M/s. Honda Motor India Pvt. Ltd., Gautam Budh Nagar V. DCIT, Noida

ITA 6807/DEL/2014

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 2802 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-01-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 08-10-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 17-12-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MITALI MADHUSMITA
• Assessee Lawyers: AJIT TOLANI
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Additional evidence; Wholly owned subsidiary
• Section: 92C; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2, NEW DELHI BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER & SMT. BEENA PILLAI, JUDICIAL MEMBER I.T.A .NOS. 1801, 6807/DEL/2014 (ASSESSMENT YEAR- 2009-10 & 2010-11) HONDA MOTOR INDIA PRIVATE LIMITED, PLOT NO. A1, SECTOR-40/41, SURAJPUR KASNA ROAD, GREATER NOIDA, INDUSTRIAL DEVELOPMENT AREA, GAUTAM BUDH NAGAR. AABCH7526E VS ACIT, CIRCLE -3, NOIDA APPELLANT BY SHRI AJIT TOLANI, ADV. RESPONDENT BY SMT. MITALI MADHUSMITA, CIT DR ORDER PER BENCH : THESE APPEALS ARE FILED BY THE ASSESSEE, AGAINST TH E FINAL ORDER DATED 22.01.2014 & 13.10.2014 PASSED BY THE LD. AO, U/S 143(3) R/W SEC. 144C OF THE INCOME TAX ACT, 1961 FOR A.Y. 2009-10 & 2010-11, RESPECTIVELY. 2. BRIEF FACTS AS RECORDED BY THE LD.AO ARE AS UNDE R: 2.1 THE ASSESSEE FILED ITS RETURN OF INCOME DECLARI NG RS.35,48,92,962/- ON 29.09.2009 FOR A.Y.2009-10 AND RS.73,80,15,235/- ON 13.10.2010, FOR A.Y.2010-11. S UBSEQUENTLY, DATE OF HEARING 08.10.2015 DATE OF PRONOUNCEMENT 07.01.2016 2 ITA NO.180 1/DEL/2014 ITA NO. 6807/DEL/2014 THE CASE WAS SELECTED FOR SCRUTINY. AS THERE WERE I NTERNATIONAL TRANSACTIONS INVOLVED, LD. AO MADE A REFERENCE TO T HE LD.TPO. FORM NO. 3ECB WAS FILED BY THE ASSESSEE IN RELATION TO T HE INTERNATIONAL TRANSACTIONS ENTERED INTO DURING THE RELEVANT YEAR UNDER CONSIDERATION ALONG WITH THE ROI. 2.2 THE COMPANY IS A 100% SUBSIDIARY COMPANY OF HON DA MOTORS CO. LTD., JAPAN. THE ASSESSEE HAS BEEN ESTABLISHED AS A CENTRAL SPARE PARTS MANAGEMENT ENTITY/DIVISION FOR ALL HON DA PRODUCTS SOLD IN INDIA. IT ALSO EXPORTS TO HONDA SUBSIDIARIE S/DEALERS IN INDIAN SUBCONTINENT/EUROPE, AFRICA AND SOUTH AMERICA. THE ASSESSEE HAS ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIO NS DURING THE YEAR UNDER CONSIDERATION: FOR A.Y.2009-10: S.NO. INTERNATIONAL TRANSACTION AMOUNT (RS.) RECEIPT AMOUNT (RS.) PAYMENT METHOD APPLIED 1. PURCHASE OF SPARE PARTS - 76,70,43,430 TNMM 2. EXPORT SALES 6,819,216 - TNMM 3. REIMBURSEMENT PAID - 11,56,688 TNMM 4. REIMBURSEMENT OF TECHNICAL ASSISTANCE FEE - 14,01,324 TNMM TOTAL 6,819,216 7684,56,32,088 THE ASSESSEE HAD USED TNM METHOD AS THE MAM AND HAD TAKEN 8 EXTERNAL COMPARABLES, USING THE DATA FOR FINANCIAL YEAR ENDING ON 31 ST MARCH, 2009 IN ALL, EXCEPT IN ONE CASE, AND HAD CA LCULATED THE PROFIT LEVEL INDICATOR(PLI) OF OPERATING PROFITS TO SALES AT 21.97%. 3 ITA NO.180 1/DEL/2014 ITA NO. 6807/DEL/2014 FOR A.Y.2010-11: S. NO. INTERNATIONAL TRANSACTION AMOUNT (RS.) RECEIPT AMOUNT (RS.) PAYMENT METHOD APPLIED 1. IMPORT OF SPARE PARTS FOR RESALE - 1,069,715,945 TNMM 2. EXPORT COMPONENTS 81,913,098 - TNMM 3. PAYMENT OF TECHNICAL GUIDANCE FEE - 1,66,000 TNMM TOTAL 1,069,881,945 THE ASSESSEE HAD USED TNM METHOD AS THE MAM AND HAD TAKEN 8 EXTERNAL COMPARABLES, USING THE DATA FOR FINANCIAL YEAR ENDING ON 31 ST MARCH, 2009 IN ALL EXCEPT IN ONE CASE AND HAD CALC ULATED THE PROFIT LEVEL INDICATOR(PLI) OF OPERATING PROFITS TO OPERATING REVENUE(OP/OR) AT 16.76%. 2.3 FOR BOTH THE ASSESSMENT YEARS THE LD.TPO REJECT ED THE TRANSACTIONAL NET METHOD(TNMM) USED BY THE ASSESSEE AS MOST APPROPRIATE METHOD(MAM), AND HELD THAT RESALE PRICE METHOD (RPM) IS MAM. THE LD. TPO USED INTERNAL COMPARABLE UNCON TROLLED TRANSACTION OF THE ASSESSEE, FOR DETERMINATION OF T HE ALP SINCE ASSESSEE HAD TRANSACTIONS WITH BOTH RELATED AND UNR ELATED PARTIES. THE LD.TPO HELD THAT, IN THE CASE OF THE ASSESSEE, WHERE INTERNAL COMPARABLE IS AVAILABLE, INTERNAL RPM IS THE MOST A PPROPRIATE METHOD. 2.4 AGGRIEVED BY THE ORDER OF THE LD.TPO, THE ASSES SEE FILED ITS OBJECTIONS BEFORE THE DRP. THE DRP UPHELD THE ACTIO N OF THE TPO BY 4 ITA NO.180 1/DEL/2014 ITA NO. 6807/DEL/2014 RELYING ON THE ORDER OF THE DRP FOR ASSESSMENT YEAR 2009-10. THE LD.AO GAVE EFFECT TO THE DIRECTIONS OF THE DRP IN B OTH THE ASSESSMENT YEARS, VIDE ORDERS DATED 22.01.2014 & 13.10.2014. 3. AGGRIEVED BY THE ORDERS OF THE LD.AO, THE ASSESS EE IS IN APPEAL BEFORE US IN BOTH THE ASSESSMENT YEARS ON THE FOLLO WING GROUNDS: A.Y: 2009-10 1. THE HONBLE DISPUTE RESOLUTION PANEL (DRP)/LD. TRA NSFER PRICING OFFICER (TPO) ERRED IN FACTS AND CIRCUMSTAN CES OF THE APPELLANTS CASE AND THEREBY FAILED TO APPROPRIATEL Y COMPREHEND THE BUSINESS NEEDS & RATIONALE OF THE AP PELLANT, DYNAMICS/CRITICAL MARKET FACTORS DRIVING THE SPARE PARTS INDUSTRY, ETC. WHICH SIGNIFICANTLY INFLUENCE THE AP PELLANTS PROCUREMENT AND PRICING DECISIONS. 2. THE HONBLE DRP/LD. TPO ERRED IN COMPREHENDING THE BUSINESS OPERATIONS OF THE APPELLANT AND HAS FAILED TO GIVE COGNIZANCE TO THE FACT THAT IT IS NOT ONLY PURCHASE BUT ALSO SELLS SPARE PARTS, COMPONENTS AND ACCESSORIES TO BO TH RELATED AND UNRELATED PARTIES. THUS, A THOROUGH AN ALYSIS OF THE APPELLANTS BUSINESS OPERATION WOULD CLEARLY RE VEAL THAT ITS TRADING OPERATIONS CAN ONLY BE VIEWED AS ONE S INGLE BUSINESS SEGMENT AND CANNOT BE FRAGMENTED. 3. THE HONBLE DRP/LD. TPO ERRED IN NOT ACCEPTING THE ECONOMIC ANALYSIS OF THE APPELLANT USING EXTERNAL/INDEPENDEN T COMPARABLE DATA, AND INSTEAD UNDERTAKING A SKEWED ANALYSIS USING INTERNAL COMPARISON OF GROSS MARGINS EARNED BY THE APPELLANT ON RELATED PARTY PURCHASES VIS--V IS UNRELATED PARTY PURCHASES, WITHOUT TAKING INTO COGN IZANCE THAT SIGNIFICANT VOLUME OF TRANSACTIONS WERE DONE W ITH DOMESTIC GROUP COMPANIES ONLY IN THE NON-ASSOCIATED CATEGORY. THUS, THE ACTION OF THE HONBLE DRP/LD. TPO DEFEATS THE VERY FOUNDATION OF A TRANSFER PRICING A NALYSIS BY USING CONTROLLED TRANSACTION DATA FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF THE IMPUGNED INTERNATIONAL TRANSACTION OF THE APPELLANT. 4. THE HONBLE DRP/LD. TPO ERRED IN LAW IN REJECTING T HE TRANSFER PRICING DOCUMENTATION MAINTAINED BY THE AP PELLANT 5 ITA NO.180 1/DEL/2014 ITA NO. 6807/DEL/2014 AND THEREBY RE-DETERMINING THE ARMS LENGTH PRICE O F THE IMPUGNED TRANSACTIONS, AS THE CIRCUMSTANCES NECESSI TATING THE DETERMINATION OF PRICE BY THE LD. TPO AS MENTIO NED IN SUB-SECTION (3) OF SECTION 92C DID NOT EXIST. 5. WITHOUT PREJUDICE, THE HONBLE DRP/LD. TPO ERRED IN LAW AND IN FACTS IN REJECTING THE APPELLANTS CLAIM OF ADJU STMENTS ON ACCOUNT OF BASIC CUSTOMS DUTY, INWARD FREIGHT, INSU RANCE ETC. BEING ADDITIONAL COSTS AND STATUTORY LEVIES BORNE B Y THE APPELLANT IN RELATION TO IMPORTED GOODS. 6. THE HONBLE DRP/LD. TPO FOLLOWED AN APPROACH WHICH IS IN CONTRADICTION TO THE APPROACH ADOPTED BY THE LD. TP OS OFFICE IN PRECEDING YEARS (I.E. AY 2007-08 AND AY 2008-09) , WHEREBY THE ANALYSIS USING NET MARGINS OF EXTERNAL/INDEPENDENT COMPARABLE COMPANIES HAS BEEN CONSISTENTLY PERFORMED AND ACCEPTED IN THE APPELLAN TS CASE. 7. THE HONBLE DRP/LD. TPO ERRED IN LAW IN NOT APPLYIN G THE PROVISO TO SECTION 92C OF THE ACT AND HAS FAILED TO ALLOW THE APPELLANT THE BENEFIT OF DOWNWARD VARIATION OF 5% I N DETERMINING THE ALP. 8. THE ORDER PASSED BY THE LD. TPO IS INVALID IN LAW A S IT VIOLATES THE WELL-ESTABLISHED PRINCIPLES OF NATURAL JUSTICE. 9. THE LD. AO HAS ERRED IN FACTS AND CIRCUMSTANCES OF THE INSTANT CASE AND THEREBY INITIATING PENALTY PROCEED INGS U/S 271(1)(C) OF THE ACT AGAINST THE APPELLANT, WHICH I S BAD IN LAW. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMI T OR SUBSTITUTE, ANY OF THE AFORESAID GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL AND CONSIDER EACH OF THE GROUNDS AS WITHOUT PREJUDICE TO THE OTHER GR OUNDS OF APPEAL. 3.1 LD.AR SUBMITTED THAT GROUND NOS. 1 & 8 ARE GEN ERAL IN NATURE. A.Y: 2010-11 : 1. THAT ON THE FACTS AND IN LAW, THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3, NOIDA(HEREINA FTER 6 ITA NO.180 1/DEL/2014 ITA NO. 6807/DEL/2014 REFERRED TO AS THE LEARNED AO) ERRED IN ASSESSING THE INCOME OF THE APPELLANT FOR THE RELEVANT ASSESSMENT YEAR AT RS.839,638,250 AS AGAINST THE RETURNED INCOME OF RS.738,015,235. 2. THE HONBLE DISPUTE RESOLUTION PANEL (DRP)/LD. TRAN SFER PRICING OFFICER (TPO) ERRED IN FACTS AND CIRCUMSTAN CES OF THE APPELLANTS CASE AND THEREBY FAILED TO APPROPRI ATELY COMPREHEND THE BUSINESS NEEDS & RATIONALE OF THE APPELLANT, DYNAMICS/CRITICAL MARKET FACTORS DRIVING THE SPARE PARTS INDUSTRY, ETC. WHICH SIGNIFICANTLY INFL UENCE THE APPELLANTS PROCUREMENT AND PRICING DECISIONS. 3. THE HONBLE DRP/LD. TPO ERRED IN COMPREHENDING THE BUSINESS OPERATIONS OF THE APPELLANT AND HAS FAILED TO GIVE COGNIZANCE TO THE FACT THAT IT IS NOT ONLY PUR CHASE BUT ALSO SELLS SPARE PARTS, COMPONENTS AND ACCESSOR IES TO BOTH RELATED AND UNRELATED PARTIES. THUS, A THO ROUGH ANALYSIS OF THE APPELLANTS BUSINESS OPERATION WOUL D CLEARLY REVEAL THAT ITS TRADING OPERATIONS CAN ONLY BE VIEWED AS ONE SINGLE BUSINESS SEGMENT AND CANNOT BE FRAGMENTED. 4. THE HONBLE DRP/LD. TPO ERRED IN NOT ACCEPTING THE ECONOMIC ANALYSIS OF THE APPELLANT USING EXTERNAL/INDEPENDENT COMPARABLE DATA, AND INSTEAD UNDERTAKING A SKEWED ANALYSIS USING INTERNAL COMPARISON OF GROSS MARGINS EARNED BY THE APPELLANT ON RELATED PARTY PURCHASES VIS--VIS UNRELATED PARTY PURCHASES, WITHOUT TAKING INTO COGNIZANCE THAT SIGNIFICANT VOLUME OF TRANSACTIONS WERE DONE WITH DOMESTIC GROUP COMPANIES ONLY IN THE NON-ASSOCIATED CATEGORY. THUS, THE ACTION OF THE HONBLE DRP/LD. TPO DEFEATS THE VERY FOUNDATION OF A TRANSFER PRICING A NALYSIS BY USING CONTROLLED TRANSACTION DATA FOR THE PURP OSE OF DETERMINING THE ARMS LENGTH PRICE OF THE IMPUGNED INTERNATIONAL TRANSACTION OF THE APPELLANT. 5. THE HONBLE DRP/LD. TPO ERRED IN LAW IN REJECTING T HE TRANSFER PRICING DOCUMENTATION MAINTAINED BY THE 7 ITA NO.180 1/DEL/2014 ITA NO. 6807/DEL/2014 APPELLANT AND THEREBY RE-DETERMINING THE ARMS LENG TH PRICE OF THE IMPUGNED TRANSACTIONS, AS THE CIRCUMST ANCES NECESSITATING THE DETERMINATION OF PRICE BY THE LD. TPO AS MENTIONED IN SUB-SECTION (3) OF SECTION 92C DID NOT EXIST. 6. WITHOUT PREJUDICE, THE HONBLE DRP/LD. TPO ERRED IN LAW AND IN FACTS IN REJECTING THE APPELLANTS CLAIM OF ADJUSTMENTS ON ACCOUNT OF BASIC CUSTOMS DUTY, INWAR D FREIGHT, INSURANCE ETC. BEING ADDITIONAL COSTS AND STATUTORY LEVIES BORNE BY THE APPELLANT IN RELATION TO IMPORTED GOODS. 7. THE HONBLE DRP/LD. TPO FOLLOWED AN APPROACH WHICH IS IN CONTRADICTION TO THE APPROACH ADOPTED BY THE LD. TPOS OFFICE IN PRECEDING YEARS (I.E. AY 2007-08 AND AY 2 008- 09), WHEREBY THE ANALYSIS USING NET MARGINS OF EXTERNAL/INDEPENDENT COMPARABLE COMPANIES HAS BEEN CONSISTENTLY PERFORMED AND ACCEPTED IN THE APPELLAN TS CASE. 8. THE HONBLE DRP/LD. TPO ERRED IN LAW IN NOT APPLYIN G THE PROVISO TO SECTION 92C OF THE ACT AND HAS FAILE D TO ALLOW THE APPELLANT THE BENEFIT OF DOWNWARD VARIATI ON OF 5% IN DETERMINING THE ALP. 9. THE LD. AO HAS ERRED IN FACTS AND CIRCUMSTANCES OF THE INSTANT CASE AND THEREBY INITIATING PENALTY PROCEED INGS U/S 271(1)(C) OF THE ACT AGAINST THE APPELLANT, WHI CH IS BAD IN LAW. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMI T OR SUBSTITUTE, ANY OF THE AFORESAID GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE AP PEAL AND CONSIDER EACH OF THE GROUNDS AS WITHOUT PREJUDI CE TO THE OTHER GROUNDS OF APPEAL. 3.2 GROUND NOS. 1 & 7 ARE GENERAL IN NATURE. 8 ITA NO.180 1/DEL/2014 ITA NO. 6807/DEL/2014 3.3 MR. AJIT TOLANI, THE LD. COUNSEL FOR THE ASSESS EE, AND MS. MITALI MADHUSMITA, APPEARING ON BEHALF OF THE REVENUE, ADV ANCED DETAILED ARGUMENTS. WE WOULD BE ADVERTING TO THE SAME AS AN D WHEN NECESSARY IN OUR FINDING. 3.4 IT HAS BEEN SUBMITTED BY THE LD.AR THAT THE GR OUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDICE TO EAC H OTHER. THE ASSESSEE HAS ALSO FILED AN APPLICATION DATED 11.03. 2015 IN A.Y.2009- 10, FOR ADMISSION OF ADDITIONAL EVIDENCE. THE LD.AR SUBMITS THAT THE SAME IS NOT PRESSED. HENCE, APPLICATION DATED 11.03 .2015 FOR ADMISSION OF ADDITIONAL EVIDENCE, IS REJECTED. 4. WE HAVE HEARD RIVAL CONTENTIONS. ON A CAREFUL CO NSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, PERUSAL OF THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW, WE SUMMARIZE THE ISSUES AS FOLLOWS. 4.1 THE FIRST ISSUE THAT ARISE FOR OUR CONSIDERATI ON IS; A) WHETHER THE CLAIM OF THE ASSESSEE COMPANY THAT IT IS ALSO A MANUFACTURER IS CORRECT ON FACTS. B) WHICH IS THE MOST APPROPRIATE METHOD TO BE ADOPT ED? C) WHETHER EXTERNAL OR INTERNAL COMPARABLES ARE TO BE ADOPTED FOR DETERMINING THE ALP D) WHETHER THE ADJUSTMENTS TO THE ALP, CLAIMED BY T HE ASSESSEE, ARE TO BE GRANTED OR NOT. 4.2 THE LD.AR SUBMITS THAT THE ASSESSEE IS THE SOLE DISTRIBUTOR OF SPARE PARTS, COMPONENTS AND ACCESSORIES FOR HONDA P RODUCTS AND THE RESPONSIBILITY OF THE ASSESSEE IS TO ENSURE THA T SUCH SPARE PARTS, COMPONENTS AND ACCESSORIES ARE AVAILABLE FOR THE EN D-CUSTOMER 9 ITA NO.180 1/DEL/2014 ITA NO. 6807/DEL/2014 THROUGH REPLACEMENT MARKET. THE LD.AR SUBMITS THAT AUTOMOBILE SPARE PARTS, COMPONENTS AND ACCESSORIES ARE PURCHAS ED FROM BOTH RELATED AND UNRELATED SUPPLIERS. THE LD.AR SUBMITTE D THAT CERTAIN SPARE PARTS AND COMPONENTS WHICH CANNOT BE PROCURED LOCALLY FROM DOMESTIC SUPPLIERS ON ACCOUNT OF VARIOUS REASONS SU CH AS, NON- AVAILABILITY OF PRODUCT, AVAILABLE PRODUCT ARE OF I NFERIOR QUALITY, PARTS/COMPONENTS UNIQUE TO HONDA PRODUCTS ARE NOT A VAILABLE ETC. ARE IMPORTED FROM OVERSEAS SUPPLIERS. THE LD.AR SUB MITTED THAT SEGMENTAL ACCOUNTING IS NOT POSSIBLE SINCE THE ASSE SSEE DEALS WITH A SIGNIFICANT NUMBER OF SPARE PARTS/COMPONENTS AND ACCESSORIES AND IT IS ADMINISTRATIVELY IMPOSSIBLE TO SEGREGATE PURCHASE AND SALE INFORMATION FROM EACH AND EVERY SUPPLIER/CUSTOMER. 4.3 THE LD.AR FURTHER SUBMITTED THAT, THE ASSESSEE ALSO GETS MANUFACTURING DONE THROUGH THIRD PARTIES BY PLACING JOB WORK ORDER ON THEM BY SPECIFYING THE DESIGN, QUALITY AND QUANT ITY. IT WAS FURTHER SUBMITTED THAT IMPORTED PARTS ARE ALSO GIVE N TO SUCH JOB ORDER MANUFACTURES, FOR BEING PART OF THE SPARE TO BE MANUFACTURED AND THAT, VALUE ADDITION IS CARRIED ON BY THE ASSES SEE IN THIS PROCESS. 4.4 THE LD.AR SUBMITTED THAT BROADLY THE ASSESSEE C OMPANY HAS APPLIED TNMM TO ALL THE TRANSACTIONS BY FOLLOWING T HE EARLIER YEARS TP STUDY METHODOLOGY. THE LD.AR SUBMITS THAT, BEFOR E LD.TPO, THE ASSESSEE HAD ARGUED THAT THERE IS A VALUE ADDITION OF ABOUT 34% TO CERTAIN COMPONENTS SOLD, WHICH ARGUMENT WAS NOT BEE N CONSIDERED BY THE LD.TPO. FURTHER THE LD.AR SUBMITS THAT THE A SSESSEE NOT ONLY PURCHASES GOODS FROM RELATED AND UNRELATED PARTIES, BUT ALSO SELLS 10 ITA NO.18 01/DEL/2014 ITA NO. 6807/DEL/2014 ITS GOODS TO RELATED AND UNRELATED PARTIES. THE LD. AR FURTHER SUBMITTED THAT THE ASSESSEE HAD USED EXTERNAL INDEP ENDENT DATA FOR THE PURPOSES OF DETERMINING ARMS LENGTH PRICE. 5. THE ARGUMENTS OF THE LD. AR ARE SUMMARISED BELO W:- ASSESSEE IS A MANUFACTURING ENTITY IN SPARE PARTS; THAT ASSESSEE IS ALSO A VALUE ADDED DISTRIBUTOR; THAT TNMM SHOULD BE THE MAM FOR DETERMINING THE ALP ; EXTERNAL COMPARABLES HAVE TO BE TAKEN FOR ARRIVING AT THE ALP IN THE FACTS OF THIS CASE. 5.1 THE ARGUMENTS OF THE LD. DR ARE SUMMARISED BE LOW:- THE ASSESSEE IS A TRADING ENTITY. THE ASSESSEE HAS ALL ALONG DESCRIBED ITSELF AS A DISTRIBUTOR. THE ASSESSEE HAS NOT BROUGHT ON RECORD ANY DOCUMENT OR EVIDENCE TO PROVE THAT IT IS A MANUFACTURER OF SPAR E PARTS. INTERNAL COMPARABLES HAVE TO BE PREFERRED TO EXTERN AL COMPARABLES FOR DETERMINATION OF ALP. THE DESIGN, QUALITY SPECIFICATION OF THE SPARE IS D ETERMINED BY THE AUTOMOBILE MANUFACTURER AND NOT THE ASSESSEE. RPM IS THE MAM TO DETERMINE THE ALP. 6. ON CONSIDERATION OF THE ARGUMENTS, WE OBSERVE THAT THE ASSESSEE HAS, IN ALL ITS REPORTS AND SUBMISSION, ST ATED THAT IT IS A DISTRIBUTOR/RE-SELLER OF SPARE PARTS, AND THAT IT I S SELLING AS WELL AS PURCHASING THE SPARE PARTS, FROM BOTH RELATED AND U NRELATED ENTITIES. EVEN THE FUNCTIONAL ANALYSIS CARRIED ON B Y THE ASSESSEE IN ITS T.P. REPORT DOES NOT CLAIM OR INDICATE THAT THE ASSESSEE IS CARRYING OUT MANUFACTURING ACTIVITY OF ANY TYPE. IN THE TP STUDY, THE 11 ITA NO.18 01/DEL/2014 ITA NO. 6807/DEL/2014 ASSESSEE HAS DESCRIBED ITSELF TO BE ENGAGED IN THE BUSINESS OF TRADING ACTIVITY. HOWEVER, THE ASSESSEE HAS, AS A P ASSING REFERENCE, STATED BEFORE THE DRP THAT IT PLACES ORDER FOR CERT AIN SPARES WITH THE MANUFACTURER IN CERTAIN CIRCUMSTANCES. PLACING ORDERS FOR MANUFACTURING, DOES NOT MAKE THE ASSESSEE A MANUFAC TURER. IT WOULD BE A CASE OF PROCUREMENT OF SPARES THROUGH JO B WORK ORDERS ON FACTORIES. THERE MAY BE CASES OF VALUE ADDITION , IN CASE THE ASSESSEE SUPPLIES CERTAIN PARTS TO THE JOB WORK MAN UFACTURER FOR MANUFACTURE OF A SPARE PART. 6.1 BE IT AS IT MAY, IN OUR VIEW THE ASSESSEE IS PR EDOMINANTLY A DISTRIBUTOR. IT IS INVOLVED IN SOME CASES IN PLACIN G ORDERS FOR CERTAIN SPARES, FROM FACTORIES. THIS DOES NOT IN OUR VIEW, MAKE THE ASSESSEE A MANUFACTURER. INSTEAD OF BUYING GOODS OFF THE SHE LF, IT IS BUYING SPARES BY PLACING JOB WORK ORDER FROM MANUFACTURER. THE CLAIM OF LAYING DOWN THE DESIGN, SPECIFICATION ETC. BY THE A SSESSEE, IS NOT ACCEPTABLE FOR THE REASON THAT, IT IS THE AUTOMOBIL E COMPANY WHICH MANUFACTURES THE CAR, WHICH DOES SUCH FUNCTIONS, AS RIGHTLY POINTED BY THE LD. DR. THE TYPE OF SPECIFICATION, QUALITY ETC., OF SPARES IS DULY DEFINED IN EACH AND EVERY CAR/AUTO MANUFACTURE . 6.2 THE LD.AR HAS EXPRESSED A SITUATION WHERE CERTA IN PARTS ARE IMPORTED, AND USED AS PARTS OF THE KIT, THAT IS MANUFACTURED/ASSEMBLE LOCALLY ON JOB ORDER BASIS, A ND THEN SOLD. SUCH KIT INCLUDES, BREAK KIT, GEAR BOX KIT, ETC. I N SUCH CIRCUMSTANCES, THERE CAN BE A CASE OF VALUE ADDITIO N TO THE SPARES PURCHASED OR IMPORTED. THESE CASES ARE TO BE CONSID ERED SEPARATELY. THE BURDEN IS ON THE ASSESSEE TO FURNISH THE REQUIR ED DATA FOR 12 ITA NO.18 01/DEL/2014 ITA NO. 6807/DEL/2014 SEPARATE DETERMINING OF ALP IN ALL CASES WHERE THER E IS VALUE ADDITION THROUGH MANUFACTURE/ASSEMBLY. 6.3 IN OUR VIEW, THE FACTS AND FUNCTIONS OF THE ASS ESSEE HAVE NOT BEEN PROPERLY REPORTED BY THE ASSESSEE AND RESULTAN TLY HAVE NOT BEEN APPRECIATED AND ADJUDICATED UPON BY THE TPO. THE FUNCTION OF DISTRIBUTOR HAS TO BE TREATED DIFFERENTLY FROM THE FUNCTION OF JOB ORDER MANUFACTURER OF SPARE OR CASES WHERE THERE IS VALUE ADDITION. HENCE, THE FACTS OF THE CASE, THE FUNCTIONAL PROFIL E ETC. HAVE TO BE EXAMINED AFRESH TO ARRIVE AT THE CORRECT A.L.P. 6.4 IN VIEW OF THE ABOVE DISCUSSION, WE SET ASIDE T HE ISSUE OF DETERMINING OF ALP TO THE FILE OF THE ASSESSING OFF ICER/TPO, WITH THE FOLLOWING DIRECTION; A) RPM IS THE MAM FOR THE DISTRIBUTOR/TRADING SEGM ENT. IN OUR VIEW, THIS METHOD HAS TO BE PREFERRED TO OTHER METH ODS. THUS, WE UPHOLD THE FINDING OF THE DRP FOR THE SEGMENT WHERE VALUE ADDITION IS MADE TO IMPORTED SPARES, AND IN CASE WHERE PROCU REMENT IS DONE BY PLACING JOB WORK ORDERS, FRESH ADJUDICATION IS T O BE DONE DE NOVO TO DETERMINE THE MAM. C) THE BURDEN IS ON THE ASSESSEE TO SUBSTANTIATE IT S CLAIM OF VALUE ADDITION ETC. WITH FACTS AND FIGURES. D) INTERNAL COMPARABLES ARE TO BE PREFERRED TO EXTE RNAL COMPARABLES FOR THE DISTRIBUTION SEGMENT, WHEREVER APPROPRIATE DATA IS AVAILABLE. 6.5 IN VIEW OF THE ABOVE DISCUSSIONS AND FINDINGS , GROUND NOS. 2, 3, 4, 5, AND 7 ARE SET ASIDE TO THE FILE OF THE ASS ESSING OFFICER FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. 13 ITA NO.18 01/DEL/2014 ITA NO. 6807/DEL/2014 CLAIM OF ADJUSTMENTS: 7. THE LD. TPO REJECTED THE CONTENTIONS OF THE ASSESSE E FOR ADJUSTMENT WITH REGARD TO CUSTOMS DUTY AND MARINE F REIGHT & INSURANCE CHARGES INCURRED WITH REGARDS TO IMPORTED GOODS. THE LD.TPO HELD THAT, WHILE DETERMINING NET OPERATING M ARGIN, COST OF GOODS SHALL INCLUDE TOTAL COST OF PURCHASES OF GOOD S AND THAT THE CUSTOMS DUTY AND MARINE FREIGHT & INSURANCE CHARGES ARE PART OF THE COST OF GOODS SOLD IN THE DOMESTIC MARKET. THE LD.TPO HELD FURTHER THAT FOR DETERMINING OPERATING MARGINS, CUS TOMS DUTY AND MARINE FREIGHT & INSURANCE CHARGES SHALL BE TREATED AS A PART OF OPERATING COST. 7.1 IT IS SUBMITTED BY THE LD.AR THAT, THE ASSESS EE HAS PAID EXCISE DUTY AMOUNTING TO RS.29,82,46,000/-. THE ASSESSEE H AS PAID CUSTOMS DUTY AND MARINE FREIGHT & INSURANCE CHARGES (FOR TRANSPORT OF GOODS FROM THE PORT OF EXPORTATION AND IMPORTATI ON), IN RELATION TO IMPORTED GOODS. THE LD.AR SUBMITS THAT CUSTOMS DUTY AND MARINE FREIGHT & INSURANCE CHARGES PAID ARE ADDITIONAL COS TS TO THE ASSESSEE, WHICH IS NOT APPLICABLE, IN CASE OF LOCAL LY PROCURED GOODS. THEREFORE, IT HAS BEEN SUBMITTED BY THE LD.AR THAT, IF AT ALL A COMPARISON OF NET OPERATING MARGINS (ON GOODS IMPOR TED FROM OVERSEAS VIS--VIS GOODS PROCURED LOCALLY) IS TO BE MADE, THEN REASONABLE ECONOMIC ADJUSTMENT ON ACCOUNT OF CUSTOM S DUTY AND MARINE FREIGHT & INSURANCE CHARGES PAID, IS WARRANT ED. THE LD.AR SUBMITTED THAT, THE ASSESSEE IS ONLY CLAIMING THE A MOUNT THAT DO NOT FORM PART OF THE CENVAT CREDIT. 14 ITA NO.18 01/DEL/2014 ITA NO. 6807/DEL/2014 7.2 WE FIND SOME FORCE IN THE ARGUMENTS OF THE LD.AR. THE CLAIM FOR ADJUSTMENT FOR MARINE FREIGHT AND INSURANCE CAN NOT BE ALLOWED AS SUCH COSTS WOULD ALSO BE PRESENT IN BAD PURCHASE . THIS IS REJECTED AS FAR AS STATUTORY LEVIES, IMPOSED BY THE INDIAN CUSTOMS AUTHORITIES, ARE CONCERNED WHICH IS NOT THE CASE WI TH LOCALLY PROCURED GOODS. IN CASE OF LOCALLY PROCURED GOODS, EXCISE DUTY IS PAYABLE. THE DIFFERENCE BETWEEN THE RATE OF CUSTOM DUTY AND THE RATE OF EXCISE DUTY MAY BE CONSIDERED FOR ADJUSTMEN TS AS THESE ARE STATUTORY LEVIES. SUCH ADJUSTMENTS MAY HAVE TO BE CONSIDERED WHILE COMPARING THE NET MARGINS OF IMPORTED GOODS V IS-A VIS LOCALLY PROCURED GOODS. WE ARE, THEREFORE, INCLINED TO ALLO W THIS GROUND OF THE ASSESSEE TO THE EXTENT INDICATED ABOVE AND DIRE CT THE TPO TO ADJUST FOR THE DIFFERENCE IN STATUTORY LEVIES. 8. IN THE EVENT OF THE ABOVE DISCUSSION THE GROUND NOS . 6 STANDS ALLOWED IN PART. 9. THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED FO R STATISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 07.01.2016. SD/- SD/- (J.S. REDDY) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: *KAVITA 15 ITA NO.18 01/DEL/2014 ITA NO. 6807/DEL/2014 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 16 ITA NO.18 01/DEL/2014 ITA NO. 6807/DEL/2014 DATE 1. DRAFT DICTATED ON 12.10.2015 2. DRAFT PLACED BEFORE AUTHOR 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 5. APPROVED DRAFT COMES TO THE SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON 7. FILE SENT TO THE BENCH CLERK 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.