ITA1 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
IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH – AHMEDABAD
(BEFORE SHRI G. C. GUPTA, VP AND SHRI A. MOHAN ALANKAMONY, AM)
I.T.A. Nos. 3096/Ahd/2010 and 3308/Ahd/2011 A.Ys. 2006-07 and 2007-08
General Motors India Pvt. Ltd., The D. C. I. T. / Chandrapura Industrial Estate, A. C. I. T., Dist. Panchmahal, vs Panchmahal Circle, Halol 389 350 Godhara P. A. No. AAACG 8371 P
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 directed against the orders of the AOs u/s 143(3) r.w.s. 144C of the Act dated 20.9.2010 and 28.10.2011 for the assessment years 2006-07 and 2007-08 respectively. The above orders of the AOs were based 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 grounds in an elaborate and illustrative manner. However, the assessee has, subsequently, come up 1 ITA2 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 with its concise grounds along with an additional ground vide its letter dated 5.9.2012, according to which, ground No.1 being general in nature; it does not survive for adjudication. The remaining grounds are reformulated as under:
“That the AO/TPO erred:
(2) in disallowing Rs.3,14,830/- being proportionate 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 provision for slow moving and obsolete inventory made by the assessee in respect of some items in accordance with the method of accounting consistently followed by it;
(5) without prejudice, the AO/DRP erred in not allowing 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.10,60,000/- out of account of workmen and staff welfare expenses;
(7, 8, 9 & 11) in making a transfer pricing adjustment 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 respect of its Tech. Centre operations;
Additional ground:
- by making the transfer pricing addition to the entire value of transactions entered Into by the assessee and had not made adjustments only to the value of International transactions entered into by the assessee (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.
2 ITA3 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
II. ITA NO.3308/A/10 – AY 2007-08:
2.1. Likewise, for the AY 2007-08 also, the assessee 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. The remaining concise grounds are reformulated as under:
“That the AO/TPO erred:
(2) in disallowing Rs.2,91,258/- being proportionate 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 respect of some items in accordance with the method of accounting consistently followed by it;
- in disallowing the said amount which was the cost of inventory for which provision had been made;
(7, 8, 9 & 10) In making a transfer pricing adjustment of Rs.227,21,60,504/- [Rs.206 crores + 16.32 crores];
- by reducing the expenditure of Rs.206 crores on purchase of CKD Kits by the assessee from its AEs;
- by making an addition of Rs.16,32,00,000/- with respect to its Tech. Centre operations;
(11) by making an addition of Rs.4,89,60,504/- to the 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 and 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.
3 ITA4 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. As the facts of the issues involved in these appeals being almost similar and identical, for the sake of convenience 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 of findings of the Hon’ble Mumbai Benches in the cases of (i) M/s. Onward Technologies Limited in ITA NO.7985/Mum/2010 and (ii) M/s. Aurionpro Solutions Limited in ITA NO.7872/Mum/2001 with a plea that since the issue of determining of the ‘tested party’ under dispute is covered by the above findings and in favour of the Revenue, the same requires to be considered while deciding the present appeals. In order to facilitate the assessee to have its comments, if any, on the case laws on which the Revenue has placed its reliance (supra), the cases were scheduled 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 course of hearing, the assessee vide its application dated 2.11.2012 sought the permission of this Bench to produce additional evidence on the premise that during the hearings before the TPO & DRP, un-audited analysis of the product line profitability schedules prepared by the assessee including 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:
4 ITA5 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
“Audited analysis of PLP by General Motors India (GMI) with the transfer pricing calculation of General Motor Daewoo Auto & Technology [GMDAT] for the period from 1.4.2006 to 31.3.2007.”
5.1. After hearing the rival parties and also having considered the reasoning of the assessee in non-furnishing of the audited accounts before the authorities below earlier, the additional evidence now sought to be furnished was directed to be placed on record.
6. We shall now proceed to adjudicate the issues chronologically as under: Briefly stated, the issues involved are that –
A.Y. 2006-07 :
7. The assessee is engaged in manufacture and trading of automobiles and its parts. The assessee had, for the assessment year 2006-07 furnished its return of income admitting ‘Nil’ 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 92CA (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 to reduction in the expenditure on purchase of CKD Kits and services, change of tested party, partial/total disallowance of extraordinary expenses on account of adjustments made to compensate for lower capacity utilization, reduction of cost on account of lower level of indigenization, reduction in the quantum of additional marketing, advertisement, selection of companies which
5 ITA6 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 related to party transactions etc. In respect of Tech. Centre operations also, various submissions were made with respect to selection of comparable companies with different business profits, use of single year data for the purpose of comparison, claim of benefit of 5% range and other objections. The TPO dealt with each issue and other 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 operations.
7.1. After due consideration of the assessee’s submissions and for the reasons recorded therein, the DRP directed the AO to enhance the income of the assessee. Accordingly, the AO had, in his order u/s 143(3) r.w.s. 144C of the Act dated 20.9.2010 worked out the 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. transactions [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 AO had, u/s 143 (3) r.w.s. 144C of the Act dated 28.10.2011, made the following additions, as per the directions of the DRP and for the detailed reasons recorded in the assessment order, namely:
6 ITA7 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
(i) Adjustment on account of ALP in intl. transactions [including Rs.206 + 4.9 + 16.32 crores] being expenditure on purchase of CKD kits, royalty and Tech Centre operations 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 appeals for both the AYs, raised various issues, the main and foremost issue [ 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 attributed by the TPO/DRP.
8.1. Therefore, the main issue raised in Ground Nos. 7, 8, 9 & 11 and Gr. Nos.7, 8, 9 & 10 for the AYs. 2006-07 and 2007-08 respectively are taken up for adjudication, as under:
9. It was the contention of the assessee before the TPO/DRP that the functions performed by GMDAT include designing and developing of CKD kits and components, research and development from time to time, production of the CKD Kits and components required by CKD Assemblers, procuring CKD Kits and components from third parties, quality control and testing as necessary in respect of manufactured and procured CKD Kits and components, packing, storing and shipping of the CKD Kits and components to CKD Assemblers based on the purchase orders. GMDAT owns routine tangible assets like fixed assets, inventory and accounts 7 ITA8 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 receivables. It has the requisite infrastructure such as land and buildings, machinery and tools for manufacturing of kits. It also owns manufacturing facilities such as necessary manufacturing equipment and tools.
9.1.1. A comparative chart giving functions performed by the assessee and GMDAT was produced to make an impact that the assessee carries the entrepreneurial role in relation to sale of GM Cars in India by localizing cars, building dealer network and overall sales and marketing function. Developing market is an important and difficult task to be performed in business. The product failure risk after assembling of a vehicle and obsolescence risk due to changing technology and dynamic market conditions are also borne by the assessee. The assessee is responsible for developing local marketing intangibles for competing in the Indian market. The functions and risks of the assessee are more complex in nature.
9.1.2. Under TNMM, various suitable adjustments were made to mitigate the material differences on account of various extra-ordinary factors experienced by the assessee vis-à-vis comparable 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 manufactured by comparable companies proposed by the TPO/assessee along with companies selected as comparables in the transfer pricing documents was as under:
8 ITA9 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
Name of the Selected by Selected by Product profile company the assessee the TPO On-road automobiles having 4 or more wheels √ x such as light, medium and heavy commercial Force Motors Limited vehicles, jeep type vehicles and passer cars, agricultural tractor and diesel engines for other purposes Passenger cars in the mid size premium segment, sports utility vehicle, utility vehicles, Hindustan Motors Ltd √ x multi-purpose vehicles and total passenger vehicles [Mitsubishi Lancer, Mitsubishi Pajero, Lancer Cedia, Ambassador] Four or more wheels such as light, medium and Mahindra & Mahindra heavy commercial vehicles, jeep type vehicles Limited √ √ and passenger cars (Scorpio, Balero, Cargo three wheeler – Champion Alfa)
9.1.4. It was, further, submitted that as per annual report of Mahindra and Mahindra Limited, the company is engaged in the manufacturing multi utility vehicle [MUV], LCV and three wheeler segments and that the functions performed by Force Motors Limited are broadly similar to the functions performed by M & M and, hence, Force Motors 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 technology 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, Hindustan Motors Ltd has imported certain technology for manufacture of cars, has reported export earnings, launched new products and made a profit 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 to be adopted, M & M should also be put to such stringent comparability criterion. M&M is also
9 ITA10 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 involved in the manufacture of multi utility vehicles, light commercial vehicles as well as three wheelers apart from passenger cars. If Force Motor Limited is to be rejected on the basis of different product profile, M&M should also be rejected on the same basis. A comparative chart is as under:
Company Name (Mar-07) 12 months % Selected by Turnover (Mar 07) 12 profit months (Rs. In crores) Force Motors Limited -5.29 Assessee 1138.96 Hindustan Motor Limited 4.92 Assessee 625.18 Mahindra & Mahindra 9.70 Assessee/TPO 6490.38 Ltd Arithmetic Mean (2 2.20 comparables – excluding Hindustan) 3.11 Arithmetic Mean (3 comparables GMI Margin (before -0.62 1844.10 adjustment) GMI Margin (after 4.16 adjustment considering 2 comparables) GMI Margin (after 2.88 adjustment considering 3 comparables)
9.1.7. It was, further, argued by the assessee that based on the prior year’s approach, the TPO selected only one company as comparable and no fresh analysis was undertaken for the same comparables. Stringent comparability filters were applied to reject two companies selected by the assessee. TPO was not consistent while applying filters and selecting the final comparable companies. TPO had finally proposed one company (M&M as a comparable with a profit margin of 9.7 percent on revenue).
9.1.8. It was submitted that the assessee carried out adjustments to the operation margin on account of idle capacity adjustment; indigenization adjustment and excessive marketing spend. The normalized profitability for assessee was worked out to be 5.9 per cent which was rejected by the TPO stating that adjustment should be made if the difference exists in 10 ITA11 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 respect of details of the comparables vis-à-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. Reliance 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 submission of the assessee, the DRP had recorded its findings [for the 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 attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustment and for which reliable data 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 valuable intangibles, the data for comparability of GMDAT or the comparables is also not available.
It was stated that in case Mahindra & Mahindra Ltd is taken as a comparable then Force Motors Ltd., being functionally similar, should also be taken as a comparable with General Motors as its sales growth is almost NIL 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 Motors is never considered as a part of industry whereas Mahindra & Mahindra Ltd is manufacturing motor vehicles besides tractors and is always considered as part of the motor industry.
From the companies selected by the TPO and the assessee, Mahindra & Mahindra Ltd is a company selected by both. Also with respect to product range being similar brand command, scale of operation/market share, growth rate in last past several years in India, export, non-related party transactions being less than 25%, new products/models launched and production scale being plant capacity utilization above 50% Mahindra & Mahindra Ltd is almost similar to the assessee. The assessee had argued that Force Motors were planning 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 total turnover of the comp any was more than Rs.20,323 crores which is much higher than the assessee company. However, as per the information available, Force motors are planning to launch SUV in the year 2011 which has no relevance with the financial data for assessment year 2007-08. The turnover of Mahindra & Mahindra in the jeeps’ segment is approximately Rs.6500 crores which is comparable with that of the assessee.
In view of the facts narrated above, the results of assessee have to be compared with Mahindra & Mahindra only…………………..” 11 ITA12 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. Aggrieved by the stand of the TPO/DRP in the issue of ‘tested party’, among others, the assessee has come up before us.
10.1. During the course of hearing, the lengthy and elaborate submissions made by the learned Senior Counsel are summarized as under:
10.1.1. In rebutting the learned DR’s accusation that 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] wherein a detailed record of functions performed by the assessee and General Motors 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 GMDAT, he had reproduced the entire list of functions performed [courtesy: Annexure Exhibit II of DR’s submission] thereby, according to the learned Sr. counsel, a systematic attempt was made to underplay the functions actually performed by the assessee vis-à-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 Company which was originally established in 1965 as Shinjin Motors and in 1972; Shinjin Motors entered into a joint venture with GM and changed its name to General Motors Korea and later on in 1976 to Saehan Motor. In 1982, when the Daewoo Group gained control over the company, the name was changed to Daewoo Motor Company. It was, further, submitted that the
12 ITA13 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
Daewoo group of companies which included many businesses of which Daewoo Motor Company was one, went bankrupt in Asian financial crisis and in 2002, the trade and assets of Daewoo Motor Company were purchased by General Motors. GMDAT at that time was owned 55.4 per cent by third parties and 44.6 per cent by GM.
10.1.4. The company develops, manufactures and markets passenger vehicles and associated replacement parts and accessories. It owns and operates four manufacturing facilities, a R & D Centre and a design centre in Korea. The shareholding pattern of the company for the FY 2006-07 was as under: Name of shareholder Holding (%)
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, Australia 02.71
10.1.5. With regard to the market presence and product 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 global appeal and world- class product engineering and die manufacturing capabilities. GMDAT has its headquarters in Bupyoeng-ku, Incheon. It is also responsible for production and sales at home and abroad;
(ii) That it sells vehicles in more than 150 markets worldwide and the sales in the domestic market are made through Daewoo Motor Sales corporation whereas in the overseas market, it is through the Associated enterprises (AE);
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(iii) That GMDAT’s vehicles are sold under GM brands 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 complement GM’s product offerings which are focused on the larger sized passenger cars, SUVs and pick-up trucks. The small size cars have been one of GMDAT’s most popular products globally;
(iv) That the company produces and sells finished vehicles [internally referred to as complete built-up units [CUBS] to its associated enterprises for distribution in the local markets. The company also produces and sells finished vehicle kits [internally referred as CKD Kits] to its associated enterprises who in turn assemble the CKD Kits to produce finished vehicles;
(v) That in addition to CKD Kits, GMDAT also produces and purchases parts and accessories for use in its vehicles. The company sells parts and accessories to its associated enterprises for resale in local markets;
(vi) That CKD Kits may include essentially a complete 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 price-walk is performed and a pricing approach is then established based on budgeted costs and revenues of the parties involved. Pricing of CKD Kits follow cost plus mark- up based approaches internally referred to as ‘fully costed prices’;
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(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 percent markup;
(b) cost of purchasing parts from outside vendors plus a 4 percent mark- up;
(c) cost of consolidating and packaging into CKD Kits plus 5 percent mark-up; &
(d) market adjusted prices;
(ix) That in cases where the fully costed pricing cannot be adopted, then the market adjusted prices were used. This was a market based approach since market conditions were also considered for determining the transfer prices. In such a scenario, GMDAT and CKD Assemblers negotiate the final transfer price having regard to the market conditions and other macro economic factors in the CKD Assembler’s jurisdiction;
(x) As regards to the transactions with the assessee, 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 functions, namely:
(a) designing and developing CKD kits and components 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; 15 ITA16 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
(d) procuring CKD Kits and components from third parties;
(e) quality control and testing as necessary in respect 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 assessee) are -
(a) that the assessee purchases CKD Kits and components 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 servicing needs of its customers, the assessee imports spare parts and accessories from GMDAT in addition to local procurement for their resale in India; and that the assessee imports spare parts and accessories as finished goods and do not undertake any further value addition and the assessee also distributes the imported spare parts and accessories through its dealership network;
10.1.6. With regard to the selection of GMDAT as the tested party by the assessee, it was submitted that:
(i) GMDAT in relation to sale of CKD Kits and components to GMI acts as a contract manufacturer undertaking limited functions. 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 manufacturing of CKD Kits and components;
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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 GMDAT and its comparable companies; and
e. Choice of GMDAT as the tested party is in line with the OECD transfer pricing guidelines;
10.1.7. In respect of non-selection of GMI (the assessee) 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 other hand, GMDAT act as a contract manufacturer undertaking limited risks and owning routine intangibles;
(ii) GMI is entirely responsible for the sale of cars assembled by it in India. Towards this end, GMI markets the cars through its extensive network of dealers throughout the country;
(iii) GMI is also involved in supply chain management including identifying the market opportunities, purchasing, designing, logistics, production, research and development, assembling, distribution, marketing, finance and sale of finished products;
(iv) GMI’s 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;
17 ITA18 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
(v) Indian transfer pricing regulations do not stipulate 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 and 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 carried out, namely:
(i) Idle capacity adjustment; (ii) Indigenization adjustment & (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] undertaken by GMI and GMDAT:
Denying the Revenue’s allegation that the GMDAT carries out all the research and development activities (R&D) whereas GMI does not undertake any R&D on its own account, it was submitted that GMI had incurred expenditure of Rs.16.11 crores on R&D which has been reported in the financial statement of GMI and that as per the financial statements of GMDAT, the company does not own significant intangibles. In fact, the
18 ITA19 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 company has negative goodwill amount to Korean Won [14,87,013] in its books of accounts. This makes it absolutely clear that GMI’s operations relating to manufacture and sale of cars and components 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 components, GMI incurs significant time and cost in conducting local research and development activities in relation to its cars that it assembles. The need for undertaking such research and development activities arises owing 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 the car’s basic technology to suit the Indian environment. The adoption could be driven by factors such as changes in the Indian automobiles regulatory environment, customer feedback etc.,
10.1.10. Disproving the learned D.R’s allegation that the assessee in its transfer pricing documentation had selected GMDAT as the tested party as GMDAT with respect to its transaction with GMI is engaged in manufacturing and supplying CKD Kits and components and in other words, GMDAT acts as an Original Equipment Manufacturer [OEM] for GMI and, therefore, the functional profile of the comparables should also be same as that of GMDAT etc., it was submitted that all the comparable companies selected by the assessee were functioning as OEM of automobile components, spares and accessories and, therefore, they were comparable to GMDAT with respect to the international transaction relating to manufacture and supply of CKD kits and components. Hence, based on the above, it is reasonable to conclude that the argument put-forth by the revenue is erroneous and without any rationale whatsoever. 19 ITA20 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
10.1.11. With regard to the Revenue’s concern over the geographical variances between the comparable companies selected which were operating out of Asia Pacific region and the tested party which is operating out of South Korea region, the assessee contended that it had submitted a set of 27 comparable companies operating out of South Korea region, only which were engaged in manufacturing and supplying of automobile components, spares and accessories. It was made clear by the assessee that while furnishing the above, it did not propose any additional comparable which was not filed during the assessment proceedings, but, only presented something which was already available with the TPO.
10.1.12. With regard to the Revenue’s allegation that the assessee had not furnished any financial information of comparable companies, the learned Sr. Counsel drew the attention of the Bench to the effect that the financial details including operating margin of comparable 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 Revenue’s (TPO’s) averment that GMDAT should not be selected as the tested party as the comparable companies selected by the assessee does not come under his jurisdiction and, thus, he can neither call for any additional information nor scrutinize their books of accounts etc., it was contended on behalf of the assessee that on the one hand the DRP/TPO had rejected the assessee’s approach of selecting GMDAT as the tested party by arguing that there was no reliable data available for both GMDAT and comparables and, therefore, GMDAT cannot be taken as the tested party, however, the TPO himself had taken GMDAT as the tested party while making adjustment to 20 ITA21 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 transaction relating to payment of royalty by the assessee to GMDAT. It was argued that the TPO had rejected internal CUP used by the assessee, instead, adopted external CUP taking GMDAT as the tested party and relying on ADGAR online data-base. This approach of 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 was not framing an assessment on the comparable companies selected by the assessee, instead, was assessing as to whether the assessee had in any way over paid for purchase of CKD Kits and components to its AE, GMDAT. The financial statement of comparable companies was audited by independent auditors and, hence, it should be appropriate to place reliance on the same. It was, further, argued that the TPO, while applying TNMM was expected to compute the profit level indicator/operating margins from the financial information submitted for the comparable companies and till the time those financial statements enable the TPO to reliably compute the profit level indicator and there should not be any concern whatsoever.
10.1.15. Rejecting the Revenue’s allegation that sufficient financial data was not available for the tested party, it was submitted that the segmental financial data for benchmarking a part of GMDAT’s business which relates to manufacturing and sale of CKDs to the assessee was furnished to the TPO and on his request, the financial 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 segmental financial statement of GMDAT was not reliable, the learned Sr. Counsel reiterated
21 ITA22 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 that the segmental data relied upon for benchmarking international transactions relating to import of ACKD Kits and components was completely reliable and was based on sound allocation keys. In this regard, it was submitted that a review was done for GMDAT’s segmental profitability in relation to export of CKD Kits and components to the assessee and the same has been found reasonably accurate. [Source: Report of factual findings of Deloitte Anjin LLC, Korea - on page 40 PB].
10.1.17. It was urged that GMDAT’s segmental profitability in relation to export of CKD Kits and components to the assessee was completely reliable and, thus, it was unjustified on the part of the Revenue to reject GMDAT as the tested party for analyzing the inter-company transactions.
10.1.8. Preference of transaction by transaction approach over aggregation approach :
The assessee based on the detailed functional analysis, selected GMDAT as the tested party in its transfer pricing documentation, 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 independent companies involved in similar business;
(ii) On the other hand, if one chooses to select GMI as the tested party, the whole business of GMI will need to be tested against the independent comparable companies. Therefore, apart from the relevant international transaction i.e., purchase of components and spares, other third party costs including manufacturing expenses, employee remuneration, selling and general get tested;
22 ITA23 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
(iii) That only a part of the total expenses i.e., 17.55 per cent pertains to international transaction with AEs and out of this, only 15 per cent pertains to import of CKD and components. Thus, while selecting GMI as the tested party, the balance 82 per cent which pertains to third party cost will need to be benchmarked the risk of transfer pricing adjustment (as already done by the TPO in this case);
(iv) Therefore, while selecting GMI as the tested party, 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 transaction-by-transaction approach also gets support from Indian TP regulations, 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 TTJ 577);
(iii) Star India (P) Ltd v. ACIT [ITA NO.3585/M/2006];
(iv) Ankit Diamonds v. DCIT [8 ITR (Trib) 487];
(v) Technimount ICB Pvt. Ltd v. ACIT [ITA No.7098/Mum/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]
23 ITA24 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
10.1.11. In conclusion, it was emphasized that in view of the specific requirements of Indian TP regulations, OECD Guidelines and existing judicial precedents on the issue, transaction-by-transaction approach should be preferred over aggregation approach. Therefore, based on the above considerations, it is reasonable to conclude that GMDAT should be selected as the tested party for analyzing 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 (2008) 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 criteria to be followed between the tested party and comparables. A tested party should be as party for which these criteria can be reasonably determined and followed. Further, it was argued that the reliability of data is one of the most important factors governing selection of tested party.
10.2.1. Guidance on tested party selection comes from OECD. Extensively quoting the guidelines, the learned D R submitted that for selection of the tested party, the following criteria are to be kept in view, namely: (a) Tested party to be one with less complex functional analysis;
24 ITA25 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
(b) Reliability of data of the party selected as tested party; &
(c) Selection of the party requiring minimum adjustments.
10.2.2. It was, further, submitted that the functional description of GMDAT as detailed in the transfer pricing documentation, it is seen that GMDAT is an entrepreneur engaged in manufacturing of Completely Knocked Down [CKD] Kits in its plants across many countries, manufacturing of cars and also involved in R & D. The company has complex business activities and a high level of intangible 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 geographical adjustment required.
10.2.3. Admittedly, it was argued by the learned DR, all the intangibles are owned by GMDAT which has been specifically mentioned in TP Documentation at para 3.1. GMDAT is the technology owner who is supplying CKDs and intangibles (for which royalty is also paid) and on whose specifications, the manufacturing activity is being carried out by the assessee. Even in development of local content, the approval of the foreign party is a must before the changes are incorporated. 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 adjustments 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 before the TPO. The assessee has not been able to submit any reliable segmental data or
25 ITA26 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 reliable basis on which the global accounts have been segregated and the accounts with respect to Indian transactions have been prepared. Hence, it was claimed, the data utilized by the assessee in respect of the tested party is unreliable and unsubstantiated. If the assessee is to choose its tested party, it has to make available correct, verifiable and validated data in respect of such tested party. From the functional analysis of the assessee as well as GMDAT, it is clearly brought out that GMDAT is a far more complex entity catering to a number of subsidiaries, having plants at multiple locations, intangibles on which royalty is being paid even by the Indian company. The annual accounts filed by the assessee reveal the complex nature of operation of the AE as against the simple manufacturing function of the Indian party without owning any distinct intangibles. With operations across multiple geographies and substantial related party transactions, GMDAT not only fails the test of minimum adjustments but is clear that it is not possible to estimate the degree of adjustment needed to ensure comparability of GMDAT with the comparables selected. Sufficient data relating to comparables if this company is selected as tested party is also not available. Thus, it was submitted that GMDAT is more complex of the two parties and would require large number of adjustments 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 companies selected. All of them are functionally different from the tested party selected by the assessee. The tested party is engaged in manufacturing and sale of automobiles and CKDs. The second comparable is engaged in iron, gravity and aluminum castings, the third is engaged in production of body parts like floors, center pillars, hoods and so on. Perusal of the companies and the description
26 ITA27 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 mentioned by the assessee is sufficient to come to conclusion that these companies cannot be compared with tested party of the assessee. No details relating to geographical sale or sourcing is available. It was submitted that companies like Toyota Corporation with a turnover of Rs.36,000 crores and Sumitomo Electric Industries Limited 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 multifarious 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 Governments, geographical loan and size of market etc., are the key issues in selection of comparables, if the comparables happen to be spread across multiple geographies. It was submitted that there is huge functional and geographical variation in selection of comparables. The market for the products of these comparables is not known. The local laws in different countries in which these entities operate is now known. It is also not known whether segmental data for specific area of assessee’s function is available or not. No details whatsoever are available relating to financial aspect of these companies. The assessee has not attempted computation for functional or geographical differences in the study. It is known fact that the Japanese, Chinese, Malaysian, Indian markets or financial background is totally different and cannot constitute a single set of data for comparison with a Korean company without any adjustment in margins. It is clear that sufficient financial data is not available either in the case of the tested party or in the case of selected comparables.
10.2.5. To strengthen his stand, he had placed strong reliance on the following case laws, namely:
27 ITA28 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
(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 submissions, perused the relevant materials on record and also voluminous 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 consideration before the earlier Bench of this Tribunal was as to whether a minute examination of functional profile is necessary for the selection of comparables and the answer given was that functional profile must be first examined and after that proceed to select the comparable. In this case, the comparables chosen by the assessee were discussed by the TPO and those were discarded for the basic reason that the companies those quoted by the assessee were dealing in product distribution whereas 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 consideration of the issue, the Hon’ble Bench had observed thus: “16.1… (on page 47) It is clear that arm’s length price is to be determined by taking result of comparable transactions and those transactions must be in comparable circumstances. It is therefore required to have a proper study of specific characteristics of controlled transaction. It is also 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 profile is also required to be compared. We may like to add that there are so many perspectives which were required to be compared and in this connection the Hon’ble Courts have also 28 ITA29 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
suggested so, such as, comparison of functional profile, similarity in respect of assets employed and a thorough screening of the comparables 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 risk 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 said AE. A similar problem was considered by ITAT Delhi Bench in the case of Bechtel 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 minute examination of functional profile is necessary for the purpose of selection of 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 now 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 distribution whereas the TPO was of the view that the AE was nothing but ‘front office’ of the assessee and simple engaged in marking activity. In this context, we are of the view that in order to determine the most appropriate method for determining the arm’s 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.”
We are in agreement with the findings of the earlier Bench (supra) that such a selected party should be least complex and should 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 ITR 150 (Cal) :
The issue before the Tribunal was that the CIT (A) had confirmed the adjustments to the international transactions of the assessee with its AEs based at Bahamas, USA without considering the submissions and the financial of the AEs explaining the facts etc. 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 as under:
“26. 1……………………………………………………………………………………. 2………………………………………………………………………………………… 29 ITA30 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………………………………………………………………………………………….
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. TKC came out the work on its own, only parts of the job are sub-contracted to the assessee for its convenience. Futher, being an entrepreneur company, it is difficult to determine 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, the 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 design 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 approximately 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 determining the arm’s length nature of the transactions undertaken by the assessee with TKC. Hence, the recourse available to test the arm’s length price of the services rendered by the assessee to TKC is to test the margins from the Indian side. In view of the discussion on tested part earlier, the assessee was selected as the tested party 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 respect to services provided to TKC were compared internally with services provided to other third parties in foreign market.
Taking into account the divergent submissions, the Hon’ble Tribunal had recorded its findings that –
“33. Based on facts and our findings of the case, after due consideration of all the facts, we conclude that the analysis undertaken by the assessee to determine the arm’s 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 Datacore US is at arm’s length for both the assessment years.”
(iii) In the case of Ranbaxy Laboratories Limited v. Additional CIT reported in 110 ITD 428, the Hon’ble Delhi Tribunal had recorded its findings that -
“58. ……………………………………………………………….. The tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one party to the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered 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 tested party. But where comparable 30 ITA31 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
or almost comparable, controlled and uncontrolled transactions or entities are available, it may not be right to eliminate them from consideration because they look to be complex. If the taxpayer wishes to take foreign AE as a tested 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 tax 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 foreign AE) could also be taken as a tested party for comparison.
11.2. At this juncture, we would like to refer to the United Nation’s 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 necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested 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 reliable 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 on 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 method.”
With regard to the challenges emerging in transfer pricing in India, it has been observed as under:
“10.4. Emerging Transfer Pricing Challenges in India
10.4.1. Transfer pricing Regulations in India
10.4.1.1……………………………………………………………………………..
31 ITA32 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
10.4.1.2………………………………………………………………………………
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 hearing by the learned Sr. Counsel that the financial details including operating margin of comparable companies along with the back-up computations were furnished before the TPO in the transfer pricing documentation [Source: Pages 113 to 210 of the Transfer Pricing Study]. This contradicts the assertion of the learned DR that the assessee had not furnished any financial information of the comparable companies.
11.2.2. The United Nation’s Practical Manual on Transfer Pricing also contradicts the TPO’s argument that GMDAT should not be selected as the tested party as the comparable companies selected by the assessee doesn’t fall within his jurisdiction and he can neither 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 assessee’s 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, GMDAT 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 payment of royalty by GMI to GMDAT.
32 ITA33 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
11.2.4. Rebutting the Revenue’s allegation made during the course of proceedings that the segmental financial statement of GMDAT was not reliable, the assessee reiterates that the segmental 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 auditors – Deloitte Anjin LLC.
11.2.5. Moreover, we find that the DRP had not considered in great detail the plea of the assessee as to why GMDAT should 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 ruling of the Hon’ble Jurisdictional High Court [Special Civil Application No.8179 of 2010 dated 31.8.2010] in the case of AIA Engineering Ltd. v. Dispute Resolution Patel through Secretary-DRP & 1. After due consideration of rival submissions, the Hon’ble Court had ruled thus – “16…………………………………………………………..If the Dispute Resolution Panel was of the opinion that the application dated 22.4.2010 could not have been entertained, it should have considered the objections 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 directions 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 draft assessment order; and thirdly, in the light of the observation made by the dispute Resolution Panel that the petitioner has chosen to withdraw the objections, preferring any appeal against the impugned order before any forum would be an exercise in futility, as no appeal would be entertained against an order passed on a concession. Thus, the dispute Resolution Panel has virtually closed all doors for the petitioner. 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 much as the petitioner had never sought withdrawal of the objections filed by it. The impugned order also causes 33 ITA34 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
immense prejudice to the petitioner as recorded hereinabove. 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 the learned DR had placed reliance in the findings of the Hon’ble Mumbai Tribunals in the cases of (i) Aurionpro Solutions Ltd v. Addl. CIT in ITA No.7872/Mum/2011 dated 12.4.2013; and (ii) M/s Onward Technologies Ltd v. DCIT (OSD) in ITA No.7985/Mum/2010 dated 30.4.2013. (i) In the case of Aurionpro Solutions Ltd (supra), the issue before the Hon’ble Bench was that the assessee engaged 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 loans as working capital advanced to its 100% subsidiary outside India. When the issue was referred to TPO, the TPO took a view that as in a third party comparable situation, advances would bear interest and, therefore, need to charge a markup as per CUP method. Accordingly, the TPO proposed to benchmark the loans at dollar denominated LIBO [London Inter Bank Operative] rate plus mark up of 3%. When the issue landed up before the DRP, the DRP had, after analyzing the issue, directed the AO/TPO to compute the interest on loans to AE @ 14% per annum thereby enhanced the transfer pricing adjustment. Aggrieved assessee took up the issue with the Tribunal. The Hon’ble Tribunal, after due consideration of the issue in depth and for the reasons recorded therein, directed the AO/TPO to determine the arm’s length interest at Libor plus 2% on the monthly closing balance of advances during the FY. We have, with due regards, perused the issue and the findings of the Hon’ble Bench in detail. Ironically, the main issue before the Bench was the percentage of the interest to be calculated on the loan advanced 34 ITA35 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 by the assessee to its foreign AEs. We are, therefore, of the view that this case is not directly applicable to the issue under dispute. (ii) In the case of M/s. Onward Technologies Ltd (supra) as relied on by the Revenue, it is observed that the assessee, a parent company had international transaction with its AEs. With regard to IT enabled services provide to its AEs, the assessee had chosen six comparables with its foreign AEs as a tested party. The TPO had ignored the working of the assessee whereby selecting 20 comparable cases. When the issue reached before the Tribunal for resolve, the Hon’ble Bench had, after having considered rival submissions, recorded its findings, among others, as under:
“11.2.2. (On page 12)…………………………………………………………………. So, it is the profit actually realized by the Indian assessee from the transaction with its foreign AE which is compared with that of the comparables. 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 international transaction of the Indian enterprise with its foreign AE. The scope of TP adjustment 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 margin from the activities undertaken by the foreign AE nor can it curtail the profit arising out of transaction between the Indian and foreign AE at arm’s length. The contention 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 the tree by making the substantive section 92 otiose and the definition of ‘internal transaction’ u/s 92B and rule 10B redundant. This is patently an unacceptable position 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 ALP and the same is required to be strictly adhered to as prescribed. This contention is, therefore, repelled.”
With have duly perused the findings of the Hon’ble 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 the case of Mastek Limited 35 ITA36 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
(supra) had stressed that (at the cost of repetition) “ we are of the view that in order to determine the most appropriate method for determining the arm’s 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 Hon’ble Calcutta Tribunal in the case of Development Consultants (P) Ltd (supra) had recorded its findings that “33. Based on facts and our findings of the case, after due consideration of all the facts, we conclude that the analysis undertaken by the assessee to determine the arm’s 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 Datacore US is at arm’s length for both the assessment years.” Thirdly, the Hon’ble Delhi Tribunal 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 which the relevant data for comparison is available in public domain or is furnished to the tax administration.’ Then, the United Nation’s Practical 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 controlled transaction and should be the party in respect of which the most reliable 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 on comparables is furnished to the tax administration….”
11.4. Considering the divergent views expressed by various Tribunals (supra) and majority of them were in favour of selecting the ‘tested party’ either from local or foreign party and the United Nation’s 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.
36 ITA37 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
11.5. Reverting back to the issue, the assessee submitted 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 had stated, among others, that 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 owning valuable intangibles, the data for comparability of GMDAT or the comparable is also not available.
11.5.2. This view of the DRP has been denied by 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 commercial vehicles as well as three wheelers apart from passenger cars. It was, further, countered by the assessee if Force Motor Limited were to be rejected on the basis of different profit profile and then M&M should also be axed on the same logic. We find force in the above argument of the assessee. According to the assessee, GMDAT is only engaged in manufacturing and supply of certain components used in manufacturing of cars only. This has not been disputed by the revenue.
37 ITA38 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
11.6.1. We are in disagreement with the revenue’s argument that GMDAT should not be selected as a ‘tested party’ as the comparable as the comparable companies selected by the assessee doesn’t fall within the ambit of TPO’s jurisdiction and, thus, he can neither call for any additional information nor scrutinize their books of accounts. The Revenue can get all the relevant particulars around the globe by using the latest technology under its thumb or direct the assessee to furnish the same.
11.6.2. As rightly highlighted by the assessee, 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 reliable data available for both GMDAT and comparables; however, on the other hand, he had conveniently taken GMDAT as the ‘tested party’ while making adjustment to transaction relating to payment of royalty by the assessee to GMDAT. This exposes the inconsistency approach of the TPO.
11.6.3. The financial statements of comparable 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 submitted that segment financial data for benchmarking - a part of GMDAT’s business - was made available to the TPO and also on his request, the financial statements of GMDAT (at company level) was furnished to the TPO and the same is not disputed. Therefore, there should be no grievance on the part of the Revenue to say that no sufficient data was made available.
11.6.5. Taking all the above facts and circumstances of the issue as discussed in the foregoing paragraphs, in consonance with the
38 ITA39 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 case laws quoted (supra) and also the United Nation’s Practical Manual on transfer pricing, we direct the TPO to adopt GMDAT as the ‘tested party’ for analyzing the inter-company transactions of the assessee for both the AYs under consideration. To facilitate the TPO to analyze the inter-company transactions in the case of the assessee by selecting GMDAT as ‘tested party’ as directed above, this issue is restored on the files of the TPO. It is ordered accordingly.
Gr. No.2 Disallowance of Rs.3,14,830/- and Rs.2,91,258/- being proportionate lease charges in respect 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 of lease of 99 years in respect of lease-hold land. The lease-hold land was initially acquired under a lease agreement by Hindustan Motors Limited from Gujarat Industrial Development Corporation. Subsequently, the land was assigned by HML to the assessee vide assignment deed. By virtue of such an assignment, according to the assessee, the assessee has only got right to use the lease-hold land for the purpose of its business. The assessee has the right for the possession and use of land till the expiry of the said lease period. However, the AO had disallowed the amounts claimed by the assessee by following the decision of the earlier Bench of this Tribunal in the assessee’s 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 submitted that the Hon’ble jurisdictional High Court in the case of Sun Pharmaceuticals Ind. Ltd. [329
39 ITA40 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
ITR 479 (Guj)] on similar facts ruled in favour of the assessee. A SLP filed by the Revenue against the said ruling was also dismissed by the Hon’ble Supreme Court vide Spl. Leave Appeal (Civil) CC 19002/2009 dated 4.12.2009. In view of the above, it was pleaded that the disallowances require to be deleted.
12.1.2. The DR present was heard and also perused the case laws relied on by the Revenue.
12.1.3. At the outset, we would like to point out that the Hon’ble jurisdictional High Court in the case of Sun Pharmaceuticals Ind. Ltd. (supra) on an identical issue dismissed the Revenue’s appeal by affirming the Tribunal’s findings that ‘merely because the deed was registered, the transaction in question would not assume as different 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 assessee 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 ratio of the Apex Court decisions, the Court does not find this to be a case which warrants interference…’
12.1.4. In consonance with the ruling of the Hon’ble 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 to reiterate that we have duly perused the case laws on which the revenue had placed strong reliance. Since, the Hon’ble jurisdictional High Court in the case of Sun
40 ITA41 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
Pharmaceuticals Ind. Ltd. (supra) ruled in favour of the assessee, we have allowed the assessee’s 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 under 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, business associates, employees etc., during the course of business. The AOs have, however, disallowed such expenditure on the premise that the assessee manufactures passenger cars and the sale of the same is being effected through its authorized dealers and, thus, there is no need for incurring such expenditure.
13.1. DRP had also rejected the assessee’s claim on the ground that the assessee had not submitted any evidence in support of the claims that the expenditure incurred on gifts etc., was only for the purpose of its business and not for directors or their relatives.
13.2. Before us, it was claimed by the assessee that 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 personal. It was, further, claimed that the expenses were incurred for maintaining and furthering good and cordial business relationship with its business associates including the employees and promoting the business activities of the assessee on an on-going basis. It was, further, justified that the practice of giving such gifts is customary and unavoidable having regard to the competitive environment the assessee operates in and the same of utmost requirement to enable smooth running of its business so as to generate 41 ITA42 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 goodwill etc. It was asserted that the expenses have since been incurred wholly and exclusively for the purposes of the business, 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) 107 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.1361 & 1878/2009 (Ahd)
The learned DR present was heard.
13.3. As rightly highlighted by the learned Sr. Counsel for the assessee, it is rather customary in this line of business to present complementary gifts to the visiting dignitaries, patrons, dealers, business associates so as to maintain cordiality, rapport etc., Under these circumstances, the amounts spent for giving presents to them could be said to be expenditure incurred wholly and exclusively for the purpose of its business since this amount was spent for keeping alive 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 expenditure 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 the assessee’s legitimate
42 ITA43 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 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.2,44,28,818/-on account of provision for slow moving and obsolete inventory made by the assessee for the AYS 2006-07 & 2007-08:
14. Briefly, the assessee had debited [for the AY 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 provision comprised of the following: (i) Rs.73,30,86,489/- on account of process rejects, material scrapped, contract cancellation for obsolete material and shortage on physical inventory count etc., &
(ii) Rs.2,44,28,818/- on account of provision for slow 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 obsolete material and shortage on physical inventory count, however, disallowed the 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 Tribunal’s order in the assessee’s own case for the AYs 1997-98 & 98-99 wherein it was held that the market value of the wastage/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
43 ITA44 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 jurisdictional Tribunal has been challenged or reversed by the Hon’ble High Court.
14.3. During the course of hearing, the submissions of the learned Sr. Counsel are summed up as under:
(a) That according to the regular accounting method followed, the closing stock of inventories is valued at cost or market value whichever is lower;
(b) That a provision was, therefore, created for inventory which is identified as slow moving or obsolete. The slow moving/obsolete inventory level is determined through SAP as per the uniform policy adopted for identification of such inventory and it does not involve manual intervention. There are over 24000 different parts required in assembly 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 assessee’s line of business is for the reason that thousands of different parts are required to be assembled to manufacture a car and also to provide warranty services. The assessee has to maintain adequate inventory to ensure that the manufacturing process or warranty services are not affected. Therefore, owing to assessee’s 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 year or the inventory may be otherwise non-usable;
44 ITA45 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
(d) Further, the assessee regularly reviews the provisions made and, if upon such review, it is observed that some stocks have 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 Hon’ble Tribunal in a mechanical manner and had failed to examine the issue on merits based on facts and law applicable during the years under assessments. The AO had also failed to recognize that the legislature 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 regard to valuation of closing stock that enables the assessee to value inventory for the purpose of determining the income chargeable under the head ‘profit and gains of business and profession’ in accordance with the method of accounting regular employed by the assessee. The Hon’ble Tribunal, accordingly, did not have the occasion to examine the accounting policy 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 Hon’ble Tribunal will have limited applicability only for AYs 1997-98 and 1998-99 and will not be binding precedent for subsequent years including the AYs under dispute. The AO, instead of considering the submission of the assessee, relied on the findings of the Hon’ble Tribunal which were binding only for the AYs 1997-98 and 98-99;
(f) Without prejudice, that in any event the disallowance proposed by the AO was erroneous as the entire cost of the inventories 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 directed by the Hon’ble 45 ITA46 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
Tribunal for the AYs. 1997-98 and 98-99.The AO had, erroneously assumed that the entire sums of Rs.2.5 crores and Rs.2.44 crores represent the market values of the inventory and had failed to appreciate that the above amounts represent the cost of inventories to the assessee and not the market value thereof. Even if any addition can be made for the market value of such obsolete inventories, it was evident that proposed disallowances of Rs.2.5 crores and Rs.2.44 crores were unjustified as that values represent the cost and not the realizable value/market value of such obsolete stocks;
(g) That the Hon’ble 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 directions of the Tribunal for the AYs 1997-98 & 98-99 after taking into consideration the realizable value estimated and assigned to scrap which had already been accounted for in the books of account, and, thus, no further adjustments were made while giving effect to the Tribunal’s 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 of the authorities below on this count.
14.5. We have carefully considered the rival submissions and also perused the findings of the earlier Bench of this Tribunal in the assessee’s own case for the AYs 1997-98 and 1998-99 and also the specific provision of s. 145A which was inserted by the Finance (No.2) Act, 1998 w. e. f.
46 ITA47 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
1.4.1999 with regard to valuation of closing stock which enables the assessee to value inventory for the purpose of determining the income chargeable under the head ‘profit and gains of business 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 assessee’s 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 circumstances of the issue and also keeping the principles of natural justice and equity in view, this issue is restored on the files of the AO with a directions to look into the matter afresh and to take appropriate action after due verification of the assertion of the assessee in the matter as recorded in hereinabove. 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 allowing a deduction of Rs.3,67,03,644/- being provision for slow moving and obsolete inventory reversed during the year and credited to the P & L account which had already been disallowed in earlier year(s) in spite of the same having been verified and accepted by the AO himself in the remand report furnished before the DRP.”
15.1. On a perusal of the directions of the DRP dated 27.8.2010; it is observed that the issue has been dealt with by the DRP. For ready
47 ITA48 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 reference, the relevant portions of the directions of DRP are extracted as under:
“73.4.11. Further, vide supplementary submissions filed on 10 th June, 2010 with the Panel, the assessee has submitted a chart showing movement of slow moving/obsolete inventory under various heads for the previous years 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 disallow the incremental provision, without considering the reversal of provision amounting to Rs.3,67,03,644/- on other items. It has been submitted that in case the addition in respect of slow moving/obsolete stock is sustained in principle, then 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 assessee’s arguments have been considered carefully, but the same are found not acceptable. It is admitted fact that identical issue came up for consideration before the Hon’ble ITAT in the assessee’s own case for AY 1997-98 and 1998-99. the ITAT, Ahmedabad, Bench ‘D’ vide order No.1392 & 1393/Ahd/2004 dated 23.12.2008 has held that the market 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 evidence that the said decision of the Hon’ble ITAT in the assessee’s own case has been reversed by the High Courts. The assessee has not submitted any details/evidence to show that it has even challenge dthe said finding of the Hon’ble ITAT. Hence, respectfully following the above decision of the Hon’ble ITAT it is held that, the market value of such obsolete material as on the 31 st March 2006 is to be taken and added to the total income. 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 year 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 substantiate 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 Hon’ble Bench had held that the market/scrap value of obsolete stock should be included for computing the total income and, accordingly, the AO 48 ITA49 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 was directed to adjudicate the issue afresh. The AO 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 realizable value estimated and assigned to scrap which had already been accounted for in the books of account, and, thus, no further adjustments were made while giving effect to the Tribunal’s order for the said AYs. Further, the learned Sr. Counsel had asserted that the deduction of Rs.3,67,03,644/- being provision for slow moving and obsolete inventory reversed during the year and credited to the P & L account had already been disallowed in earlier year(s) and the same having been verified and accepted by the AO himself 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 stand 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 material 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 value 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 in the books of account and no further adjustment was made while giving effect to the order of the ITAT for those assessment years etc. [Refer: AR’s written submission dated: 19.6.2012 on page 10] This fact has not been disputed by the Revenue.
49 ITA50 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
15.4. Taking into consideration of the above scenario and the fact that the disallowances of the provisions for slow moving and obsolete inventory made for the AYs 2006-07 and 2007-08 have since been restored on the files of the AO and also that the AO had, according to the assessee, conceded in his remand report furnished before the DRP that the deduction of Rs.3,67,03,644/- being provision for slow moving and obsolete inventory reversed during the year and credited to the P & L account which had already been disallowed in the earlier year(s) etc., we are of the considered view that this issue also requires to be looked into by the AO. To facilitate the AO to do the exercise, this issue is restored on the file of the AO for needful. It is ordered accordingly.
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 expenditure of Rs.10,89,67,670/- under the head ‘workmen and staff welfare’. According to the AO, since some of the expenses have increased disproportionately from the previous year, the assessee was required to 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 crores booked under the head ‘Admn. Employee welfare and recreation’. Excluding the said sum, there was an increase of Rs.1.06 crores. It was explained by the assessee that there has been an increase in the employees’ strength from 1649 to 1882 during the year under consideration. It was, further, explained that as workmen and staff welfare expenses were largely a function of the employee head count, the increase in head count coupled with the general inflation had resulted in increase in costs over the previous year. In
50 ITA51 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 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 unverifiable and considering the same and also in view of the possibility of inclusion of certain expenditure for non-business purposes, a disallowance of Rs.10.6 lakhs being 10% of Rs.1.06 crores was made.
16.2. Aggrieved, the assessee took up the issue with the DRP for relief. The DRP had, after due consideration of the assessee’s contention as recorded in its direction, confirmed the addition for the reasoning that - “73.3.7………….The assessee has not submitted any cogent 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 submissions made by the rival parties during the course of hearing.
16.3.1. At the outset, we would like to point 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 to 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 not on a sound footing. The assessee had, in fact, attributed the increase in expenditure due to
51 ITA52 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 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 that the assessee had not submitted any cogent reason for such an increase 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 verifiable’’. However, on a perusal of the AO’s finding, it is observed that no such an observation is finding a place. In a nut-shell, the AO had not come 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 doesn’t stand the testimony of law. As a matter of fact, no disallowance can be resorted to for the sake of making a disallowance. While making any disallowance, it must be ensured that such a disallowance shall withstand further scrutiny.
16.3.3. In view of the above, we are of the firm view 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 workman & 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 assessee had provided certain engineering and R & D services to its AEs and earned a net operating profit of 10.22% over total costs. The TPO had objected to
52 ITA53 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 the ALP margin computed for provision of engineering services. He had also rejected four comparable companies and finally proposed four following companies as comparables: (i) Rolta India Limited, (ii) Ace Software Exports Limited,
(iii) KLG Systel Limited, & (iv) Powersoft Global solutions Limited.
17.1. The DRP had, in its directions, agreed with the TPO’s stand. During the course of hearing, the assessee had object 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 annual report and, thus, this company cannot be a comparable on the ground of 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 business 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:
53 ITA54 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
(i) Onward Technologies Ltd: The TPO had rejected Onward stating that the company had related party transactions of 65 per cent of sales. In this regard, it was submitted that the TPO erred while not considering the consolidated results; that in preparing the consolidated 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 states. Thus, the result from consolidated P & L account of the company has been used for the purpose of benchmarking the engineering services of the assessee. Thus, the TPO had erred in making an erroneous observation and, accordingly, Onward requires to be considered as a comparable.
(ii) Pentasoft Technologies Limited (Pentasoft) : The TPO had rejected Pentasoft based on the segmental revenue from operation for the financial year 2006-07 being less than last year’s sale and that almost all sales were to related party. It was submitted that the subsidiary company Pentasoft, Esoftcom ((Mauritious) Limited is also engaged in rendering 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 through its three divisions, namely, The Business software Division, the Engineering Division and the Education and training division. The engineering Division will provide engineering software, consulting services and product design, architectural design services, interactive media and electronic and embedded systems. The target market will be the automotive, aerospace and heavy engineering industries.
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17.3. However, the TPO had rejected Pentasoft on the premise that the company has declining revenue during the financial year 2006-07. Rebutting the TPO’s stand, it was submitted that there are no specific provisions under Indian transfer pricing regulations that require a de facto rejection of companies with declining revenue. Moreover, the TPO had not provided any concrete rationale to substantiate that the company had negative phase of economic cycle. Relies on the findings of the Hon’ble 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 different from that of the assessee thereby quoting incorrect text from annual report. As per the company’s website, the software segment of the company is involved in the provision of application services, product engineering, information management and IT Infrastructure management services. It was submitted that even though the company is engaged in services other than engineering services, only relevant segmental results pertaining to the provisions of engineering services has been considered in the computation of the arm’s 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 has related party transactions and, therefore, it is functionally different from the business of the assessee.
55 ITA56 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
Assessee’s submission :
17.4. It was, however, asserted that as per the annual report of the company, the company’s business operations is related 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 business activity like any other company who incurs such expenses to boost their 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 distribution expenses thereby classifying it as in different function segment of carrying out its marketing activities.
17.6. Moreover, the subsidiary companies of Tata Technologies are also engaged in rendering engineering services which is in alignment with the functions performed by the assessee. Since the international transactions are undertaken with a subsidiary engaged in similar operations, consolidated financial statements of Tata Technologies have been considered for the purpose of benchmarking. Hence, the TPO had erroneously rejected comparable company for reasons which are not in accordance with the objective of under-taking a fair transfer pricing analysis and, accordingly, Tata Technologies should be considered as a comparable.
17.6.1 It was claimed by the assessee that before 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.
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17.7. On the other hand, the Revenue had refuted the assessee’s claim as under:
(a) That the assessee had claimed that routine and low-value added functions were outsourced to various tech centres across 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 assessee to have been used by the Tech Centre enables high end research. High end research would not mean merely developing additional codes of software. Admittedly, the team is engaged in developing use for futuristic materials, safety related research, integration of control and telemetric software 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 engaged in high end research is incorrect and is liable to be rejected.
(A) Selection of comparables for Tech Centre Operations:
(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 Hon’ble 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 exceptional final results due to
57 ITA58 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 mergers/de-mergers. In this case, there is no exceptional final result due to merger/demerger;
(c ) That the assessee’s Tech Centre Operations are not low end captive operation, but, full fledged R & D activity liable to be compared with a high end research oriented company. The functional profile of Rolta is seen that there is functional similarity between the two companies. 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 company 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 margins in those cases were in the range of 54% to 72% which have been found to be high by the Hon’ble Tribunal(s). However, the margin of Rolta India Ltd being 38.79% as adopted by the TPO which doesn’t come in the ambit of exceptionally high margin. Moreover, in many cases, the Benches of the Tribunal have held that high profitability of a company cannot be a ground for its exclusion from comparable and, thus, Rolta India Ltd is found to be a comparable one.
(ii) Powersoft Global Solutions Limited :
(a) That the company is engaged in CAD/CAM/GIS/other design services and offers a proper comparable for the assessee. Hence, the plea of the assessee that the company is not functionally comparable is incorrect and is liable to be rejected.
58 ITA59 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
(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 related 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) 109 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 transactions cannot be taken as a comparable. In this case, the related party transactions are to the extent of over 80%, there is no question of accepting this company as comparable.
(iii) PSI Data Systems Limited : Extensively quoting the Press Release of the company 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 accounts have been adopted for computing comparable margins. The accounts of PSI Data system was available as a consolidated account and no segmental were available. The assessee had adopted the entire turnoff of PSI Data Systems for computing the margins and not segmental accounts.
59 ITA60 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
(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 has related party transactions and, therefore, it is functionally different from the business of the assessee.
17.8. We have carefully considered the rival submissions 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 Ace Software Exports Limited and KLG Systel Ltd. M/s. Powersoft Global solutions Limited does not have related party transactions. Rolta India Limited has only 20% related party transactions. Therefore, the working of the TPO deserves t be sustained………….”
17.8. 1. The DRP’s assumption was that the assessee had not put forth any arguments with regard to Ace Software Exports and KLG Systel Limited.
17.8.2. The assessee had identified itself as low-end 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 companies: (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 assessee’s tech-center is engaged in providing high-end
60 ITA61 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 research services. Tech-Center is essentially engaged in provision of engineering design and analysis of automobile parts, assemblies and manufacturing tools. This entails provision of computer-aided design and data translation services. Such services involve product assembly documentation, exterior and interior surfacing / designing, 3D modeling and 2D drawings etc.
17.8.4. It was further submitted that Tech-Center focuses mainly on providing routine services in relation to next generation materials, designs, manufacturing processes. Primary research and development of strategy (including identification of projects) is done at US level.
Work is performed within Tech-Center using the standard GM practices and processes. There are standard budgetary controls and procedures applicable for ISL including standard process of approvals based on cost of projects. These guidelines and procedures are common for all GM operations around the world. These procedures are defined in advance before executing this work from India. ISL is engaged in provision of various support services for computer aided designing and analysis of automobile parts for the Group’s internal requirements for provision of engineering services. It was, further, submitted that the TPO’s 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 comparables selected by the assessee on the following reasons:
(i) Different business profile; (ii) Segmental results not available; & (iii) Related party transactions.
61 ITA62 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
17.8.5. The TPO was inconsistent while applying filters and selecting the final comparables. The assessee had also assailed the rejection of companies such as (i) Onward Technologies Ltd., (ii) Pentasoft Technologies Ltd., (iii) PSI Data Systems Ltd; & (iv) Tata Technologies Limited and also objected to the selection of (i) Powersoft Global solutions Limited, (ii) Rolta India Limited for the reasons we have already recorded (supra).
17.9. We have duly considered the issue in detail. Surprisingly, the DRP’s direction, which was bald and cryptic, had subscribed that the functions etc of all these companies are comparable with the assessee. Therefore, the working of the TPO deserves to be sustained . 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 with no alternative, but, to remit back the issue on the files of the TPO for fresh 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 selected by the TPO cannot be as comparables so as to enable the TPO arrive 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 & 2007-08:
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18. Even though the assessee has consistently raised this issue before the DRPs, neither the TPO nor DRPs have dealt 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 provisions 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 arm’s length price so determined and price at which the international transaction has 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 arm’s length price.”
18.3. In view of the above provision of the Act, the AO/TPO is directed to verify as to whether the variation between 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 assessee’s claim is not entertain-able. It is ordered accordingly.
Gr. No.11: Addition of Rs.4,89,60,504/- being royalty transaction for the AY 2007-08 :
63 ITA64 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. During the year, the assessee had paid royalty of Rs.12,24,01,259/- as per technology license agreement to GMDAT @ 5%. From the search of ADGAR online database for royalty agreement for independent parties related to assemblies for automobiles. The TPO found two agreements , one of those agreements were related to GMDAT’s, 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 assessee’s product royalty agreement.
19.1. The contention of the assessee before the TPO was that it had benchmarked its transactions with internal CUP available on similar agreement with the third party ie., Isuzu Motors Limited, Japan to obtain certain technical information and assistance in relation to manufacturing of Tavera in India and as per this agreement, Isuzu charged royalty at the rate of 5% of net selling price to the assessee for providing technical information and assistance in this regard. It was, further, contended that net royalty payment was approximately 0.4% of the gross 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 Isuzu’s agreement is not exactly comparable with the assessee’s 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 specification and for same project of %age of royalty payment to gross selling price is not correct way of comparing prices. Accordingly, the adjustment to royalty payment was determined at Rs.4,89,60,504/-.
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19.3. Being aggrieved, the assessee took up the issue, among others, before the DRP and contested the TPO’s working. As usual, the DRP sustained the TPO’s stand with its inexplicable way that “ In view of independently comparable agreement which resembles the assessee’s 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 agreement and Namyang- Henglong agreement, ‘the licensed product’ is only for a single component/parts of the vehicle and not the entire vehicle which is in contrast to the TLA between GMDAT and GMI. According to the assessee, the agreement between GMI and GMDAT was Automotive agreement for manufacturing of complete vehicle, according to which, GMDAT to provide technology to GMI in relation to manufacture, assemble and market GMDAT’s project J200 right-hand 4 door notchback vehicles, accessories and parts in India and other countries. The royalty rate was charged at 5 per cent of net assessable value. The agreement between the assessee and ISUZU was if Automotive agreement for manufacturing of complete vehicle, according to which, Isuzu is to provide certain technical information and assistance in relation to manufacturing of the entire vehicle, 1-163 Wagon (Tavera) and components or parts thereof in India. 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 cent paid in both Namyan- Henglong agreement and Delphi-Jingzhou agreement relates to technology transfer with respect to only a single component/parts of a vehicle only whereas the TLA between GMDAT and the assessee relates to technology transfer with respect to an entire vehicle. Moreover, it was claimed by the
65 ITA66 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 assessee that the royalty rate of 3 per cent on selling price of the licensed product was in addition to the initial signing payment of USD 80,000 & 1,00,000 respectively. It was, further, claimed that as per the agreement between the assessee and GMDAT, the assessee had paid royalty at the rate of 5 per cent of the Net assessable value in accordance with the formula set-forth in the Government of India regulations. However, in the agreements considered by the TPO, the base of royalty rate was computed on net selling price of the product which will be substantially higher from that of the assessee. It was the assertion of the assessee that the actual royalty payment made by the assessee as a percentage of gross selling price which was approximately at 0.54 per cent. Thus, the royalty rate of 5 per cent by the assessee to GMDAT was at arm’s length only.
Application of CUP entails stringent comparability requirements:
19.5. Extensively quoting Rule 10B (1) of I. T. Rules and also OECD Guidelines, it was claimed that comparability under the CUP method was particularly dependent upon the similar products and contractual terms among other things. Differences in geographic markets may also influence the reliability of the comparison under this method, particular if they are material but cannot be reliably ascertained. Therefore, it was submitted that, application of CUP entails stringent comparability requirements between the tested party and the comparable selected, even a minor difference among the two may leave the whole analysis irrelevant.
In conclusion, it was submitted that there were material differences between the third party agreements being compared by the TPO which was only for a single component/parts of the vehicle as
66 ITA67 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 compared to the agreement of the assessee with GMDAT which was for the entire vehicle. Therefore, it was inappropriate on the part of the TPO to compare the agreement between GMDAT and the assessee with agreements between third parties.
19.6. On the other hand, the submissions of the Revenue 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 internal CUP whereas the TPO had used external CUP;
(b) That the assessee had wrongly stated that the royalty rate in the Isuzu agreement which has been adopted as CUP by the 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 sales value of licensed vehicle. Since the JPY 25000 per licensed vehicle was lower of the two figures, this constitutes the actual royalty payment and not 5% as claimed by the assessee and hence, even by the assessee’s own CUP, the royalty rate should have been much lower at 1.2% and not 5%;
(c) That the assessee’s claim of royalty payment at 0.54% of the gross selling price was misleading as the assessee was wrong in presenting royalty payment as a %age of gross selling price as such sale includes non-licensed items also which form a substantial value 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 been rejected by the TPO and he had conducted his own search to find two external CUP which
67 ITA68 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 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 agreement was not 5% but it was Yen 25000 (Rs.l9072) per licensed vehicle subject 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 into 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 manufactured/distributed by it. The remaining parts will have to be sourced only from 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 manufacture 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 Namyang – Henglong & Delphi - Jingzhou, it was submitted that -
(a) The agreements taken by the TPO was proper comparable for the assessee. The nature of agreement, scope of services as well as the payment terms of Isuzu agreement were totally different from the
68 ITA69 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 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 royalty rate charged in the Isuzu case, because of the per licensed vehicle rate 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 vehicle 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 assessee.
19.10. In conclusion, it was submitted that the TPO had rightly selected the two comparables and had rightly rejected the GMI –Isuzu agreement as a proper comparable.
19.11. We have carefully considered the lengthy submission 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 been narrowed down to the issue of comparing of the agreements. The assessee had taken the agreement entered into between the assessee and Isuzu 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 agreement 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 had, without involving 69 ITA70 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 itself in analyzing the contentions put-forth by the assessee with that of the TPO in rejecting the assessee’s comparable, sustained the TPO’s 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 comparison.
19.13. In view of the above, we are of the considered view that this issue requires to be remitted back on the file of the TPO for a detailed examination and verification of the assessee’s contentions. To facilitate the TPO to implement the above direction, this issue is restored on the file of the TPO to take appropriate action after affording a reasonable opportunity to the assessee of being heard. It is ordered accordingly.
Gr.No.12 : 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 and the potential comparables [AY 2007-08]:
20. Both the parties were heard. Since the issue is factual which requires verification at the AO/TPO’s level as 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 assessee’s claim and to take appropriate decision in correctly computing the working capital adjustment, if it so warrants. It is ordered accordingly.
70 ITA71 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. In the result , both the appeals of the assessee for the assessment years 2006-07 and 2007-08 are partly allowed for statistical purposes.
Order pronounced in open Court on 02-08-2013
Sd/- Sd/-
(G. C. GUPTA) (A. MOHAN ALANKAMONY) VICE PRESIDENT ACCOUNTANT MEMBER
Lakshmikanta Deka/-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:
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