Income Tax Appellate Tribunal - Hyderabad
M/S. Tecumseh Products India Private ... vs Assessee on 23 September, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 1686/Hyd/2010
Assessment Year : 2006-07
M/s Tecumseh Products India vs. Asst. Commissioner of Income-
Pvt. Ltd., Hyderabad. tax, Circle 2(3), Hyderabad.
PAN: AABCT6893J
(Appellant) (Respondent)
Assessee by : S/Shri Kanchan Kaushal &
D. Bafna
Revenue by : Shri P. Soma Sekhar Reddy
Date of hearing : 23-09-2013
Date of pronouncement : 13 -11-2013
O RDE R
PER B. RAMAKOTAIAH, A.M.:
This appeal is preferred by Assessee against the order of the AO approved by the Dispute Resolution Plane (DRP), Hyderabad u/s 143(3) read with section 144C(5) of the IT Act, dated 25-10-2010. The issue in this appeal is on Transfer Pricing adjustment made by AO. Assessee has raised detailed Ground No. 1 on TP adjustments made. Ground No.2 is on adjustment made on sale of compressor sub- assembly components and Ground No.3 is disallowance of depreciation on machinery purchased from AEs. Grounds have many sub-grounds, which are not required to be extracted. Assessee also placed on record voluminous paper books in volumes, from pages 1 to 579 and another paper book from pages 581 to 826.
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2. We have heard learned counsel Shri Kanchan Kaushal/Shri Dharmesh Bafna and the learned CIT-DR Shri Somasekhar Reddy.
3. Briefly stated, Assessee company is a wholly owned subsidiary of Tecumseh Products Company, USA ( in short 'TPC USA') and collectively with its affiliates referred to as "Tecumseh Group" or "AEs"). Assessee is primarily engaged in the manufacture, marketing, service and repair of hermetically sealed compressors in domestic as well as international market. Assessee has two manufacturing facilities at Balanagar (AP) and Ballabgarh (Haryana). The Balanagar facility predominantly manufactures compressors for air conditioning equipments whereas the Ballabgarh facility makes compressors meant for refrigeration equipments. In addition, Assessee manufactures sub-assembly and components (pump kits, crankshafts etc.) from its Export Oriented Manufacturing Unit (EOU Unit) in Balanagar and exports them to TPC USA. All the compressor sub- assembly & components produced from EOU Unit is exported only to TPC USA, in order to manufacture compressor for sale in USA market. The annual requirements and the specifications of the components are provided by TPC USA. Assessee does not sell similar components to any other customer in India or outside India and therefore acts as a contract manufacturer for TPC USA with respect to sale of compressor sub-assembly and components. The total value of sale of compressor sub-assembly and components constitute only 5% of total turnover of Assessee. During the Financial Year 2005-06, Assessee has entered into the following international transactions with its AEs:
1. purchase of fixed assets;
2. Purchase of components, tools, spares and accessories;
3. Sale of software tools, compressor, parts of compressors, compressor sub-assembly and components;
4. Software Engineering services;
5. Interest on ECB Loan; and 3 ITA No. 1686/Hyd/2010 M/s Tecumseh Products India P. Ltd.
6. Reimbursement of expenses.
As per the Transfer Pricing (TP) Documentation prepared by Assessee, it was submitted that all the above international transactions have met the arm's length standard as prescribed in the Indian Transfer Pricing Regulations contained in Section 92, 92A through 92F of the IT Act, 1961 read with Rules 10A to 10E of IT Rules, 1962, except the transactions in relation to sale of compressor sub-assembly & components and purchase of some components in the EOU Unit at Balanagar. Accordingly, Assessee has offered Rs. 28,269,298/- as a suo-moto transfer pricing adjustment in its (revised) return of income for AY 2006-07 to meet the arm's length standard. Assessee filed its original return of income for the AY 2006-07 on October 28, 2006 declaring the total loss of Rs. 37,29,58,707/-. The return of income was subsequently revised on 29-11-2006 u/s 139(5) of the Act by offering suo-moto transfer pricing adjustment of Rs. 2,82,69,298, thereby reducing the total loss to Rs. 34,46,89,409.
4. A reference u/s 92CA of the Act was made to Addl.
Commissioner of Income-tax (TPO) in order to determine arm's length price of the international transactions of Assessee. There is no dispute with reference to method accepted being TNMM. The TPO after analyzing the transactions made adjustments u/s 92CA of Rs. 6,52,00,000/- to the sale of sub-assembly components to its AE and also disallowed the depreciation claim to the extent of cost attributed to the purchase of old machinery imported. TPO determined the value of the machinery at NIL thereby disallowance of depreciation was worked out at Rs. 2,36,76,683/-. Assessee raised various objections before the DRP and the DRP, however, rejected the objections and accordingly, the AO passed consequential order making the adjustments to the income returned.
5. The learned counsel referring to the orders of the authorities and the paper books filed submitted that orders of the TPO/DRP 4 ITA No. 1686/Hyd/2010 M/s Tecumseh Products India P. Ltd.
suffers certain factual errors as well as the issues on comparability. Referring to the adjustments made with reference to sales made to AE of Compressor sub-assembly and components, it was submitted that Assessee operates 100% EOU and exports to TPC USA. Assessee arrived at the cost, which is identifiable from the separate books of account maintained for the EOU at 18,84,61,988/-.This amount of Rs. 18.84 crores was also accepted by the AO in the show cause notice issued wherein he has arrived at the ALP of operating cost at 110.16% and arrived at the shortfall of Rs. 3.66 crores. However, the AO without any show cause notice to Assessee, re- worked out the proportionate operating cost, ignoring the separate details furnished in this regard, at operating cost at a higher figure of Rs. 22.82 crores. Referring to page 22 of the TPO's order, the learned counsel submitted that on a total cost of Rs. 441.27 crores of Assessee company, the AO arrived at the proportionate cost attributable, on the basis of sales turnover, at Rs. 22.82 crores. It is the submission that when Assessee has maintained segmental information, particularly 100% EOU unit accounts are maintained as such, there is no need to adopt proportionate turnover at a higher figure than what was spent by Assessee as operating cost.
6. The next objection of the learned counsel is with reference to the addition made after arriving at the PLI taking comparables. Reserving his submissions on the comparables, it was submitted that Assessee itself has made suo-moto adjustments at the time of filing return along with TP report and this adjustment of Rs. 2,82,69,298/- made by Assessee suo-moto was ignored and made the addition at a higher amount. It was his contention that if suo-moto adjustment is considered, the adjustment so arrived at by the TPO is within the (+) or (-) 5% threshold limit so, no further adjustment was called for. It was submitted that Assessee filed return originally within time without any TP report and consequent to the report prepared, Assessee felt that suo-moto adjustment of Rs. 2,82,69,298/- was required and 5 ITA No. 1686/Hyd/2010 M/s Tecumseh Products India P. Ltd.
accordingly return was filed within time allowed u/s 139(5) of the Act stating as revised return. The learned TPO ignoring the fact that reference was made on the same return along with report enclosed to the return, came to the conclusion that Assessee cannot file revised return on the reason that there is no omission or wrong statement, therefore, the revised return was ignored and suo-moto adjustment was also consequentially ignored. Referring to the provisions of the Act of section 92C(4) and provisos along with Rule 10B(e), it was his submission that suo-moto adjustments are to be taken into consideration while determining the ALP. He referred to the orders of ITAT, Delhi Bench in the case of Haworth (India) Pvt. Ltd. (ITA No. 5341/Del/2010 for AY 2006-07, order dated 29-04-11) to submit that suo-moto adjustments are to be considered.
7. Apart from suo-moto adjustment issue, Assessee also contested the comparables on two filters, viz., i) being the data pertaining to an Assessee, which has different accounting period than that of Assessee. It was submitted that even though no objection was taken in the course of TP proceedings, the TPO himself excluded certain companies on the same filter in the later year. Therefore, Assessee is objecting to the comparables of 1.Atlas Cap India Pvt. Ltd., 2.KSP Ltd, 3.Mother and Plott ltd, 4. Shakti Pumps (India) Ltd., which have a different accounting period and therefore, these are to be excluded. The other filter, which the assessee raised is 'functionality' of the companies selected itself. It was submitted that Assessee is not only manufacturing compressors but also components for compressors and the adjustments made are with reference to sale of parts of compressors, therefore, selection of companies, which are in the 'compressor' manufacturing is not correct. Referring to various copies of products placed on record, it was submitted that Assessee is not selling compressors to the AE but only components pertaining to the compressor for which separate 100% EOU is established. Therefore, selecting companies, which are dealing in compressors is not correct.
6 ITA No. 1686/Hyd/2010M/s Tecumseh Products India P. Ltd.
In that regard, learned counsel objected to the inclusion of
1.Kirloskar Brothers Ltd. where there is no segmental data with reference to the sales of compressor and compressor parts. W ith reference to 2. Emerson Gilmate Technologies (India) Ltd., the said company was both in manufacturing and trading and segmental data was not available. Referring to 3. Elgi Equipments Ltd., it was submitted that this company is in the business of manufacturing compressors and not functionally comparable. In view of this, Assessee is objecting to inclusion of above comparables by the TPO in the transfer pricing analysis and arriving at the arithmetic mean of PLI at 10.16%. It was fairly admitted that adjudication on the basis of comparables will arise only if the suo-moto adjustment made by Assessee was ignored. If it is taken into consideration the adjustment proposed by the TPO on the basis of PLI at 10.16% is within the (+)/(-) 5% threshold limit provided under the Act.
8. Referring to the other issue of denial of depreciation, it was submitted that Assessee has purchased machinery from its AE, the details of which are as under:
Name of the Amount in Rs. Custom duty Countervailing Associate Enterprise paid (Rs.) Duty (Rs.) Tecumseh Products 15,31,19,135 1,78,32,005 9,56,334 Company Fasco Australia PT. 47,25,420 - 11,69,938 Ltd.
Total 15,78,44,555 1,78,32,005 21,26,271 Computation of the disallowance of deprecation by AO Particulars Amount (Rs.) Total value of fixed assets purchased = B 15,78,44,555 Depreciation Rate = C 15% Amount of Depreciation = D=B*C 2,36,76,683 It was submitted that TPO wrongly assumed that machinery has no value, whereas Assessee has paid customs duty and countervailing duty on the machinery imported. Assessee also substantiated by 7 ITA No. 1686/Hyd/2010 M/s Tecumseh Products India P. Ltd.
filing valuation report justifying price paid. The valuation report was from M/s SGS and this is the basis for valuation of customs duty as well. He relied on the coordinate bench decision of ITAT, Mumbai in the case of Ballast Nedam Dredging in ITA NOs 6531/Mum/06 & 1591Mum/08, dated 31-03-2013 to submit that when Assessee relies on the valuation report and there is no evidence contrary to justify, the TPO cannot determine actual cost at Nil thereby denying depreciation. It was also submitted that Assessee also purchased new machinery worth US $ 500,965 and details of the assets purchased are as under:
(in USD) Invoice Fair Market Moving and Invoice Value Classification No. Value Other cost of Fixed Assets 183978 753,000 299,003 1,052,003 Second hand machinery 184094 1,407,000 325,623 1,732,623 -do-
184095 98,850 60,375 159,225 -do-
184096 20,500 8,550 29,050 -do-
184158 476,895 24,070 500,965 New
Machinery
247032 Data not available 11,216 Second hand
machinery
Total 3,485,082
It was the submission of learned counsel that AO/TPO has not even examined the facts and rejected valuation certificate and DRP simply confirmed the opinion without taking detailed objections raised by Assessee before them.
9. The learned DR, however, referred various facts and submitted that TPO is correct in arriving at the operating cost on proportionate basis and correct in rejecting revised return, which was filed after filing original return and in selection of comparables which were not objected to by Assessee and taking the cost at Nil of second hand imported machinery. He supported the orders of TPO/DRP.
8 ITA No. 1686/Hyd/2010M/s Tecumseh Products India P. Ltd.
10. We have considered rival contentions and examined the record. There are six issues for adjudication in this appeal under the transfer pricing provisions, which are as under:
A) whether Assessee's return filed along with TP report is to be considered or not ?
B) Whether adjustment made by the AO ignoring suo-moto adjustment made by the Assessee is correct or not ? C) Whether operating cost adopted by TPO is correct or not D) Whether the comparables selected by the TPO is correct E) Whether (+)/(-) 5% threshold limit available under the Act can be invoked in this case.
F) Determination of value of imported machinery by the TPO thereby denying depreciation.
These issues are considered in detail and decided as under:
A) whether Assessee's return filed along with TP report is to be considered or not ?
As briefly stated, Assessee filed return of income on 28 th October, 2006 declaring loss of Rs. 37,29,58,707/- without TP report for the assessment year under consideration. Subsequently after the international transactions were analysed and on the basis of transfer pricing documentation prepared by the consultant, Assessee realized that some of the transactions require suo-moto adjustment. Accordingly, Assessee made adjustment of Rs. 2,82,69,298/- thereby revising total loss to Rs. 34,46,89,409/-. This indicates that there is a reduction of loss in the ultimate claim made by Assessee. We were surprised about the finding by the TPO and DRP for ignoring the return filed by Assessee reducing loss. When Assessee files a revised loss return reducing claim of loss, the return can certainly be considered as a revised return under the provisions of section 139(5) of the Act. First of all, the return filed originally on 28-10-2006 cannot be considered as a valid return as it did not include statutorily prescribed TP documentation and Assessee declared the value of 9 ITA No. 1686/Hyd/2010 M/s Tecumseh Products India P. Ltd.
international transaction as per its accounts books. Therefore, the other/revised return filed on 29-11-2006 enclosing TP documentation and declaration of higher value of international transaction by making suo-moto adjustment under the provisions of the Act cannot be rejected as the same was a valid return, even though, stated to be filed u/s 139(5) of the Act. In fact, to the extent of declaration of international transaction and adjustments, it can be certainly be stated as omission on the part of Assessee or in a worse situation a wrong statement in the original return, as provided u/s 139(5). The provisions of section 139(5) are as under:
139(5): If any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier."
As can be seen from the above provision of the Act, we are of the opinion that the return filed subsequently on 29-11-2006 is a valid return, which is to be considered as correct. . In fact, as submitted this return was only processed by the AO and was reported to TPO under the TP provisions. Since both the TPO and DRP erred in not considered the same, we direct the AO to consider the revised return as a valid return. In these circumstances, grounds of Assessee on this issue are allowed.
B) Whether adjustment made by the AO ignoring suo-moto adjustment made by the Assessee is correct or not ?
There is no dispute with reference to arriving at the arm's length price under the provisions of the Act as prescribed under the Rules and making adjustment with reference to the International transactions undertaken by Assessee. Rule 10B(e) pertaining to TNMM method, is as under:
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10B(e) transactional net margin method, by which,--
(i) the net profit margin realised by the enterprise from [an international transaction or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between [the international transaction or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
(iv) the net profit margin realised by the enterprise and referred to in sub-
clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to [the international transaction or the specified domestic transaction].
As can be seen under 10B(e)(i), the 'net profit margin realized' by the enterprise from an international transaction is to be computed in relation to cost incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. Here it is not prescribed that the value of 'international transaction' should be considered as such. What is required to be done is 'net profit margin realized' by the enterprise from an international transaction, if Assessee makes suo-moto adjustments to the net profit margin as realized by the enterprise, the same has to be considered under (e)(i) of section 10B. In this connection, we refer to the findings of the coordinate bench of ITAT, Delhi in the case of Haworth (India) Pvt. Ltd. (supra), which are as under:
11 ITA No. 1686/Hyd/2010M/s Tecumseh Products India P. Ltd.
"66. It can be seen from the above table that the major component of receipt of International transaction of the assessee is commission income as it constitute Rs. 15,39,33,769/- of the total operating income of Rs. 17,73,98,197/-. Therefore, it cannot be said that commission expenses which have been suomoto disallowed by the assessee were not claimed as operating expenses while computing the arm length price. If they are subsequently disallowed suomoto by the assessee in the revise return, they are required to be excluded from the operating cost and the calculation of the assessee should have been accepted that its profit margin should have been taken according to the income computed in the revise return for which the assessee has also paid the due taxes. In this manner, finding force in the contentions of ld. AR, we are of the opinion that ground no. 2 of the assessee is to be allowed and accordingly allowed. Ground no. 3 is the alternative argument and as the main argument of the assessee is accepted we need not required to go in the alternative claim made by the assessee."
Therefore, the TPO/DRP are not correct in not considering suo-moto adjustments made by Assessee. For arriving at the profit margins realized by the enterprise, suo-moto adjustment has to be taken into account in arriving at the difference to be added so as to make the 'net profit realised' to arrive at the arm's length price in relation to the international transaction as provided under 10B(e)(v). The AO is directed to consider suo-moto adjustment made by Assessee accordingly.
C) Whether operating cost adopted by TPO is correct or not While calculating the net profit margin from the international transaction on sub-assembly and components supplied to the TPC USA, the AO has considered the operating cost at Rs. 22.82 crores. This he has arrived at on the basis of the proportionate turnover ignoring the segmental reports prepared by Assessee. In fact, the sale of sub-assembly and components are only 5% of the turnover of Assessee and these sub-assembly and components are manufactured 12 ITA No. 1686/Hyd/2010 M/s Tecumseh Products India P. Ltd.
at 100% EOU established for this purposes at Balanagar. As per the provisions of the Act, this 100% EOU is maintaining separate books of account as Assessee is also eligible for deduction u/s 10A/10B. Assessee reported 18,84,61,988/- as the cost in this unit, but resulted in a loss as per the books of account. Consequent to the TP documentation undertaken by Assessee, arm's length price of the sale price was shown at Rs. 20,00,48,439/- as against Rs. 17,17,79,141/-, which were actual sales. Since actual sales in the books resulted in OP/TC at (-) 8.85%, Assessee made adjustment on the basis of TP documentation where OP/TC was at 6.15%. This has resulted in addition of the above amount of Rs. 2,82,69,298/- u/s 92 su-moto adjustment made by Assessee. The TPO in the show cause letter issued to Assessee on 28-10-2009 arrived at arm's length price at 110.16% of operating cost on 18,84,61,988/- and arrived at an adjustment proposed at Rs. 3,66,78,663/-. Without considering the objections of Assessee, TPO, surprisingly, determined the operating cost at Rs. 22.82 crores based on the proportionate cost on the ratio of sales in various segments. This action of the TPO was not justified at all when Assessee has maintained separate books of account, which was also accepted under the provisions of the Act and, therefore, there is no reason for rejecting the same and estimating the operating cost on the basis of the proportionate turnover. In fact, Assessee has incurred loss in these transactions, where as there was profit in other activity, which constitute 95% of Assessee's turnover. Taking sales as basis and arriving at the OP cost does not result in correct appreciation of Assessee's transactions. Therefore, since segmental working is available on the basis of separate books of account maintained for EOU unit, we are of the opinion that operating cost has to be taken at Rs. 18,84,61,988/- and the TPO/AO is directed to take operating cost with the above figure. Accordingly, this contention of Assessee is allowed.
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D) Whether (+)/(-) 5% threshold limit available under the Act can be invoked in this case.
i) Before adverting to the comparables and arriving at the ALP under the Transaction Net Margin Method, it is necessary to consider the arguments of assessee vis-a-vis the provisions of the Act with reference to (+)/(-) 5% of threshold limit available in the impugned assessment year. For this, one has to consider the provisions of section 92(1), which is as under:
"92. (1) Any income arising from an international transaction shall be computed having regard to the arm's length price.
Explanation.--For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price."
ii) International transaction referred to above were defined in section 92B(1) is as under:
"92B (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises."
Explanation provided retrospectively there in also clarifies the expression 'international transaction'. International Transaction means a transaction between two or more AEs. This does not take into consideration adjustments made to ALP at this stage at all.
iii) Section 92C, which is computation of arm's length price is as under:
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"92C. (1) The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :--
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;
(f) such other method as may be prescribed by the Board.
(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed :
[Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean.] (3) .....
(4) ......."
iv) The next step is to determine the ALP in one of the methods.
As can be seen from the provisions, international transaction refers to a transaction actually been undertaken between two or more AEs. Short of other details, it refers only to transactions actually undertaken by Assessee with AE. After determining the arm's length price in any one of the methods prescribed, what is required to be compared under proviso is the variation between arm's length price so determined and the price at which the international transaction has been undertaken. Therefore, if the variation between the arm's length price so determined and the transaction actually undertaken does not exceed (+)/(-) 5% as provided, this difference has to be considered in arriving at ALP. In this case, what Assessee contended is that if the suo-moto adjustment made by Assessee is also considered, then, the ultimate ALP determined will be within the threshold limit as provided above. We are afraid that this contention 15 ITA No. 1686/Hyd/2010 M/s Tecumseh Products India P. Ltd.
of Assessee is not correct for the reason that what the Act provides is that if the variation between ALP so determined and value at which the international transaction has been undertaken does not exceed such percentage then the price at which the International Transaction has actually been undertaken shall be deemed to be the arm's length price.
v) The subsequent amendment to proviso makes this issue very clear. The present Section 92C is as under:
"92C. (1) The arm's length price in relation to an international transaction [or specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :--
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;
(f) such other method as may be prescribed by the Board.
(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed :
[Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices:
Provided further that if the variation between the arm's length price so determined and price at which the international transaction [or specified domestic transaction] has actually been undertaken does not exceed [such percentage [not exceeding three per cent] of the latter, as may be notified by the Central Government in the Official Gazette in this behalf], the price at which the international transaction [or specified domestic transaction] has actually been undertaken shall be deemed to be the arm's length price.] [Explanation.--For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009.]"16 ITA No. 1686/Hyd/2010
M/s Tecumseh Products India P. Ltd.
The intention of the legislature is clear. The present proviso makes it absolute that comparison is with actual transaction only and no adjustment need be required if the variation as compared to the actual transaction undertaken by Assessee is with in the thresh hold provided. In this case, the actual transaction undertaken by Assessee as reported is the sale at Rs. 17,17,79,149/-. if the ALP determined by the AO/TPO is (+)/(-) 5% of this transaction on actual sales reported, then no adjustment is required. While making any adjustment, first step is to verify whether this (+)/(-) 5% threshold has exceeded when compared to actual transaction undertaken by Assessee, if yes, adjustment is required under the provisions of the Act. The next step is the quantification of adjustment which is to be made under Rule 10B(e). While doing so, suo-moto adjustment made by Assessee cannot be ignored and if any adjustment is required over and above suo-moto adjustment made by Assessee, difference only can be considered and, therefore, in our view there are two sorts of checks provided in the Act., i.e., i) no adjustment is required if the variation between ALP determined and the actual transaction is within threshold limit and, if not, ii) the adjustment is required provided suo- moto adjustment made by Asessee is also considered while arriving at the further adjustment, if any, required. Therefore, while examining the threshold limit of (+)/(-) 5%, we are of the opinion that the actual transaction undertaken by Assessee should be the base and not revised transaction reported by making suo-moto adjustment.
vi) There is one more aspect to the contention made. As briefly stated, Assessee incurred loss in International transaction and suo-
moto adjustment of Rs. 2,82,69,298 on the basis of transfer pricing documentation. This indicates that the Assessee exercised option provided u/s 92C particularly of proviso of (+) or (-) 5% threshold and did not treat the actual sale transaction as ALP. Having exercised the option and treating the different (enhanced) amount as ALP, in our view, Assessee cannot contend that the threshold of (-) or (+) 5% 17 ITA No. 1686/Hyd/2010 M/s Tecumseh Products India P. Ltd.
is available again, if TPO action results in further addition. On this reason also the claim fails. This contention of Assessee is considered as rejected.
E) Whether the comparables selected by the TPO is correct ?
As mentioned above in the submissions, there are two sets of objections on the comparables selected by TPO; one being data pertaining to companies which have different accounting period than that of Assessee and the second one being the functional comparability of selected companies, being in business of compressor manufacturing whereas adjustments were done in the segmented results of supply of components (to the compressors). As selection of comparables by TPO suffers from these basic deficiencies, we are of the opinion that this issue requires re-examination by TPO by selecting proper comparables and then determine the ALP. In the interest of justice, we restore this issue of arriving at ALP to the file of TPO/AO for fresh consideration by taking objections from Assessee and also on the basis of TP proceedings in the later year, which were also referred before us. Therefore, for determination of ALP, the issue is set aside to the file of the TPO/AO to do the same afresh as per the provisions of the Act.
F) Disallowance of Assessee's claim for depreciation.
i) As briefly stated above, Assessee has imported certain machinery (old as well as new machinery) from TPC USA. The purchase price of these machineries was based on fair market value and supported by an independent valuer's report M/s SGS Global Trade Solutions Inc., who certified second hand machinery procured by Assessee. As Assessee submitted before the authorities, the comparative analysis of the machinery prepared indicates that purchase price paid to M/s TPC USA is lower than the value 18 ITA No. 1686/Hyd/2010 M/s Tecumseh Products India P. Ltd.
determined by M/s SGS Global Trade Solutions. Assessee paid customs duty and also countervailing duty and the valuation was accepted by the authorities at the time of import. Though TPO as well as DRP were of the opinion that the machinery does not have any value, we do not understand on what basis they have come to this opinion. There is no dispute with the fact that the machinery was imported and used in Assessee's business for manufacturing of its compressors / parts, so, there is no dispute with reference to usage of second hand machinery. It is also not the case of the revenue that machinery imported was kept idle and Assessee unnecessarily paid the amount to the AE. This being so, the value paid by Assessee duly supported by valuation report cannot be ignored. In case of any doubt on the matter, the best way is to refer the machinery to the valuation officer under the IT Act. Without doing so, the TPO or the DRP has no base to determine the value at Nil and consequently denying the depreciation claim of the assessee while at the same time, the payment of custom duty and countervailing duty are considered as value of cost. Not only that, as submitted by Assessee and as seen from the Table furnished, new machinery worth US$ 500,965 was also treated as old machinery and valuation was determined at Nil. This shows non-application of mind by TPO as well as by DRP.
ii) When Assessee raised specific objections on all issues running to 67 pages, the DRP simply rejected them without even commenting about factual issues also. The purpose for which DRP is constituted gets defeated if DRP does not apply its mind and endorse the orders of the TPO without even examining the factual aspects of the submissions and judicial principles relied upon. In these circumstances, we cannot approve the action of the TPO/DRP as there is no other report by any valuation officer that can be taken as external CUP and the value as paid by Assessee can be accepted as such. further the price paid being lesser than valuation officer's value available, the same can be accepted as ALP.
19 ITA No. 1686/Hyd/2010M/s Tecumseh Products India P. Ltd.
iii) The learned counsel in the course of arguments relied on the decision of the coordinate bench of ITAT, Mumbai in the case of Ballast Nedam Dredging in ITA Nos. 6531/Mum/06 & 1591/Mum/08, order dated 31-01-2013 to submit that in the absence of any contrary certificate, the certificate relied upon by Assessee has to be accepted. In the said case, Assessee has filed two certificates and TPO tweaked with two certificates so as to arrive at the so called difference in the ALP. On those facts, it was held that "if proper analysis was made there would not be any difference from the price paid to the price determined, as demonstrated before the TPO both on the basis of the third party quotations which are considered as internal CUP and the VG Bouw Certificates as external CUP. Under both the workings Assessee is able to justify the price paid and on this reason also, we have to accept Assessee's contentions." Similarly, in the case under consideration, Assessee justified the price paid by way of a certificate which can be considered as external CUP. Since TPO/DRP did not rely on any other certificate and in the absence of any contrary information, price paid by Assessee, which was lesser than the value mentioned in the certificate can be accepted as such. For these reasons, we allow Assessee's ground and direct the AO/TPO to accept Assessee's valuation and allow depreciation as claimed. Grounds pertaining to this issue are allowed.
11. In the result, appeal of Assessee is considered as partly allowed for statistical purposes.
Pronounced in the open court on the 13 th day of Nov.'13
Sd/- Sd/-
(SAKTIJIT DEY) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 13 th November, 2013.
20
ITA No. 1686/Hyd/2010
M/s Tecumseh Products India P. Ltd.
kv
Copy to:-
1) M/s Tecumseh Products India P. Ltd. Balanagar Township, Hyderabad.
2) ACIT, Circle - 2(3), Room No. 824, 'B' Block, 8 th Floor, IT Towers, AC Guards, Hyderabad.
3) DRP,, Hyderabad.
4) Addl.CIT(TPO), Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.