011 DATED 23.11.2012. (II) POWERSOFT GLOBAL SOLUTIONS LIMITED: SINCE THIS COMPANY IS ENGAGED IN DIVERSIFIED BUSINE SS OPERATIONS AND ALL THESE SERVICES APART FROM ENGINEERING SERVICES ARE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. COMPARABLES REJECTED BY THE TPO: 17.2. THE SUBMISSIONS OF THE ASSESSEE ARE UNDER: ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 54 54 (I) ONWARD TECHNOLOGIES LTD: THE TPO HAD REJECTED ONWARD STATING THAT THE COMPANY HAD RELATED PARTY TRANSACTIONS OF 65 PE R CENT OF SALES. IN THIS REGARD, IT WAS SUBMITTED THAT THE TPO ERRED WHILE N OT CONSIDERING THE CONSOLIDATED RESULTS; THAT IN PREPARING THE CONSOLI DATED STATEMENTS, THE PROFIT MADE ON INTER-COMPANY TRANSACTIONS WOULD BE ELIMINATED AND, THEREFORE, THE MARGINS EARNED IN THE INTER-COMPANY TRANSACTIONS WOULD BE TOTALLY ELIMINATED IN THE CONSOLIDATED FINANCIAL ST ATES. THUS, THE RESULT FROM CONSOLIDATED P & L ACCOUNT OF THE COMPANY HAS BEEN USED FOR THE PURPOSE OF BENCHMARKING THE ENGINEERING SERVICES OF THE ASS ESSEE. THUS, THE TPO HAD ERRED IN MAKING AN ERRONEOUS OBSERVATION AND, A CCORDINGLY, ONWARD REQUIRES TO BE CONSIDERED AS A COMPARABLE. (II) PENTASOFT TECHNOLOGIES LIMITED (PENTASOFT) : THE TPO HAD REJECTED PENTASOFT BASED ON THE SEGMENTAL REVENUE FROM OPERA TION FOR THE FINANCIAL YEAR 2006-07 BEING LESS THAN LAST YEARS SALE AND T HAT ALMOST ALL SALES WERE TO RELATED PARTY. IT WAS SUBMITTED THAT THE SUBSID IARY COMPANY PENTASOFT, ESOFTCOM ((MAURITIOUS) LIMITED IS ALSO ENGAGED IN R ENDERING SERVICES WHICH IS IN THE ALIGNMENT WITH THE FUNCTIONS PERFORMED BY THE ASSESSEE. ACCORDING TO THE ASSESSEE, ESOFTCOM (MAURITIUS) LTD PROVIDES ITS INTERNATIONAL CLIENTS A BROAD RANGE OF SERVICES THR OUGH ITS THREE DIVISIONS, NAMELY, THE BUSINESS SOFTWARE DIVISION, THE ENGINEE RING DIVISION AND THE EDUCATION AND TRAINING DIVISION. THE ENGINEERING D IVISION WILL PROVIDE ENGINEERING SOFTWARE, CONSULTING SERVICES AND PRODU CT DESIGN, ARCHITECTURAL DESIGN SERVICES, INTERACTIVE MEDIA AND ELECTRONIC A ND EMBEDDED SYSTEMS. THE TARGET MARKET WILL BE THE AUTOMOTIVE, AEROSPACE AND HEAVY ENGINEERING INDUSTRIES. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 55 55 17.3. HOWEVER, THE TPO HAD REJECTED PENTASOFT ON T HE PREMISE THAT THE COMPANY HAS DECLINING REVENUE DURING THE FINANC IAL YEAR 2006-07. REBUTTING THE TPOS STAND, IT WAS SUBMITTED THAT TH ERE ARE NO SPECIFIC PROVISIONS UNDER INDIAN TRANSFER PRICING REGULATION S THAT REQUIRE A DE FACTO REJECTION OF COMPANIES WITH DECLINING REVENUE. MOR EOVER, THE TPO HAD NOT PROVIDED ANY CONCRETE RATIONALE TO SUBSTANTIATE THA T THE COMPANY HAD NEGATIVE PHASE OF ECONOMIC CYCLE. RELIES ON THE FIN DINGS OF THE HONBLE TRIBUNAL IN THE CASE OF M/S. SONY INDIA (P) LTD. (III) PSI DATA SYSTEMS LIMITED [PSI]: THE TPO HAD REJECTED PSI ON THE GROUND THAT THE COMPANY IS ENGAGED IN FUNCTIONS DIF FERENT FROM THAT OF THE ASSESSEE THEREBY QUOTING INCORRECT TEXT FROM ANNUAL REPORT. AS PER THE COMPANYS WEBSITE, THE SOFTWARE SEGMENT OF THE COMP ANY IS INVOLVED IN THE PROVISION OF APPLICATION SERVICES, PRODUCT ENGINEER ING, INFORMATION MANAGEMENT AND IT INFRASTRUCTURE MANAGEMENT SERVICE S. IT WAS SUBMITTED THAT EVEN THOUGH THE COMPANY IS ENGAGED IN SERVICES OTHER THAN ENGINEERING SERVICES, ONLY RELEVANT SEGMENTAL RESUL TS PERTAINING TO THE PROVISIONS OF ENGINEERING SERVICES HAS BEEN CONSIDE RED IN THE COMPUTATION OF THE ARMS LENGTH RANGE FOR THE ASSESSEE. THUS, THE TPO HAD ERRED IN REJECTING PSI AS A COMPARABLE TO THE ASSESSEE. (IV) TATA TECHNOLOGIES LIMITED: THE TPO HAD REJECTED THIS COMPANY AS IT IS A SOFTWARE DEVELOPMENT COMPANY AND BASICALLY ENGAGED IN PROVIDING LIFE CYCLE MANAGEMENT TECHNOLOGY SERVICES AND THAT IT HAS MORE THAN 7 PER CENT HANDLING AND DISTRIBUTION EXPENSES AND ALSO HA S RELATED PARTY TRANSACTIONS AND, THEREFORE, IT IS FUNCTIONALLY DIF FERENT FROM THE BUSINESS OF THE ASSESSEE. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 56 56 ASSESSEES SUBMISSION : 17.4. IT WAS, HOWEVER, ASSERTED THAT AS PER THE AN NUAL REPORT OF THE COMPANY, THE COMPANYS BUSINESS OPERATIONS IS RELAT ED TO ENGINEERING SERVICES AND THAT ITS MARKETING EXPENSES IN THE FY ENDING 2007 WAS ONLY 3.31 PERCENT OF TOTAL REVENUE WHICH WAS A PART OF B USINESS ACTIVITY LIKE ANY OTHER COMPANY WHO INCURS SUCH EXPENSES TO BOOST THE IR PRODUCT SALES AND EXPAND THEIR BUSINESS OPERATIONS ETC. 17.5. THUS, THE TPO HAD ERRED IN STATING THAT THE COMPANY IS HAVING MORE THAN 7 PER CENT HANDLING AND DISTRIBUTI ON EXPENSES THEREBY CLASSIFYING IT AS IN DIFFERENT FUNCTION SEGMENT OF CARRYING OUT ITS MARKETING ACTIVITIES. 17.6. MOREOVER, THE SUBSIDIARY COMPANIES OF TATA T ECHNOLOGIES ARE ALSO ENGAGED IN RENDERING ENGINEERING SERVICES WHIC H IS IN ALIGNMENT WITH THE FUNCTIONS PERFORMED BY THE ASSESSEE. SINCE THE INTERNATIONAL TRANSACTIONS ARE UNDERTAKEN WITH A SUBSIDIARY ENGAG ED IN SIMILAR OPERATIONS, CONSOLIDATED FINANCIAL STATEMENTS OF TA TA TECHNOLOGIES HAVE BEEN CONSIDERED FOR THE PURPOSE OF BENCHMARKING. H ENCE, THE TPO HAD ERRONEOUSLY REJECTED COMPARABLE COMPANY FOR REASONS WHICH ARE NOT IN ACCORDANCE WITH THE OBJECTIVE OF UNDER-TAKING A FAI R TRANSFER PRICING ANALYSIS AND, ACCORDINGLY, TATA TECHNOLOGIES SHOULD BE CONSI DERED AS A COMPARABLE. 17.6.1 IT WAS CLAIMED BY THE ASSESSEE THAT BE FORE THE DRP THE DETAILED WORKINGS WERE FURNISHED, HOWEVER, NO DIRECTION WAS ISSUED IN THIS BEHALF. THE ADJUSTMENT WAS, HOWEVER, ALLOWED BY THE DRP IN THE FYS. 2005-06 AND 2007-08. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 57 57 17.7. ON THE OTHER HAND, THE REVENUE HAD REFUTED T HE ASSESSEES CLAIM AS UNDER: (A) THAT THE ASSESSEE HAD CLAIMED THAT ROUTINE AND LOW-VALUE ADDED FUNCTIONS WERE OUTSOURCED TO VARIOUS TECH CENTRES A CROSS THE WORLD INCLUDING INDIA, HOWEVER, HAD FAILED TO EXPLAIN THE PRESENCE OF HIGHLY QUALIFIED METALLURGICAL AND IT PERSONNEL FROM IISC, BANGALORE AND OTHER INDIAN INSTITUTES; (B) THAT EVEN THE SOFTWARE ADMITTED BY THE ASSESSE E TO HAVE BEEN USED BY THE TECH CENTRE ENABLES HIGH END RESEARCH. HIGH END RESEARCH WOULD NOT MEAN MERELY DEVELOPING ADDITIONAL CODES OF SOFT WARE. ADMITTEDLY, THE TEAM IS ENGAGED IN DEVELOPING USE FOR FUTURISTIC MA TERIALS, SAFETY RELATED RESEARCH, INTEGRATION OF CONTROL AND TELEMETRIC SOF TWARE ETC., THUS, THE CLAIM OF THE ASSESSEE THAT CAD/CAM IS DIFFERENT FROM HIGH END RESEARCH SERVICES AND CONSEQUENT INFERENCE THAT THE CENTRE IS NOT ENG AGED IN HIGH END RESEARCH IS INCORRECT AND IS LIABLE TO BE REJECTED. (A) SELECTION OF COMPARABLES FOR TECH CENTRE OPERAT IONS: (I) ROLTA INDIA LIMITED: (A) THAT AS PER THE DETAILS GIVEN BY THE ASSESSEE, THE RESTRUCTURING HAS BEEN DONE ON 5.7.2007 I.E., IN AY 2008-09 AND ROTLA RESULTS FOR THE AY 2007-08 HAVE BEEN FINALIZED ON 30/6/2007 AND, HENCE , THE ISSUE IS IRRELEVANT FOR THE YEAR UNDER CONSIDERATION; (B) THAT THE HONBLE HYDERABAD BENCH IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. (SUPRA) HELD THAT A COMPANY CANNOT BE CONSIDERED AS A COMPARABLE BECAUSE OF EXCEPTIONA L FINAL RESULTS DUE TO ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 58 58 MERGERS/DE-MERGERS. IN THIS CASE, THERE IS NO EXCE PTIONAL FINAL RESULT DUE TO MERGER/DEMERGER; (C ) THAT THE ASSESSEES TECH CENTRE OPERATIONS AR E NOT LOW END CAPTIVE OPERATION, BUT, FULL FLEDGED R & D ACTIVITY LIABLE TO BE COMPARED WITH A HIGH END RESEARCH ORIENTED COMPANY. THE FUNCTIONAL PROFI LE OF ROLTA IS SEEN THAT THERE IS FUNCTIONAL SIMILARITY BETWEEN THE TWO COMP ANIES. HENCE, THE RELIANCE PLACED ON BINDVIEW INDIA PVT. LTD [ITA NO. 1386/PN/10] BY THE ASSESSEE IS LIABLE TO BE REJECTED; (D) THAT THE ASSESSEE HAD TERMED THAT ROLTA IS A C OMPANY WITH ABNORMAL MARGINS. IN THE CASE OF SAP LAB INDIA PVT . LTD [ITA NO.398/BANG/20], THE MARGIN WAS 72% AND IN THE CASE OF SAUNAY JEWELS PVT. LTD, THE MARGIN WAS 53.81% AND, THUS, THE MARG INS IN THOSE CASES WERE IN THE RANGE OF 54% TO 72% WHICH HAVE BEEN FOU ND TO BE HIGH BY THE HONBLE TRIBUNAL(S). HOWEVER, THE MARGIN OF ROLTA INDIA LTD BEING 38.79% AS ADOPTED BY THE TPO WHICH DOESNT COME IN THE AMB IT OF EXCEPTIONALLY HIGH MARGIN. MOREOVER, IN MANY CASES, THE BENCH ES OF THE TRIBUNAL HAVE HELD THAT HIGH PROFITABILITY OF A COMPANY CANNOT BE A GROUND FOR ITS EXCLUSION FROM COMPARABLE AND, THUS, ROLTA INDIA LT D IS FOUND TO BE A COMPARABLE ONE. (II) POWERSOFT GLOBAL SOLUTIONS LIMITED : (A) THAT THE COMPANY IS ENGAGED IN CAD/CAM/GIS/OTH ER DESIGN SERVICES AND OFFERS A PROPER COMPARABLE FOR THE ASS ESSEE. HENCE, THE PLEA OF THE ASSESSEE THAT THE COMPANY IS NOT FUNCTIONALL Y COMPARABLE IS INCORRECT AND IS LIABLE TO BE REJECTED. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 59 59 (B) REJECTION OF COMPARABLES BY THE TPO : (I) ONWARD TECHNOLOGIES LIMITED: THE COMPARABLE HAS BEEN REJECTED BECAUSE OF RELATED PARTY TRANSACTION OF OVER 65%. IT IS A SETTLED POSITION THAT ANY RELATE D PARTY TRANSACTION OVER 25% WOULD RENDER A COMPARABLE LIABLE TO REJECTION. RELIES ON THE FOLLOWING CASE LAWS: (A) SONY INDIA LTD 114 ITD 448(DEL); (B) TEVA INDIA PVT. LTD (20Z11-TII-28-ITAT-MUM-TP) (C) MENTOR GRAPHICS (NOIDA)(P) LTD V. DCIT (2007) 1 09 ITD 101(DEL); (D) GLOBAL LOGIC INDIA (P) LTD V. DCIT 46 SOT 285 (DEL)(URO) (II) PENTASOFT TECHNOLOGIES LIMITED: A COMPANY WITH SIGNIFICANT RELATED PARTY TRANSACTIO NS CANNOT BE TAKEN AS A COMPARABLE. IN THIS CASE, THE RELATED PARTY TRANSA CTIONS ARE TO THE EXTENT OF OVER 80%, THERE IS NO QUESTION OF ACCEPTING THIS CO MPANY AS COMPARABLE. (III) PSI DATA SYSTEMS LIMITED : EXTENSIVELY QUOTING THE PRESS RELEASE OF THE COMPAN Y DATED 13.8.2009 POST RESTRUCTURING, THE TPO HAD CLAIMED THAT AS IS EVIDENT FROM THE ABOVE PRESS RELEASE, EVEN AFTER REORGANIZATION, POST 2009 , THE COMPANY IS NOT IN ENGINEERING DESIGN. IT WAS ALLEGED BY THE REVENUE THAT THE ASSESSEE HAD MISLED BY QUOTING THAT ONLY ENGINEERING RELATED ACC OUNTS HAVE BEEN ADOPTED FOR COMPUTING COMPARABLE MARGINS. THE ACCO UNTS OF PSI DATA SYSTEM WAS AVAILABLE AS A CONSOLIDATED ACCOUNT AND NO SEGMENTAL WERE AVAILABLE. THE ASSESSEE HAD ADOPTED THE ENTIRE TUR NOFF OF PSI DATA SYSTEMS FOR COMPUTING THE MARGINS AND NOT SEGMENTAL ACCOUNTS. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 60 60 (IV) TATA TECHNOLOGIES LIMITED: THE TPO HAD REJECTED THIS COMPANY AS IT IS A SOFTWARE DEVELOPMENT COMPANY AND BASICALLY ENG AGED IN PROVIDING LIFE CYCLE MANAGEMENT TECHNOLOGY SERVICES AND THAT IT HA S MORE THAN 7 PER CENT HANDLING AND DISTRIBUTION EXPENSES AND ALSO HA S RELATED PARTY TRANSACTIONS AND, THEREFORE, IT IS FUNCTIONALLY DIF FERENT FROM THE BUSINESS OF THE ASSESSEE. 17.8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMI SSIONS ON THE ISSUE AS RECORDED SUPRA. THE DRP FOR THE AY 2007-08 HAD, IN A UNIQUE WAY CRYPTICALLY RECORDED ITS DIRECTIONS AS UNDER: 11 THE ASSESSEE HAS NOT GIVEN ANY ARGUMENTS AGAINST AC E SOFTWARE EXPORTS LIMITED AND KLG SYSTEL LTD. M/S. POWERSOFT GLOBAL SOLUTIONS LIM ITED DOES NOT HAVE RELATED PARTY TRANSACTIONS. ROLTA INDIA LIMITED HAS ONLY 20% REL ATED PARTY TRANSACTIONS. THEREFORE, THE WORKING OF THE TPO DESERVES T BE SUS TAINED. 17.8. 1. THE DRPS ASSUMPTION WAS THAT THE ASSESSEE HAD NOT PUT FORTH ANY ARGUMENTS WITH REGARD TO ACE SOFTWARE EXPORTS A ND KLG SYSTEL LIMITED. 17.8.2. THE ASSESSEE HAD IDENTIFIED ITSELF AS LOW-E ND ENGINEERING AND R&D WORK AND A SMALL MARKUP OF 7% WAS GIVEN FOR ITS WORK. HOWEVER, THE TPO ANALYZED THE SELECTED PARTIES AND REJECTED FOR THE REASONS RECORDED [WHICH HAVE BEEN CITED SUPRA] THE FOLLOWING COMPANI ES: (I) ONWARD TECHNOLOGIES LIMITED; (II) PENTASOFT TECHNOLOGIES LIMITED; (III) TATA TECHNOLOGIES LIMITED 17.8.3. HOWEVER, IT WAS CONTENTION OF THE ASSESSEE THAT THE TPO ERRED WHILE STATING THAT ASSESSEES TECH-CENTER IS ENGAGE D IN PROVIDING HIGH-END ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 61 61 RESEARCH SERVICES. TECH-CENTER IS ESSENTIALLY ENGA GED IN PROVISION OF ENGINEERING DESIGN AND ANALYSIS OF AUTOMOBILE PARTS , ASSEMBLIES AND MANUFACTURING TOOLS. THIS ENTAILS PROVISION OF COM PUTER-AIDED DESIGN AND DATA TRANSLATION SERVICES. SUCH SERVICES INVOLVE P RODUCT ASSEMBLY DOCUMENTATION, EXTERIOR AND INTERIOR SURFACING / DE SIGNING, 3D MODELING AND 2D DRAWINGS ETC. 17.8.4. IT WAS FURTHER SUBMITTED THAT TECH-CENTER F OCUSES MAINLY ON PROVIDING ROUTINE SERVICES IN RELATION TO NEXT GENE RATION MATERIALS, DESIGNS, MANUFACTURING PROCESSES. PRIMARY RESEARCH AND DEVE LOPMENT OF STRATEGY (INCLUDING IDENTIFICATION OF PROJECTS) IS DONE AT U S LEVEL. WORK IS PERFORMED WITHIN TECH-CENTER USING THE STANDARD GM PRACTICES AND PROCESSES. THERE ARE STANDARD BUDGET ARY CONTROLS AND PROCEDURES APPLICABLE FOR ISL INCLUDING STANDARD PR OCESS OF APPROVALS BASED ON COST OF PROJECTS. THESE GUIDELINES AND PR OCEDURES ARE COMMON FOR ALL GM OPERATIONS AROUND THE WORLD. THESE PROC EDURES ARE DEFINED IN ADVANCE BEFORE EXECUTING THIS WORK FROM INDIA. ISL IS ENGAGED IN PROVISION OF VARIOUS SUPPORT SERVICES FOR COMPUTER AIDED DESI GNING AND ANALYSIS OF AUTOMOBILE PARTS FOR THE GROUPS INTERNAL REQUIREME NTS FOR PROVISION OF ENGINEERING SERVICES. IT WAS, FURTHER, SUBMITTED T HAT THE TPOS ASSERTION THAT PROVISION OF CAD/CAM SERVICES IS FUNCTIONALLY COMPARABLE TO PROVISION OF HIGH-END RESEARCH SERVICE PROVIDERS IS MISPLACED . IT WAS ALSO POINTED OUT THAT THE TPO ERRED IN REJECTING FOUR OUT OF SIX COM PARABLES SELECTED BY THE ASSESSEE ON THE FOLLOWING REASONS: (I) DIFFERENT BUSINESS PROFILE; (II) SEGMENTAL RESULTS NOT AVAILABLE; & (III) RELATED PARTY TRANSACTIONS. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 62 62 17.8.5. THE TPO WAS INCONSISTENT WHILE APPLYING FIL TERS AND SELECTING THE FINAL COMPARABLES. THE ASSESSEE HAD ALSO ASSAI LED THE REJECTION OF COMPANIES SUCH AS (I) ONWARD TECHNOLOGIES LTD., (II ) PENTASOFT TECHNOLOGIES LTD., (III) PSI DATA SYSTEMS LTD; & (I V) TATA TECHNOLOGIES LIMITED AND ALSO OBJECTED TO THE SELECTION OF (I) P OWERSOFT GLOBAL SOLUTIONS LIMITED, (II) ROLTA INDIA LIMITED FOR THE REASONS W E HAVE ALREADY RECORDED (SUPRA). 17.9. WE HAVE DULY CONSIDERED THE ISSUE IN DETAIL. SURPRISINGLY, THE DRPS DIRECTION, WHICH WAS BALD AND CRYPTIC, HAD SU BSCRIBED THAT THE FUNCTIONS ETC OF ALL THESE COMPANIES ARE COMPARABLE WITH THE ASSESSEE. THEREFORE, THE WORKING OF THE TPO DESERVES TO BE SU STAINED . HOW DID THE DRP COME TO SUCH CONCLUSION THAT THE WORKING OF THE TPO DESERVES TO THE SUSTAINED WAS NOT FINDING A PLACE IN ITS DIRECTION? 17.10. IN SUCH A SCENARIO, WE HAVE BEEN LEFT W ITH NO ALTERNATIVE, BUT, TO REMIT BACK THE ISSUE ON THE FILES OF THE TPO FOR FR ESH CONSIDERATION. TO ENABLE THE TPO TO THE ABOVE EXERCISE, THE ISSUE IS RESTORED WITH A SPECIFIC DIRECTION TO TAKE APPROPRIATE ACTION IN ACCORDANCE WITH THE PROVISIONS OF THE ACT AFTER AFFORDING A REASONABLE OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. IN THE MEANWHILE, THE ASSESSEE, THROUGH ITS ARS, TO FURNISH ALL THE RELEVANT DETAILS AS TO WHY THE COMPANIES QUOTED IT SHOULD BE TAKEN AS COMPARABLES AND ALSO AS TO WHY THE COMPANIES SELECT ED BY THE TPO CANNOT BE AS COMPARABLES SO AS TO ENABLE THE TPO AR RIVE AT A CONCLUSION AS DIRECTED BY US SUPRA. IT IS ORDERED ACCORDINGLY . GR. NO.10 NON-PROVIDING THE ASSESSEE THE BENEFIT OF 5 PER CENT GR.NO.13. RANGE AS PROVIDED BY THE PROVISO OF S. 92C(2) OF THE ACT FOR THE AYS 2006-07 & 2007-0 8: ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 63 63 18. EVEN THOUGH THE ASSESSEE HAS CONSISTENTLY RAIS ED THIS ISSUE BEFORE THE DRPS, NEITHER THE TPO NOR DRPS HAVE DEAL T WITH THE ISSUE. 18.1. BEFORE US, IT WAS PLEADED THAT THE AO/TPO BE DIRECTED TO PROVIDE THE BENEFIT OF 5 PER CENT RANGE AS PROVIDED BY THE PROVISO TO S. 92C(2) OF THE ACT. THE LEARNED DR PRESENT WAS HEARD. 18.2. WE HAVE CAREFULLY CONSIDERED THE SUBMISSION OF BOTH THE PARTIES ON THE ISSUE AND ALSO PERUSED THE PROVISION S OF S. 92C (2) OF THE ACT. FOR READY REFERENCE, THE RELEVANT PORTION OF S.92C (2) IS REPRODUCED AS UNDER: 92C(1). (2) THE MOST APPROPRIATE. PROVIDED PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HA S ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER, THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE. 18.3. IN VIEW OF THE ABOVE PROVISION OF THE ACT, T HE AO/TPO IS DIRECTED TO VERIFY AS TO WHETHER THE VARIATION BETW EEN THE ALP SO DETERMINED AND THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAD BEEN UNDERTAKEN IS WITHIN THE RANGE OF FIVE PER CENT OF THE LATTER AS SUBSCRIBED AND, IF SO, THE TPO IS DIRECTED TO ADOPT THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION WORKED OUT AS THE ALP. OTHERWISE, THE ASSESSEES CLAIM IS NOT ENTERTAIN-ABLE. IT IS ORDERED ACCORDINGLY. GR. NO.11 : ADDITION OF RS.4,89,60,504/- BEING ROYALTY TRANS ACTION FOR THE AY 2007-08 : ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 64 64 19. DURING THE YEAR, THE ASSESSEE HAD PAID ROYALTY OF RS.12,24,01,259/- AS PER TECHNOLOGY LICENSE AGREEME NT TO GMDAT @ 5%. FROM THE SEARCH OF ADGAR ONLINE DATABASE FOR ROYALT Y AGREEMENT FOR INDEPENDENT PARTIES RELATED TO ASSEMBLIES FOR AUTOM OBILES. THE TPO FOUND TWO AGREEMENTS , ONE OF THOSE AGREEMENTS WERE RELAT ED TO GMDATS, M 150 AND M 200 PROJECT ITSELF I.E., THE PROJECT FOR WHICH THE ASSESSEE HAD PAID ROYALTY TO GMDAT. THIS AGREEMENT WAS EXACTLY THE SAME ON ACCOUNT OF PRODUCT ROYALTY WITH THE ASSESSEES PRODUCT ROYA LTY AGREEMENT. 19.1. THE CONTENTION OF THE ASSESSEE BEFORE THE TP O WAS THAT IT HAD BENCHMARKED ITS TRANSACTIONS WITH INTERNAL CUP AVAI LABLE ON SIMILAR AGREEMENT WITH THE THIRD PARTY IE., ISUZU MOTORS LI MITED, JAPAN TO OBTAIN CERTAIN TECHNICAL INFORMATION AND ASSISTANCE IN REL ATION TO MANUFACTURING OF TAVERA IN INDIA AND AS PER THIS AGREEMENT, ISUZU CH ARGED ROYALTY AT THE RATE OF 5% OF NET SELLING PRICE TO THE ASSESSEE FOR PROV IDING TECHNICAL INFORMATION AND ASSISTANCE IN THIS REGARD. IT WAS, FURTHER, CONTENDED THAT NET ROYALTY PAYMENT WAS APPROXIMATELY 0.4% OF THE G ROSS SELLING PRICE AND, HENCE, SAME WAS BELOW 3% AND SHOULD BE ACCEPTED AS BENCKMARK RATE. 19.2. HOWEVER, THE TPO REJECTED THE CONTENTIONS OF THE ASSESSEE ON THE PREMISE THAT ISUZUS AGREEMENT IS NOT EXACTLY C OMPARABLE WITH THE ASSESSEES AGREEMENT FOR ROYALTY FOR M-200 PROJECT WHEREAS AGREEMENT BETWEEN KOREA DELPHY AUTOMOTIVE SYSTEMS CORPORATION , KOREA AND JINGZHOU HENGOING AUTOMOTIVE PARTS COMPANY LIMITED, CHINA IS EXACTLY COMPARABLE IN RESPECT OF ALL TECHNICAL SPECIFICATIO N AND FOR SAME PROJECT OF %AGE OF ROYALTY PAYMENT TO GROSS SELLING PRICE IS N OT CORRECT WAY OF COMPARING PRICES. ACCORDINGLY, THE ADJUSTMENT TO R OYALTY PAYMENT WAS DETERMINED AT RS.4,89,60,504/-. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 65 65 19.3. BEING AGGRIEVED, THE ASSESSEE TOOK UP THE IS SUE, AMONG OTHERS, BEFORE THE DRP AND CONTESTED THE TPOS WORK ING. AS USUAL, THE DRP SUSTAINED THE TPOS STAND WITH ITS INEXPLICABLE WAY THAT IN VIEW OF INDEPENDENTLY COMPARABLE AGREEMENT WHICH RESEMBLES THE ASSESSEES AGREEMENT FOR PAYMENT OF ROYALTY, THE ORDER OF TPO DOES NOT MERIT ANY INTERFERENCE. 19.4. BEFORE US, IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT IN BOTH THE AGREEMENTS, NAMELY DELPHI-JINZHOU AGREEMEN T AND NAMYANG- HENGLONG AGREEMENT, THE LICENSED PRODUCT IS ONLY FOR A SINGLE COMPONENT/PARTS OF THE VEHICLE AND NOT THE ENTIRE V EHICLE WHICH IS IN CONTRAST TO THE TLA BETWEEN GMDAT AND GMI. ACCORDI NG TO THE ASSESSEE, THE AGREEMENT BETWEEN GMI AND GMDAT WAS AUTOMOTIVE AGREEMENT FOR MANUFACTURING OF COMPLETE VEHICLE, ACCORDING TO WHI CH, GMDAT TO PROVIDE TECHNOLOGY TO GMI IN RELATION TO MANUFACTURE, ASSEM BLE AND MARKET GMDATS PROJECT J200 RIGHT-HAND 4 DOOR NOTCHBACK VE HICLES, ACCESSORIES AND PARTS IN INDIA AND OTHER COUNTRIES. THE ROYALT Y RATE WAS CHARGED AT 5 PER CENT OF NET ASSESSABLE VALUE. THE AGREEMENT BE TWEEN THE ASSESSEE AND ISUZU WAS IF AUTOMOTIVE AGREEMENT FOR MANUFACTU RING OF COMPLETE VEHICLE, ACCORDING TO WHICH, ISUZU IS TO PROVIDE CE RTAIN TECHNICAL INFORMATION AND ASSISTANCE IN RELATION TO MANUFACTURING OF THE ENTIRE VEHICLE, 1-163 WAGON (TAVERA) AND COMPONENTS OR PARTS THEREOF IN I NDIA. THE ROYALTY WAS AGREED UPON AT 5 PER CENT OF NET SELLING PRICE. IT WAS, THEREFORE, SUBMITTED THAT IT IS CLEAR THAT THE ROYALTY RATE OF 3 PER CEN T PAID IN BOTH NAMYAN- HENGLONG AGREEMENT AND DELPHI-JINGZHOU AGREEMENT RE LATES TO TECHNOLOGY TRANSFER WITH RESPECT TO ONLY A SINGLE COMPONENT/PA RTS OF A VEHICLE ONLY WHEREAS THE TLA BETWEEN GMDAT AND THE ASSESSEE RELA TES TO TECHNOLOGY TRANSFER WITH RESPECT TO AN ENTIRE VEHICLE. MOREOV ER, IT WAS CLAIMED BY THE ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 66 66 ASSESSEE THAT THE ROYALTY RATE OF 3 PER CENT ON SEL LING PRICE OF THE LICENSED PRODUCT WAS IN ADDITION TO THE INITIAL SIGNING PAYM ENT OF USD 80,000 & 1,00,000 RESPECTIVELY. IT WAS, FURTHER, CLAIMED TH AT AS PER THE AGREEMENT BETWEEN THE ASSESSEE AND GMDAT, THE ASSESSEE HAD PA ID ROYALTY AT THE RATE OF 5 PER CENT OF THE NET ASSESSABLE VALUE IN A CCORDANCE WITH THE FORMULA SET-FORTH IN THE GOVERNMENT OF INDIA REGULA TIONS. HOWEVER, IN THE AGREEMENTS CONSIDERED BY THE TPO, THE BASE OF ROYAL TY RATE WAS COMPUTED ON NET SELLING PRICE OF THE PRODUCT WHICH WILL BE S UBSTANTIALLY HIGHER FROM THAT OF THE ASSESSEE. IT WAS THE ASSERTION OF THE ASSESSEE THAT THE ACTUAL ROYALTY PAYMENT MADE BY THE ASSESSEE AS A PERCENTAG E OF GROSS SELLING PRICE WHICH WAS APPROXIMATELY AT 0.54 PER CENT. TH US, THE ROYALTY RATE OF 5 PER CENT BY THE ASSESSEE TO GMDAT WAS AT ARMS LENG TH ONLY. APPLICATION OF CUP ENTAILS STRINGENT COMPARABILITY REQUIREMENTS: 19.5. EXTENSIVELY QUOTING RULE 10B (1) OF I. T. RU LES AND ALSO OECD GUIDELINES, IT WAS CLAIMED THAT COMPARABILITY UNDER THE CUP METHOD WAS PARTICULARLY DEPENDENT UPON THE SIMILAR PRODUCTS AN D CONTRACTUAL TERMS AMONG OTHER THINGS. DIFFERENCES IN GEOGRAPHIC MARK ETS MAY ALSO INFLUENCE THE RELIABILITY OF THE COMPARISON UNDER THIS METHOD , PARTICULAR IF THEY ARE MATERIAL BUT CANNOT BE RELIABLY ASCERTAINED. THERE FORE, IT WAS SUBMITTED THAT, APPLICATION OF CUP ENTAILS STRINGENT COMPARAB ILITY REQUIREMENTS BETWEEN THE TESTED PARTY AND THE COMPARABLE SELECTE D, EVEN A MINOR DIFFERENCE AMONG THE TWO MAY LEAVE THE WHOLE ANALYS IS IRRELEVANT. IN CONCLUSION, IT WAS SUBMITTED THAT THERE WERE M ATERIAL DIFFERENCES BETWEEN THE THIRD PARTY AGREEMENTS BEIN G COMPARED BY THE TPO WHICH WAS ONLY FOR A SINGLE COMPONENT/PARTS OF THE VEHICLE AS ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 67 67 COMPARED TO THE AGREEMENT OF THE ASSESSEE WITH GMDA T WHICH WAS FOR THE ENTIRE VEHICLE. THEREFORE, IT WAS INAPPROPRIAT E ON THE PART OF THE TPO TO COMPARE THE AGREEMENT BETWEEN GMDAT AND THE ASSESSE E WITH AGREEMENTS BETWEEN THIRD PARTIES. 19.6. ON THE OTHER HAND, THE SUBMISSIONS OF THE RE VENUE ARE SUMMARIZED AS UNDER: (A) THAT THERE WAS NO CHANGE IN TESTED PARTY. THE ONLY CHANGE WAS THE COMPARABLE USED. WHILE THE ASSESSEE HAD USED AN IN TERNAL CUP WHEREAS THE TPO HAD USED EXTERNAL CUP; (B) THAT THE ASSESSEE HAD WRONGLY STATED THAT THE R OYALTY RATE IN THE ISUZU AGREEMENT WHICH HAS BEEN ADOPTED AS CUP BY TH E ASSESSEE AT 5%. THE ROYALTY RATE WAS JPY 25000 PER LICENSED VEHICLE OR 5% WHICHEVER IS LOW AND SUCH A RATE COMES TO AROUND 1.2% OF NET SAL ES VALUE OF LICENSED VEHICLE. SINCE THE JPY 25000 PER LICENSED VEHICLE WAS LOWER OF THE TWO FIGURES, THIS CONSTITUTES THE ACTUAL ROYALTY PAYMEN T AND NOT 5% AS CLAIMED BY THE ASSESSEE AND HENCE, EVEN BY THE ASSESSEES O WN CUP, THE ROYALTY RATE SHOULD HAVE BEEN MUCH LOWER AT 1.2% AND NOT 5% ; (C) THAT THE ASSESSEES CLAIM OF ROYALTY PAYMENT AT 0.54% OF THE GROSS SELLING PRICE WAS MISLEADING AS THE ASSESSEE WAS WR ONG IN PRESENTING ROYALTY PAYMENT AS A %AGE OF GROSS SELLING PRICE AS SUCH SALE INCLUDES NON-LICENSED ITEMS ALSO WHICH FORM A SUBSTANTIAL VA LUE OUT OF TOTAL SALE; (D) THAT THE TRANSACTION OF PAYMENT OF ROYALTY HAS BEEN BENCHMARKED BY THE ASSESSEE BY USING AN INTERNAL CUP WHICH HAS BEE N REJECTED BY THE TPO AND HE HAD CONDUCTED HIS OWN SEARCH TO FIND TWO EXTERNAL CUP WHICH ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 68 68 HAVE BEEN USED FOR BENCHMARKING THE TRANSACTION OF PAYMENT OF ROYALTY IN THE CASE OF THE ASSESSEE; (E) THAT THE ROYALTY RATE REFERRED IN ISUZU AGREEM ENT WAS NOT 5% BUT IT WAS YEN 25000 (RS.L9072) PER LICENSED VEHICLE SUBJE CT TO A CEILING OF 5% OF THE NET SALE PRICE. AT AN ESTIMATED PRICE OF RS.7. 5 LAKHS FOR A TAVERA VEHICLE, THE ROYALTY PERCENTAGE WOULD BE MERELY 1.2 % AND NOT 5% AS ADOPTED BY THE ASSESSEE 19.7. EXTENSIVELY QUOTING THE AGREEMENT ENTERED IN TO BETWEEN GMDAT AND THE ASSESSEE, IT WAS SUBMITTED THAT (A) THAT ACCORDINGLY THE ASSESSEE CAN ONLY SOURCE OR MANUFACTURE LICENSED PARTS FOR INSTALLATION IN THE VEHICLES MAN UFACTURED/DISTRIBUTED BY IT. THE REMAINING PARTS WILL HAVE TO BE SOURCED ONLY FR OM GMDAT AS PER THE CKD AGREEMENT; (B) THAT THE ISUZU AGREEMENT DOES NOT CONTAIN ANY LIMITING CLAUSE AND, HENCE, IT COMPRISES OF TECHNOLOGY LICENSE TO MANUFA CTURE ALL PARTS OF TAVERA INCLUDING TRANSMISSION AND ENGINE; AND THAT SUCH AGREEMENT CANNOT BE TAKEN AS A CUP FOR THE TLA BETWEEN THE ASSESSEE AND GMDAT WHICH EXCLUDES ENGINE AND TRANSMISSION; 19.8 EXTENSIVELY QUOTING THE AGREEMENTS BETWEEN NA MYANG HENGLONG & DELPHI - JINGZHOU, IT WAS SUBMITTED THAT - (A) THE AGREEMENTS TAKEN BY THE TPO WAS PROPER COMP ARABLE FOR THE ASSESSEE. THE NATURE OF AGREEMENT, SCOPE OF SERVIC ES AS WELL AS THE PAYMENT TERMS OF ISUZU AGREEMENT WERE TOTALLY DIFFE RENT FROM THE ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 69 69 AGREEMENT BETWEEN THE ASSESSEE AND GMDAT AND CANNOT BE TAKEN AS COMPARABLE. 19.9. QUOTING THE ISUZU ROYALTY AGREEMENT, IT WAS SUBMITTED THAT - (A) THAT THE ISUZU AGREEMENT IS SIMILAR, THE ROYALT Y RATE CHARGED IN THE ISUZU CASE, BECAUSE OF THE PER LICENSED VEHICLE RAT E OF RS.9072/VEHICLE, WOULD BE MUCH LOWER THAN THE RATE OF 5% IN THE CASE OF GMDAT RATE. AS COMPUTED ABOVE, IF THE NET SALE PRICE OF A TAVERA V EHICLE IS ADOPTED AT RS.7.5 LAKHS, THE ROYALTY RATE WOULD BE MERELY 1.2% WHICH SHOULD HAVE BEEN ADOPTED AS THE CUP RATE IN THE CASE OF THE ASS ESSEE. 19.10. IN CONCLUSION, IT WAS SUBMITTED THAT THE TPO HAD RIGHTLY SELECTED THE TWO COMPARABLES AND HAD RIGHTLY REJECT ED THE GMI ISUZU AGREEMENT AS A PROPER COMPARABLE. 19.11. WE HAVE CAREFULLY CONSIDERED THE LENGTHY SUB MISSION MADE BY THE ASSESSEE WHICH HAS BEEN EQUALLY REFUTED BY THE REVENUE BY ITS ELABORATE SUBMISSION. 19.12. ON CONSIDERING THE CONTENTIONS OF THE RIVAL PARTIES, IT IS OBSERVED THAT THE TUSSLE BETWEEN THE PARTIES HAS BE EN NARROWED DOWN TO THE ISSUE OF COMPARING OF THE AGREEMENTS. THE ASSE SSEE HAD TAKEN THE AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND ISU ZU AND TREATED AS CUP WHEREAS THE TPO HAD AS CUP THE AGREEMENTS OF (I ) NAMYANG- HENGLONG; AND (II) DELPHI-JINGZHOU. THIS HAS BEEN ASSAILED BY THE ASSESSEE FOR THE REASONS NARRATED ABOVE. THE AGREEM ENT ENTERED INTO BY THE ASSESSEE AS WELL AS THE AGREEMENTS OF UNRELATED PARTIES REFERRED TO BY THE TPO CONTAINED [TERMS AND CONDITIONS] THE NATURE AND SCOPE OF SERVICES INVOLVED WHICH REQUIRED TO BE EXAMINED. THE DRP HA D, WITHOUT INVOLVING ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 70 70 ITSELF IN ANALYZING THE CONTENTIONS PUT-FORTH BY TH E ASSESSEE WITH THAT OF THE TPO IN REJECTING THE ASSESSEES COMPARABLE, SUSTAIN ED THE TPOS STAND WITHOUT ASSIGNING ANY PLAUSIBLE REASON WHATSOEVER. MOREOVER THE RELEVANT AGREEMENTS WHICH CONTAINED TERMS AND CONDITIONS ON THE BASIS OF WHICH, THEY WERE TO BE SELECTED AS COMPARABLES. OBVIOUSLY, THIS REQUIRES CONSIDERABLE VERIFICATION, EXAMINATION AND COMPARIS ON. 19.13. IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDER ED VIEW THAT THIS ISSUE REQUIRES TO BE REMITTED BACK ON THE FILE OF T HE TPO FOR A DETAILED EXAMINATION AND VERIFICATION OF THE ASSESSEES CONT ENTIONS. TO FACILITATE THE TPO TO IMPLEMENT THE ABOVE DIRECTION, THIS ISSU E IS RESTORED ON THE FILE OF THE TPO TO TAKE APPROPRIATE ACTION AFTER AFFORDI NG A REASONABLE OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. IT IS ORDERED ACCORDINGLY. GR.NO.12 : NOT PROVIDING RELIEF ON ACCOUNT OF WORKING CAP ITAL ADJUSTMENT TO REFLECT THE DIFF ERING LEVELS OF TRADE RECEIVABLES, TRADE PAYABLES AND IN VENTORIES (WORKING CAPITAL ADJUSTMENTS) BETWEEN TH E ASSESSEE AND THE POTENTIAL COMPARABLES [AY 2007-08] : 20. BOTH THE PARTIES WERE HEARD. SINCE THE ISSUE IS FACTUAL WHICH REQUIRES VERIFICATION AT THE AO/TPOS LEVEL A S AGREED BY BOTH THE PARTIES, THIS ISSUE IS REMITTED BACK TO THE FILE OF THE AO/TPO WITH A DIRECTION TO EXAMINE THE VERACITY OF THE ASSESSEES CLAIM AND TO TAKE APPROPRIATE DECISION IN CORRECTLY COMPUTING THE WORKING CAPITAL ADJUSTMENT, IF IT SO WARRANTS. IT IS ORDERED ACCORDINGLY. ITA NO.3096/AHD/2010 (AY- 2006-07) GENERAL MOTORS INDIA PVT. LTD. VS DCIT, PANCHMAHAL CIRCLE, GODHRA ITA NO.3308/AHD/2011 (AY- 2007-08) GENERAL MOTORS INDIA PVT. LTD. VS ACIT, PANDHMAHAL CIRCLE, GODHRA 71 71 21. IN THE RESULT , BOTH THE APPEALS OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2006-07 AND 2007-08 ARE PARTLY ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 02-08-2013 SD/- SD/- (G. C. GUPTA) VICE PRESIDENT (A. MOHAN ALANKAMONY) ACCOUNTANT MEMBER LAKSHMIKANTA DEKA/ LAKSHMIKANTA DEKA/ LAKSHMIKANTA DEKA/ LAKSHMIKANTA DEKA/- -- - COPY OF THE ORDER IS FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: DIRECT ON COMPUTER 23-07-13/01 -08-13 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER: 01-08-13 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S ./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT: 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P .S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: