IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `I' NEW DELHI
BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER
AND
SHRI RAJPAL YADAV, JUDICIAL MEMBER
ITA No. 6728/Del/2013
(ASSESSMENT YEAR-2009-10)
Magneti Marelli Powertrain India Vs Deputy Commissioner of Income
Pvt. Ltd., Plot No. 1, Sub Plot Tax, Circle 6(1), Central Revenue
No. 25 & 32, Maruti Suzuki Building,
Supplier Park, Sector 3A, New Delhi-110002
Industrial Area, ImP Manesar,
Gurgaon
(APPELLANT) (RESPONDENT)
PAN No. AAFCM3204N
Assessee by: Shri Manoj Kumar Pardasani
Revenue by: Shri Yogesh Kumar Verma
Date of Hearing 6.3.2014
Date of Pronouncement 10.3.2014
ORDER
PER R. S. SYAL, AM:
This appeal by the assessee arises out of the order passed by
the Assessing Officer u/s 143(3) read with section 144C on
05.12.2013 in relation to the assessment year 2009-10.
2. The major issue involved in this appeal is against the addition
on account of transfer pricing adjustment. Briefly stated the facts of
the case are that the assessee is a Joint Venture Company between
Magneti Marelli Powertrain Spa, Itlay, Maruti Suzuki India Ltd. and
Suzuki Motor Corporation, Japan. This company was set up in India
2 ITA No. 6728/Del/2013
Magneti Marelli Powertrain India Pvt. Ltd.
to manufacture and sell Engine Control Units (ECUs). The assessee
reported six international transactions including `Payment of
technical assistance fee' to the tune of Rs. 38,58,80,000/-. Only this
transaction is in dispute inasmuch as the other five international
transactions have not been questioned by the Transfer Pricing
Officer (TPO).
3. The facts concerning this international transaction are that
assessee entered into agreement with its foreign A.E for acquiring
technology required for the purpose of manufacturing ECUs in
respect of the following : -
· Euro IV/75 HP 1.3 SDE/Suzuki Swift car application
· Bharat III/75 HP 1.3 SDE/MS Swift application
· Bharat III/75 HP 1.3 SDE/Tata Indica car application
· Bharat III/75 HP 1.3 SDE/Fiat India Palio-Linea car
application
4. The assessee used Transactional Net Margin Method (TNMM)
to benchmark all its international transaction of import of raw
material, sub-assembles and components, payment of technical
assistance fees, payment of royalty, payment of software and
purchase of fixed assets, all categorized under one broader head of
`Manufacturing of automotive components'. The ratio of the
assessee's `projected' operating profit margin to the operating
Revenue at 18.78% was compared with the mean operating profit
margin at 6.65% of comparables taken on the basis of past three
3 ITA No. 6728/Del/2013
Magneti Marelli Powertrain India Pvt. Ltd.
years data. In the light of the above analysis, the assessee claimed
that its international transactions under this broader head which also
includes `Payment of technical assistance fee' were ALP. The TPO
rejected the assessee's working by holding that TNMM was to be
applied separately for each international transaction and not
collectively as was done by the assessee. He came to hold that
simply because the overall operating profit was more than the
comparables, it could not be inferred that all the international
transactions were at ALP. He, therefore, rejected the `entity level
approach' adopted by the assessee to benchmark its international
transactions including that of `Technical assistance fees' amounting
to Rs. 38.58 crores. In the opinion of the TPO, it was Comparable
Uncontrolled Price (CUP) method which was required to be applied.
He, therefore, rejected the assessee's TNMM and sought to apply
CUP method. Accordingly, ALP of this transaction was determined
at Rs. Nil as against the amount paid by the assessee at Rs. 38.58
crore. The assessee was unsuccessful before the DRP. In the final
order passed u/s 144C(13), the A.O made this addition. The
assessee is aggrieved against such addition.
5. We have heard the rival submissions and perused the relevant
material on record. At the outset, we note that the recording by the
TPO that the assessee made payment of Rs. 38.58 crore in the year
in question for which deduction was claimed, is not correct. It has
4 ITA No. 6728/Del/2013
Magneti Marelli Powertrain India Pvt. Ltd.
been demonstrated by the ld. AR that the amount so paid was
capitalized and the assessee claimed allowance for depreciation on
such capitalized amount to the tune of Rs. 6 crore and odd. Be that
as it may, the simple fact that the assessee capitalized the amount in
the year and claimed depreciation on it, will not take the transaction
outside the ambit of `international transaction'. It is an undisputed
fact that the assessee incurred liability for the said amount and did
acquire technical assistance in the financial year relevant to the
assessment year under consideration in respect of ECUs to be
manufactured distinctly for Suzuki Swift car application; MS Swift
application ; Tata Indica car application; and Fiat India Palio-Linea
car application. Hence, the character of international transaction is
intact. Even, this aspect has not been disputed on behalf of the
assessee either before us or the authorities below.
6. It is seen that the assessee clubbed transactions of import of
raw material, sub-assembles and components, payment of technical
assistance fees, payment of royalty, payment of software and
purchase of fixed assets under one segment of `Manufacturing of
the automotive components' and analyzed all such transactions on a
combined basis. This type of combined benchmarking of all the
international transactions is not in accordance with law. The mere
fact that the overall profit earned by the assessee is more, would not
ipso facto lead to the interference then all the international
5 ITA No. 6728/Del/2013
Magneti Marelli Powertrain India Pvt. Ltd.
transactions are at ALP. The Special Bench of the Tribunal in the
case of LG Electronics India Pvt. Ltd. Vs ACIT 2013 140 ITD 41
(Delhi) (SB) has held to this extent. Thus, the approach so adopted
by the assessee in combining so many international transaction for
determining ALP on a consolidated basis, is incorrect.
7. The next major flaw in the assessee's calculation is that it took
into consideration the `Projected operating profit margin' to show
that its international transaction for the current year was at ALP.
The requirement under the relevant provisions of the Act along with
the rules is to consider the `actual' figures and not any `projected'
figures. It is beyond our comprehension as to how the projected
figures can be substituted for the actuals when the requirement is to
benchmark actual international transactions at ALP. We, therefore,
do not approve the methodology adopted by the assessee in this
regard.
8. It is further seen that the assessee showed mean operating
margin of certain comparables at 6.65% on the basis of past three
years data. We do not approve this kind of approach adopted by the
assessee for the obvious reason that Rule 10B(4) provides that the
data to be used in analyzing the comparability of an uncontrolled
transaction with an international transaction shall be the data
relating to the financial year in which the international transaction
6 ITA No. 6728/Del/2013
Magneti Marelli Powertrain India Pvt. Ltd.
has been entered into. Proviso of this rule for use of multiple year
data is only an exception and not a rule, which can be invoked if the
data for the current year does not result into the determination of
correct prices. Nothing of the sort has been shown as to why the
data of the comparables for the current year was not appropriate.
We, therefore, reject this point of view canvassed by the assessee in
making comparability.
9. We further observe that the approach adopted by the TPO is
also not correct. He rejected TNMM as applied by the assessee by
holding that CUP method was applicable. However, he computed
the ALP of such transaction under CUP as Nil. There is no dispute
on the fact that the assessee did receive technical information in
respect of ECUs to be manufactured by it for four different models
of cars pertaining to Maruti, Fiat and Tata. When technical
information was admittedly obtained, it could not be said that the
assessee ought not to have paid any consideration for that to its A.E.
The TPO seems to have gone wrong by considering that the foreign
A.E contributed capital to the tune of Rs. 20 crores and odd and
took away a sum of Rs. 38 crores and odd in the shape of fees for
technical services. This type of comparison made by the TPO for
determining that the ALP of the international transaction of
payment of technical fee at Nil, has no legal legs to stand on. When
he resorted to the application of CUP method, it was incumbent
7 ITA No. 6728/Del/2013
Magneti Marelli Powertrain India Pvt. Ltd.
upon him to ask the assessee for the submission of details of some
comparable uncontrolled transactions. There is no reference to the
asking or supplying of any such information by the assessee in the
first instance, or the TPO thereafter venturing to find out such
comparables at his own. What is required under the CUP method is
to compare the price paid with certain uncontrolled comparable
transaction to analyze if the price paid in an international transaction
is at ALP. Nothing of the sort has been done by the TPO to make
comparison of any comparable case with that of the assessee. He
simply proceeded to adopt nil value of as ALP of the international
transaction of payment of technical fee and proposed addition for
the full amount. In our considered opinion, when the assessee did
receive technical information and earned income by using the same,
it cannot be said that it has ALP at nil. Some sort of comparison is
inevitable under this method, unless it is shown that the assessee did
not get any advantage at all by making payment to its AE.
10. Thus it is seen that neither the assessee followed correct
methodology for determination of ALP of this international
transaction, nor the TPO/DRP applied the CUP method for
determination of ALP in correct perspective. In such a situation, the
order passed by the A.O making addition proposed by the TPO,
cannot be upheld. In our considered opinion, the ends of justice
would meet adequately if the impugned order on this issue is set
8 ITA No. 6728/Del/2013
Magneti Marelli Powertrain India Pvt. Ltd.
aside and the matter is restored to the file of AO/TPO for a fresh
determination of ALP of this international transaction. We order
accordingly. The ld. AR has agreed to assist the TPO in providing
data of certain comparable cases which could assist in the
determination of ALP. In such fresh proceedings, the TPO will
ascertain as to which method can be correctly applied and then
decide the question before him. Needless to say, a reasonable
opportunity of being heard will be given to the assessee.
11. The other grounds about charging of interest and initiation of
penalty proceedings are either consequential or irrelevant.
12. In the result, the appeal is allowed for statistical purposes.
Order pronounced in the open Court on 10/3/2014.
Sd/- Sd/-
(RAJPAL YADAV) (R. S. SYAL)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 10/3/2014
*Subodh*
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(Appeals)
5.DR: ITAT
ASSISTANT REGISTRAR
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