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Dy. Cit, Circle-9, Pune v/s Mercedes Benz I Pvt. Ltd

    ITA No. 1083, 1110/PUN of 2013, CO No.60/PUN of 2014

    Decided On, 25 October 2018

    At, Income Tax Appellate Tribunal Pune

    By, THE HONOURABLE MS. SUSHMA CHOWLA
    By, JUDICIAL MEMBER & THE HONOURABLE MR. D. KARUNAKARA RAO
    By, ACCOUNTANT MEMBER

    For the Appellant: Pramod Achuthan, Rajendra Agiwal, Advocates. For the Respondent: Rajeev Kumar, CIT, Ashok Babu, Advocate.



Judgment Text

Sushma Chowla, JM:

1. The cross appeals filed by the assessee and Revenue are against order of CIT(A)-IT/TP, Pune, dated 12.03.2013 relating to assessment year 2005-06 against order passed under section 143(3) of the Income-Tax Act, 1961 (in short 'the Act'). The assessee also filed Cross Objections against the appeal of Revenue.

2. The cross appeals filed by the assessee and Revenue and Cross Objections filed by the assessee were heard together and are being disposed of by this consolidated order for the sake of convenience.

3. The assessee in has raised the following grounds of appeal:-

1. The learned CIT(A) erred in proposing an adjustment of Rs 2,56,10,076 to the value of international transactions of MB India and not considering the analysis provided in the transfer pricing study report for benchmarking of the Appellant's international transactions.

The Appellant prays that the approach followed in the transfer pricing study report be accepted and accordingly, the arm's length price of the international transactions be accepted.

2. The learned CIT(A) erred in rejecting the combined transaction approach followed by the Appellant at the company level for benchmarking various international transactions of the Appellant for AY 2005-06.

The Appellant prays that the combined transaction approach followed by the Appellant at the company level for benchmarking various international transactions for AY 2005-06 should be accepted.

3. The learned CIT(A) erred in rejecting certain companies identified by the Appellant as comparable in its transfer pricing study report for benchmarking its international transactions.

The Appellant prays that all the companies identified by the Appellant in the transfer pricing study report of AY 2005-06 be accepted as comparable companies.

4. The learned CIT(A) erred by comparing the gross margin from international transaction pertaining to import of CBUs with the international transaction pertaining to import of spares (i.e. both being controlled transactions of the Appellant itself).

The Appellant prays that the approach of using controlled transaction as comparable should not be considered and consequently the approach followed by the Appellant in its transfer pricing study report should be accepted.

5. The learned CIT(A) erred in accepting RPM as the most appropriate method for benchmarking the international transaction of import of CBUs by comparing the gross margin from trading of CBUs with gross margin earned from functionally non-comparable activity of trading of spares.

The Appellant prays that the approach of using RPM as the most appropriate method be rejected and consequently the approach followed by the Appellant in its transfer pricing study report be accepted.

6. The learned CIT(A) has erred in making an adjustment to the purchase price of CBUs by applying gross margin of spares segment without considering an adjustment on account of differences in functions, risks and assets of the spares segment vis-a-vis CBU segment for AY 2005-

06. Without prejudice to any of the above grounds raised before the Honourable Tribunal, the Appellant prays that the arm's length price be determined after considering adjustment for the differences in the functions, risks and assets of spares segment vis-a-vis CBU segment.

7. The learned CIT(A) has erred in making adjustment to the purchase price of CBUs by comparing the said transaction with another controlled transaction without evaluating applicability of any other method for benchmarking and without determining availability of any uncontrolled transactions / comparable companies for comparison.

The Appellant prays that the applicability of any other method and availability of uncontrolled transactions / comparable companies be evaluated before doing any comparability with a controlled transaction for AY 2005-06.

8. The learned CIT(A) erred in making the transfer pricing adjustment without giving benefit of the +/- 5 per cent range as available under the proviso to section 92C(2) of the Income-tax Act, 1961 while carrying out transfer pricing adjustments in AY 2005-06.

The Appellant prays that benefit of the +/- 5 per cent range as available under the proviso to section 92C(2) of the Income-tax Act, 1961 be allowed to the Appellant while carrying out transfer pricing adjustments in AY 2005-06.

9. In computing the book profits under section 115JB of the Act, the learned CIT(A) erred in considering the provision for compensation payable to module suppliers of Rs 2.53,03,903 as not an ascertained liability and thereby upholding the addition made by the learned Assessing Officer for computation of the book profit under section 115JB of the Act.

The Appellant prays that the above addition made in computation of the book profit of the Appellant be deleted for AY 2005-06.

10. The learned CIT(A) erred in upholding levy of interest under section 234B of the Act.

The Appellant prays that the levy of interest under section 234B of the Act be deleted for AY 2005-06.

4. The assessee has also raised additional ground of appeal which reads as under:-

"The learned CIT(A) has erred on the facts and in law in computing the transfer pricing adjustment on the entire cost of sales of CBU Unit of the Appellant instead of limiting it to the international transactions with Associated Enterprises in respect of purchase cost of CBU’s"

5. The Revenue in has raised the following grounds of appeal:-

1. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in giving directions to the A.O. to verify and decide the admissibility of the claim of expenditure of capitalized cars as given in ground No.6 of A.Y. 2002-03, when the facts for the given assessment year are different from that in A.Y. 2002-03. On the issue of use of Controlled Transaction

2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was correct in law,

i) when he implicitly rejected the direct method of Comparable Uncontrolled Price under Rule 10B(1)(a) for the evaluation of the International Transaction of the payment of Royalty & Seems to have preferred Aggregated Transaction Net Margin Method under Rule 10B(1)(e), a indirect method while evaluating the Arms Length Price, which was rejected by him for A.Y. 2005- 06 (and in A.Y. 2008-09 as part of the Dispute Resolution Panel);

ii) by rejecting the CUP, a direct method for working out the Arm's Length of the international transaction and uncontrolled transaction; which provides for instant comparison of the prices of the products/services;

iii) when the OECD guidelines in para 1.70 clearly suggests that 'an attempt should be made to reach a reasonable accommodation keeping in mind the imprecision of the various methods and the preference for higher degrees of comparability and a more direct and closer relationship to the transaction.

On the issue of Consistency.

3. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was correct in law,

i) when the assessee company itself has provided separate benchmarking and detailed information regarding the Royalty payment in the later years;

ii) when each year should be treated separately based

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on the facts and documentation submitted ; (as per the ratio laid down in the case of M/s. Onward Technologies vs. DCIT dated 30.04.2013, appeal No.ITA No.7985/Mum/2010 of ITAT Mumbai)

4. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in treating the royalty payment of Rs.3,30,72,239/- as revenue expenditure when the assessee has acquired enduring benefit as it was conferred manufacturing rights as well as copyrights for technical product documentation etc and further when the Hon'ble DRP while deciding the case for A.Y. 2007-08 has also upheld this treatment given to royalty payment i.e. has held that royalty payment is of Capital nature.

5. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in directing the A.O. to allow Project Assistance Technical charges as deductible expenditure u/s. 37(1) of the Act, when the assessee has not been able to prove the basis of such payment, the nature of service rendered by the expatriates and also when the payment were not made in accordance with the project assistance agreement dated 11/12/1994.

6. The assessee in CO No.60/PUN/2014 has raised the following grounds of objections:-

On the facts and in circumstances of the case, the learned Commissioner of Income -Tax IT/TP ('the learned CIT(A)'):

1. has erred in not considering the facts submitted by the Respondent while adjudicating the Ground No 1 of the appeal filed and further, erred in adjudicating the said Ground on the basis of direction issued in Ground No 6 of AY 2002-03 on the basis of assumption that both these grounds are identical in facts.

The learned CIT(A) thereby erred in not deleting the addition of Rs 6,02,000 towards capitalization of manufactured cars made by the learned Assessing Officer.

2. Without prejudice to our contention that royalty expenditure is revenue expenditure, in case the Tax Department's ground that it is a capital expenditure succeeds, then depreciation under section 32 of the Act should be allowed on capitalized royalty.

3. Without prejudice to our contention that Project Assistance Technical Fees is revenue expenditure, in case the Tax Department's ground that it is a capital expenditure succeeds, then depreciation under section 32 of the Act should be allowed on capitalized Project Assistance Technical Fees.

7. First, we take up the appeal of assessee. The issue raised in the appeal filed by assessee is against transfer pricing adjustment made on account of international transactions entered into by the assessee.

8. Briefly, in the facts of the case, the assessee company was engaged in the manufacture of automobiles. For the year under consideration, the assessee had filed return of income declaring Nil taxable income under the regular provisions of the Act and had declared taxable income of Rs. 55,97,26,890/- under the provisions of section 115JB of the Act. The case of ssessee was selected for scrutiny. The assessee had entered into various international transactions. The Assessing Officer made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO). The assessee was manufacturer of luxury passenger cars and for selling them in Indian market, the assessee also undertook import of M.B. Cars as Completely Built Units (CBUs) for resale in the Indian market. The TPO noted that the assessee had earned net profit margins of 8.74% against total revenue of Rs. 465.78 crores. During the year, the assessee had undertaken several international transactions with its associated enterprises totaling Rs. 1,99,19,20,739/-. The assessee had applied TNNM method using net profit margins as Profit Level Indicator (PLI) in order to benchmark arm's length price of its international transactions. The assessee had selected 12 companies as comparablewith their weighted average net profit margins ranging from (-) 2.97% to 13.31% with its arithmetical mean of 5.96%. Since the net profit margins of assessee were 8.74%, the assessee claimed that its transactions were at arm's length. The first point which was noted by TPO was that benchmarking of transactions at entity level using TNNM method was not acceptable. He was of the view that the assessee should have benchmarked its transactions undertaken under various categories separately. The transaction-wise analysis should have been adopted by assessee, as per the TPO. Since the assessee had not benchmarked its transactions separately, the TPO noted that there were issues relating to payment of royalty on cars, import and sale of CBUs. Accordingly, the assessee was show caused in this regard. He was of the view that since the assessee had entered into international transactions with its associated enterprises under variety of heads, which had been benchmarked under the umbrella of TNNM at the entity level but as per him, the said transactions why should not be benchmarked separately. The assessee claimed that transactions were closely inter-related and inter-linked to the main activity of manufacturing and selling of passenger cars and hence, they need not be benchmarked separately. With regard to import of raw materials, spare parts, payment of royalty, etc., the TPO also enquired as to whether there was any common price list or common percentage of royalty payment at the level of parent company. In reply, the assessee explained that similar question was also raised in preceding year. The next aspect noted by TPO was the selection of comparables by the assessee for benchmarking net profit margins at entity level and he was of the view that Hindustan Motors having persistent losses except in the year under consideration was not a good sample and Chinese companies receiving various kinds of direct and indirect subsidies from the Government were also not to be taken as comparable. Then, the TPO stressed that there were varied differences in international transactions undertaken having distinct nature and scope and the same should have been separately benchmarked. He thus, issued show cause notice proposing adjustments under two heads i.e. first head was import and sales of CBUs and the second head was payment of royalty. Under the first head, the assessee was show caused that it had undertaken activities of manufacturing as well as trading and bifurcation of said activities were given by the assessee under which, gross operating margins from the manufacturing was 21.74% and that from trading activities was 21.55%. Further, bifurcation was also called for under the head 'Trading activities' i.e. trading of CBUs and trading of spares. The TPO noted that gross margins of purchase and sale of CBUs was 11.33% and in case the figures of sales, cost of purchases and gross margins in respect of trading of CBUs were excluded from the figure of total trading activities, then the resultant would reflect trading activity of spares and gross margins of trading of spares came to 25.42%. The TPO further considered adjusted indirect expenses for the trading segment allocated on the basis of sales at Rs. 8.58 crores (approx.) and he proposed to allocate indirect expenses on the basis of sales and allocable expenses in respect of trading activities of CBUs came to Rs. 2.36 crores and net margin was (-) Rs. 30,14,937/- i.e. assessee had incurred loss of (-) 1.66% in purchase and sale of CBUs. He also considered the trading of spares where margins were 25.42% and the TPO asked the assessee to show cause as to why an adjustment corresponding to difference in gross margins earned from trading activities in spares and the gross margins earned on purchase and sale of CBUs be not made in the hands of assessee. The next head was 'payment of royalty'. The TPO noted that royalty had been paid @ 5% of value addition done. He noted that in the past, arm's length rate for the royalty payment on cars was taken at 3% by taking comparables of royalty payment by Maruti Udyog Ltd. Since the facts of present case were similar, the TPO show caused the assessee to explain as to why corresponding adjustment in royalty be not made in the hands of assessee taking arm's length rate of royalty payment at 3%.

9. In reply, the assessee filed written submissions. The assessee pointed out that information with regard to group pricing policy, common price list for import of raw materials, spare parts, payment of royalty were submitted during assessment year 2002-03 and the same submissions were filed before the It was further pointed out that spare parts were imported with a view to provide after sales service and any consideration with General Distributor Agreement between the assessee and its parent company, which provided the original spare parts to assessee. It was also pointed out that different percentages of discounts on the declared price were provided to D.C. India, to dealers in India based on the category of items or spare parts. In respect of rejection of comparables, assessee placed reliance on its process of search for selecting comparables. In respect of Chinese companies, it was submitted that it would only go to increase the net profit margin of the said companies and thereby increase arm's length price computation for assessee. It was also pointed out that some of the companies did not receive subsidies. In support of use of TNNM method for benchmarking, the assessee relied on OECD guidelines and had stressed that it was reasonable to compare overall profitability of assessee to evaluate arm's length results of all the international transactions with associated enterprises, since it was not practicable to evaluate the profitability of each of the transactions separately. The assessee also pointed out that in respect of import and sale of CBUs during the year, the said transaction had to be characterized with that of manufacturing activity and in the business of manufacturing and sale of cars, trading activities such as sale of spares and of CBUs were integral part. It was stressed by the assessee that gross margins earned from sale of CBUs approximates to 11.33% and for the purpose of evaluating the net profit margins, indirect expenses should be allocated on actual basis and allocation on sale basis would not be relevant for analysis. The assessee again pointed out that its activities were so inter-linked that it was not possible to allocate indirect expenditure on one to one basis.

10. The next plea of assessee was that there was no merit in holding that trading activities of spares and trading of CBUs were two different activities and the two should be segregated and then proposed two to compare the gross profit margins of trading in spares to gross profit margins of CBUs, would mean rejecting the basic principle of functional analysis. The assessee also pointed out that in the activity of import and sale of CBUs, it was expected to earn lesser amount of gross profit as compared to the other activities, in which substantial asset cost and risk of assessee were involved. The assessee on without prejudice basis pointed out that separate Transfer Pricing Review Report submitted regarding the trading segment as a whole may be considered. The assessee also referred to objections raised against payment of royalty and rate to be charged and pointed out that payment of royalty was approved by RBI and Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Govt. of India and hence, the rate as agreed upon should be adopted.

11. The TPO analyzed the submissions of assessee and was of the view that from the perusal of international transactions undertaken by assessee, it is seen that these were variety of transactions and were different in their nature and scope. In case of any manufacturing company, most of the transactions would be present but in case the assessee's contention of benchmarking all of them together at the entity level was accepted, it would clearly lead to mean that there would be no necessity to do analysis of international transactions separately. The TPO in this regard pointed out that both the Indian Transfer Pricing Regulations as well as OECD guidelines provided for benchmarking and separate analysis for each transaction. However, where such transactions were closely inter-linked, then such class of transactions or group of transactions could be taken together for benchmarking but the same would not lead to the conclusion that all the transactions of the company which were wide and varied, different in their nature and scope could be grouped together for benchmarking. Another point raised by TPO was that the assessee searched for comparables but it was not clear whether all kinds of transactions which the assessee had undertaken were also present in the comparables taken. Various other factors were also considered by the TPO and he held that entity level benchmarking done by assessee taking all its transactions within umbrella of TNNM was not accepted. He then, went on to benchmark each of the transactions separately and the first transaction was sale of CBUs. The TPO noted the contention of assessee that import and sale of CBUs were aggregated with manufacturing activities because of the requirement of CBUs models being small, it was not economically feasible for the company to manufacture the said models in India and international transactions entered into were germane to manufacturing of cars activity and since the activity of import and sale of CBUs was negligible, the transaction was closely linked and dependent on the manufacturing of car activities. The assessee company also explained that there was no value addition made after importing the car and before selling it to the end customers. The TPO thus, held that it was purely an activity of resale and could not be considered to be closely linked or dependent on the manufacturing activity undertaken by the assessee. Since the assessee had done nothing but resold the imported cars in the domestic market without any value addition, the TPO held that the transactions needed to be benchmarked separately. The next aspect was further cost allocation and apportionment of indirect cost, which the TPO had proposed on the basis of sales.

12. The next aspect was the import of spares which were provided to end customers through dealers as per requirement and the said activity was held to be same as in the case of CBUs. The TPO noted that out of total sales of Rs. 66.05 crores under the head 'Trading', the trading of CBUs constituted Rs. 18.17 crores and the rest of sales amounting to Rs. 47.88 crores was towards trading of spare parts. The TPO thus, held that so far as the nature of transactions or quantum of transactions was concerned, the characteristics were similar and they were dealt with by assessee in similar manner. He thus, observed that contention of assessee in this regard do not affect the gross profitability on account of trading activities done by assessee. Therefore, characteristics of business of import and sale of spare parts and import and sale of CBUs were found to be similar. The TPO also held that in respect of analysis by functions performed, asset employed and risk undertaken, the two were also same and in any case they would not affect assessee's gross margin.

13. Then, he took up the set of comparables totaling 19 and noted that the companies selected were in group trading activity where the source of such vehicles was from India only, whereas in the case of assessee, cars were imported from outside India and sold to dealers in India. The TPO noted that one of the comparables Hindustan Motors Exports Ltd. dealt with export of vehicles outside India and was 100% subsidiary of Hindustan Motors Ltd. and the said concern was held to be comparable. The TPO rejected the other comparables on the ground that PLI of comparables taken by assessee was not at all comparable with that of assessee and the same were rejected. The TPO held that assessee's business of import and sale of CBUs was comparable to assessee's business of sale of spares as the source of products and intermediary i.e. dealers of assessee, remained common; the functions performed, risk assumed were also identical. The difference on account of assets employed, as per TPO would not have any bearing on the gross profit earned by assessee. Since the assessee had earned less gross profit margin on import and sale of CBUs which led to the conclusion that this international transaction was not in accordance with transfer pricing regulations and warranted adjustment. In the trading of spares, the assessee had generated gross margin of 25.42% and total sales of CBUs were Rs. 18,17,48,020/-. The TPO thus, proposed an upward adjustment of Rs. 2,56,10,076/- to arm's length price of international transaction towards import of CBUs.

14. The next aspect was payment of royalty and relying on the rate of royalty paid by Maruti Udyog Ltd., it was taken @ 3% and arm's length price value of royalty was determined at Rs. 3.30 crores as against actual royalty payment of Rs. 5.51 crores, hence the excess royalty paid by assessee at Rs. 2.20 crores was added to the income of assessee. The TPO thus, proposed an upward adjustment of Rs. 4.76 crores.

15. The Assessing Officer made the aforesaid TP adjustment in the hands of assessee and made the said adjustment on account of arm's length price of international transactions of assessee.

16. The CIT(A) dealt with this issue in para 5.3.1 onwards at page 66 of appellate order. Before the CIT(A), the assessee pointed out that TPO had incorrectly applied Resale Price Method (RPM) to make adjustment. It was further stated that the TPO had wrongly compared gross margins earned from sale of spares with sale of CBUs where both transactions of imports were controlled transactions as the spares and CBUs were imported from associated enterprises and hence, the transaction could not be compared. It was further stressed by the assessee that spares and CBUs (cars) could not be considered same and similar products; wherein car was fully finished product, which was ready to be used by customers and the spares were small parts of cars, which carries fractions of value, even the market of spares and CBUs were different. It was further explained that import of CBUs was restricted only to those models, which were not manufactured in India, whereas all the spares dealt with by assessee were for manufactured as well as imported cars. Therefore, the functions performed could not be same or similar for the said products merely because the products were resold to third parties in India. It was stressed that both the products were different and were not comparable and this was the fundamental fact. The assessee also pointed out that functions performed, assets employed and risk assumed in the activities of resale of spares and import of CBUs were different. Further, reliance was placed on Rule 10B(1)(b)(ii) of the Income Tax Rules, 1961 (in short 'the Rules') to state that application of RPM method requires that only same or similar products were to be compared since the products were not similar, RPM method could not be applied. On without prejudice basis, it was pointed out that even if both the business activities were to be compared, then adjustment on account of difference in FAR should be made. The CIT(A) observed that the said issue was raised before Dispute Resolution Panel (DRP) in assessment years 2007- 08 and 2008-09 and since no new facts have emerged during the year and as the CIT(A) was signatory of DRP order for assessment year 2008-09, following the said orders, the CIT(A) confirmed adjustment made by TPO on this ground.

17. The assessee is in appeal against order of CIT(A).

18. The learned Authorized Representative for the assessee referred to the facts sheet and pointed out that the assessee was engaged in manufacture and sale of Mercedes Benz passenger cars in the Indian market. The manufacturing unit in India in 2018 was manufacturing E, C, S, GL class and CLA class of passenger cars in India. It was pointed out that generally in automobile sector, a company starts with importing cars in the form of CBUs for three reasons i.e. (a) for assessing and penetrating into the market and then subsequently, depending upon the market situation start importing cars in the form of Semi Knocked Down (SKD) condition, Complete Knock Down (CKD) condition and then eventually operating at part level, (b) for bringing in new products available with AE as CBU, which would take time to supply the same in SKD / CKD / Parts level and also sometimes to bridge a sudden gap of demand and manufacturing capacity and (c) for bringing in niche models which would be sold in few numbers and may not be currently viable to manufacture in India but important to offer entire range to the customers. It was pointed out that the issues arising in present appeal are against aggregation of transactions, working of PLI and application of most appropriate method, which the assessee had picked up to be TNNM method. The assessee also explained that looking at the turnover-wise ratio then sale of manufactured cars was 88%, sale of CBU cars at 5% and sale of spares at 7%. The TPO had not accepted aggregation approach adopted by assessee, against which the assessee has filed ground of appeal No.2. Further, reference was made to ground of appeal No.4, wherein the assessee has agitated comparison of controlled transactions with another controlled transaction. The grounds of appeal No.5, 6 and 7 are on without prejudice basis, wherein the assessee is agitated by the order of TPO in applying RPM method and also in comparing results of two functionally different segments i.e. import of CBUs and spares. The ground of appeal No.8 is against allowing +/- 5% range. He further pointed out that ground of appeal No.9 being general, the same is not pressed and ground of appeal No.10 was consequential against charging of interest under section 234B of the Act. He also referred to additional ground of appeal No.11 i.e. TP adjustment on entire cost of CBUs sale and additional ground of appeal No.12 would become academic if ground of appeal No.4 is allowed. The learned Authorized Representative for the assessee pointed out that the assessee initially starts its operation of sale of any model or car with CBUs and in case there is demand in the market, then it starts manufacturing. It points out that in assessment year 2005-06, it was importing CBUs of model S, SLK, ML (now known as GLE), CLS, GL (now known as GLS). However, if you compare the scenario in 2018, then the import of CBUs was of A200D, B200D, GTRoadSTer, AMG models, C300 CAB, etc. models. As far as SKD are concerns, there was nothing being imported in 2005 and even in 2018, as far as CKD models are concerned in assessment year 2005-06, model S 350L class was imported and in 2018, S Maybach class was being imported. Then going to Part level, C and E were manufactured in assessment year 2005-06, whereas in 2018 models C, E, S, GL class and CLA class were being manufactured. The assessee explained that import of CBUs was carried out with a view to cater and maintain the markets for Mercedes Benz models, which were not manufactured by assessee in India, which ensured that customers continued to use the said cars and could be targeted for local manufacturing cars in future. Further, the assessee was also importing customized cars for hotel sales, diplomatic sales, sales with duty concession and various models for testing the Indian market. It was stressed that the import and sale of CBUs was important for assessing the market condition for a particular range of cars which could be targeted for manufacturing by assessee in future or to bring in niche models which would be sold in few numbers and would never be economically viable to manufacture in India. Further, CBU imports were being used to bring in new products available with associated enterprises, since the same would take time to supply the same in SKD / CKD / Parts level. It was further pointed out by learned Authorized Representative for the assessee that in addition to selling the passenger cars, warranty commitments were also given, under which spares need to be made available. The sale of car was covered by manufacturers warranty provided for two years, extendable for another one year with cost and the charges towards such warranty were embedded in sale price. The assessee when it sells its cars to various customers, there was attached warranty conditions in respect of cars manufactured in India as well as imported CBUs. Then, it was incumbent upon the assessee to provide for replacement of spare parts. The learned Authorized Representative for the assessee then, pointed out that when customer buys car from Mercedes Benz, then he would buy the spares from assessee to ensure the genuineness of parts and in case the assessee does not ensure supply of adequate spare parts, after sales service would suffer, resulting in loss of reputation. It was stressed by him that sale of manufactured/traded cars were lower in generation of revenue from sale of spare parts and both the activities i.e. import and sale of spare parts could not be independently carried out and was fully linked to the sale of manufactured cars and also sale of CBUs. The learned Authorized Representative for the assessee referred to Rule 10A(a) of the Rules, which explained the meaning of transaction to include number of closely linked transactions. He thus, stressed that the Legislative intent was to include transactions of similar nature which were closely linked to each other, as a single transaction. He further referred to provisions of section 92B of the Act, which deals with meaning of expression 'international transaction'. He then placed reliance on the following decisions:-

a) Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT & Ors. in ITA No.16/2014 & Ors., judgment dated 16.03.2015 (Hon’ble Delhi High Court);

b) Bobst India Pvt. Ltd. Vs. DCIT in ITA No.1295/PN/2011, relating to assessment year 2007-08, order dated 28.02.2013;

c) Toyota Kirloskar Motors Pvt. Ltd. Vs. ACIT in ITA No.828/Bang/2010, relating to assessment year 2003-04, order dated 22.11.2012;

d) Cummins India Ltd. Vs. DCIT (2017) 80 taxmann.com 62 (Pune Trib.) 19. The learned Authorized Representative for the assessee thus, stressed that combined transactions approach applied by assessee at company level for benchmarking various international transactions should be accepted. Taking up next issue raised vide ground of appeal No.3, the learned Authorized Representative for the assessee then pointed out that TPO had without any basis rejected certain companies identified by assessee, as not being functionally comparable. With regard to ground of appeal No.4, the learned Authorized Representative for the assessee drew our attention to section 92F(ii) of the Act and pointed out that the said principle is to be applied in uncontrolled transactions. He stressed that gross margin of controlled transaction with another controlled transaction could not be compared. The argument of assessee was that import of spares from associated enterprises and import of CBUs from associated enterprises, being controlled transactions could not be compared with each other. In this regard, he placed reliance on the decision of Tribunal in assessee's case in ITA Nos.1080/PN/2013, 1107/PN/2013 and CO No.57/PN/2014, relating to assessment year 2002-03, order dated 06.06.2016 and also in the case of Addl.CIT Vs. Technimont ICG India Pvt. Ltd. in ITA No.5085/Mum/2010, cross appeal in ITA No.4608/Mum/2010 and CO No.78/Mum/2011, relating to assessment year 2005-06, order dated 17.07.2012 and in the case of M/s. Bobst India Pvt. Ltd. Vs. DCIT in ITA No.1380/PN/2010, relating to assessment year 2006-07, order dated 09.10.2014.

20. Coming to next ground of appeal No.5, the contention of assessee was under section 92C(2) of the Act, RPM method is to be applied to same or similar products. However, the TPO had applied RPM method to compare results shown for sale of CBUs i.e. cars with sale of spares. Since both transactions were absolutely dissimilar, then the same could not be compared together and it was pointed out that margins of spares were always high. The learned Authorized Representative for the assessee further pointed out to the differences effecting margins of assessee vis--vis margins of comparables in applying FAR analysis and pointed out that similar adjustments were allowed in assessee's own case by DRP for assessment years 2007-08 and 2008-09. The assessee also filed computation to adjust for differences in definitions of spares and CBUs segment as required under Rule 10B(1)(b)(iv) of the Rules. He also fairly pointed out that ground of appeal No.7 would become academic in case grounds of appeal No.2 and 4 are allowed in favour of assessee. The ground of appeal No.8 was against benefit of +- 5% range. Then, he referred to ground of appeal No.11, under which adjustment was sought on account of transaction, which has been allowed by DRP in assessment year 2011-12. He also pointed out that the said ground would become academic in case grounds of appeal No.2 and 4 are allowed. The ground of appeal No.12 was argued to be academic in nature.

21. The learned Departmental Representative for the Revenue on the other hand, pointed out that the assessee was engaged in manufacturing and trading activities of passenger cars under the brand name Mercedes Benz. He further pointed out that assessee was importing CBUs and spares, wherein the total revenue was to the tune of Rs. 465 crores with operating margins of 8.74%. While rejecting aggregation approach, he pointed out that TPO had issued show cause notice which is reproduced under para 4 of TPO's order and also referred to Rule 10B(2) of the Rules and considered FAR analysis of import of CBUs and spare parts, for sale of CBUs, where there was no value addition. Coming to ground of appeal No.4, he relied on the orders of TPO and CIT(A) and pointed out that the assessee has not gone into the business modules of comparables.

22. The learned Authorized Representative for the assessee in rejoinder stressed that in view of closely linked transactions, aggregation approach needs to be applied.

23. We have heard the rival contentions and perused the record. The assessee had entered into various international transactions with its associated enterprises i.e. import of raw materials, purchase of spare parts, import of CBUs, import of capital goods, payment of royalty, payment of technical services availed, reimbursement / recovery of expenses, recovery of warranty claims, etc. The assessee was primarily engaged in manufacturing activity of passenger cars and in addition to import of raw materials and capital goods. The case of assessee is that manufacturing and sales activities also requires service to its customers, for which it imports spares for after sales service and also provide to the customers the models of cars which were not manufactured in India, in order to build its customer base. While applying transfer pricing provisions, the assessee had adopted combined transactions approach and had identified TNNM method as most appropriate method in order to benchmark its international transactions. The margins of assessee's transactions worked out to 8.75% and the said margins were compared with set of comparables whose mean margins worked out to 5.96%. The assessee thus, claimed that its international transactions with its associated enterprises were at arm's length. However, the TPO in transfer pricing proceedings did not accept the approach adopted by assessee in following combined transactions approach using TNNM method as most appropriate method. The TPO benchmarked the international transactions pertaining to import of CBUs by using Resale Pricing Method (RPM) and compared the gross margins earned from the transactions of import of spares with import of CBUs. The margins earned from import of spares of 25.42% were higher than gross margins earned from trading of CBUs i.e. 11.33% and the TPO thus made an upward adjustment of Rs. 2,56,10,076/-. The TPO also separately benchmarked the international transactions pertaining to payment of royalty and applied CUP method as most appropriate method. The rate of royalty paid by assessee was compared with the royalty payment made by Maruti Udyog Ltd. to Suzuki Motors Corporation, Japan and considered 3% royalty rate of Maruti Udyog Ltd. as arm's length price for assessee's royalty payment transactions. This resulted in an upward adjustment of Rs. 2,20,48,698/-. The Assessing Officer passed order under section 143(3) of the Act, against which the assessee filed appeal before the CIT(A). The CIT(A) deleted adjustment made in relation tointernational transactions pertaining to payment of royalty. The CIT(A) observed that transfer pricing adjustment determined by benchmarking controlled transaction with another controlled transaction could not be considered to be at arm's length price. The CIT(A) thus, deleted adjustment of Rs. 2.20 crores, against which the Revenue is in appeal. In respect of addition to ITA No. the adjustment for import of CBUs, the CIT(A) confirmed the said adjustment inorder to maintain consistency approach as the same was upheld by DRP for assessment year 2008-09. The assessee is in appeal against the findings of CIT(A) in this regard.

24. First, we shall take up grounds of appeal raised by assessee, wherein ground of appeal No.1 raised by assessee is general and the same is dismissed. The assessee by way of ground of appeal No.2 has raised the issue against rejection of combined transactions approach applied by assessee. The plea of assessee before us is two-fold; first one is for aggregation approach to be applied in respect of import of raw materials, purchase of spare parts and import of CBUs. The second objection raised by assessee is against method applied by TPO, wherein under the garb of RPM method, the gross margins earned have been compared with another controlled transaction of assessee company and adjustment upheld in the hands of assessee. The case of TPO on the other hand, was that as far as import and sale of CBUs is concerned, it was an independent international transaction, wherein the assessee was importing passenger cars and without making any value addition, the same was sold to end customers and hence was purely an activity of resale, such an activity of resale as per TPO could not be closely linked or be dependent on the manufacturing activity undertaken by assessee. The second aspect of transfer pricing provisions applied by TPO was that such import of CBUs can be compared with import of spares. The assessee was importing spares for providing after sales service to its customers, through its dealers. The assessee pleaded that import of spares was part of warranty commitments made by it while selling the manufactured cars and also while selling imported CBUs and hence, it was closely linked to its core activity of manufacturing. The TPO did not accept the plea of assessee and the same was upheld by CIT(A), against which the assessee is in appeal before us.

25. The assessee is a company which is engaged in manufacture and sale of Mercedes Benz passenger cars in Indian market. The assessee had established manufacturing facility in India and was manufacturing some of models of passenger cars. Another connected business activity of assessee was in importing models which were though available in global market but were not manufactured by assessee, which depended on the demand of such models. The intention of assessee was to import cars in the form of Completely Built Units (CBUs). In order to bring in models which would be sold in few numbers, the intention behind importing the said models was to make available entire range of products which were available worldwide, to the customers in India. Such an exercise ensures not only customer satisfaction as claimed by assessee but it could also help in targeting and identifying the market conditions for particular range of cars, enabling the assessee to manufacture the said cars in future. Another set of CBUs were imported in order to bring in new products available with associated enterprises, to India but which otherwise would take time to establish manufacturing facility in India. The assessee has explained that it was importing cars in the form of Semi Knocked Down (SKD), Complete Knock Down (CKD) and then eventually operating at Parts level. In the year under consideration, the assessee was manufacturing C and E class of vehicles but had imported CBUs of class S, SLK, ML (now known as GLE), CLS and GL. The assessee had also furnished current position i.e. in 2018, wherein at Parts level the assessee was manufacturing models C, E, S, GL class and CLA class. It may be seen that C and E class were at Part level in the year under appeal and continues in current scenario also. Further, class S and GL were imported as CBUs in the year under appeal and were now at Parts level in 2018. The assessee thus was engaged in manufacturing operations and in the year under consideration, as pointed out above was manufacturing C and E models of passenger cars and in addition, it had imported certain models of Mercedes Benz, which were resold in the Indian market. The assessee had benchmarked international transactions undertaken by it by combining the manufacturing activity with import of CBUs.

26. Another transaction which was aggregated to benchmark arm's length price of international transactions undertaken by assessee with its associated enterprises was the import of spare parts. The explanation of assessee was that along with sale of passenger cars, the assessee was providing warranty commitments for a period of two years, which could also be extended by another one year with additional cost. Such provision of manufacturer's warranty was being provided free of charge to the customers but the charges towards providing such warranty were embedded in sale price of cars. The warranty commitment was in respect of manufactured cars and also resale of imported CBUs, under which, in case of failure of any part or component or faulty design / manufacture, then the assessee was obliged to provide for replacement of spare parts. The warranty was being administered through dealers who were also resolving complaints of customers; on the other hand, ITA No. dealer recovers warranty charges i.e. cost of labour plus cost of spare parts, replace / repairs plus applicable taxes from the assessee. In this regard, the assessee enters into dealership agreement with various dealers, under which it was obliged to provide spare parts and accessories in respect of cars which were manufactured and also imported CBUs. The dealer was obliged to use only spare parts provided by assessee company in repairing and maintaining passenger cars and also was to maintain adequate stock of spare parts. Since the warranty commitment could involve either replacement or repairs of parts, the dealers had to ensure that warranty claims of customers were settled without any delay and properly. In order to meet the demands of warranty commitments, the assessee was importing spares to ensure genuineness of parts and especially to maintain and enhance the performance of vehicles. The intention behind the import of spare parts was not only to provide customer satisfaction but to build its reputation in the market. Undoubtedly, the assessee was raising sufficient revenue from sale of spare parts along with sale of passenger cars and resale of imported CBUs.

27. Another aspect to be noted is the plea of assessee before us that because of competition in the market i.e. auto industry, passenger cars had to be sold at competitive prices, which in turn, was compensated from the premium pricing on sale of spares. The assessee thus, argues that sale of spares being part of warranty commitments was attached to sale of manufactured cars and resale of imported CBUs. The assessee thus, had aggregated three transactions i.e. manufacture of cars with resale of imported CBUs and also import of spare parts and benchmarked its international transactions to be at arm's length price when compared with similar transactions undertaken by selected comparables.

28. The issue which is raised before us is against aggregation of transactions which were closely linked. Section 92(1) of the Act states 'any income arising from an international transaction shall be computed having regard to arm's length price'. Under section 92B of the Act, meaning of expression 'international transaction' is provided as 'transaction between two or more associated enterprises'. Further, section 92F(v) of the Act defines transaction to include 'an arrangement, understanding or action in concert....'. Rule 10A(d) of the Rules explains the meaning of expression 'transaction' as 'transaction includes number of closely linked transactions'. In other words, the Legislature has intended to include transactions of similar nature which were closely linked to each other as a singular transaction. Even the Accounting Standard-17 supports the approach of aggregation of various international transactions. Before proceeding further, we may also refer to Rule 10B(1) of the Rules, which talks of various methods out of which, most appropriate method is to be applied for the purpose of section 92C(2) of the Act to determine arm's length price in relation to an international transaction. In other words, in order to analyze arm's length price of international transactions, the Legislature itself provides that closely linked transactions were to be adopted as one transaction in order to carry out transfer pricing analysis for such transactions by applying any of the prescribed methods as most appropriate method.

29. The Hon'ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT & Ors. (supra) has held as under:-

"... There are often situations where separate transactions are intertwined and linked or are so continuous that they cannot be evaluated adequately on separate basis..."

30. The Pune Bench of Tribunal in Bobst India Pvt. Ltd. Vs. DCIT (supra) has held as under:-

"... if certain transactions are so closely linked that they cannot be evaluated separately such transactions should be evaluated together. Once Assessee has discharged his onus of determining arm's length price based on reliable data then same should not be interfered by the TPO/Assessing Officer. They have not given cogent reasoning for negating the same so Assessing Officer is directed accordingly."

31. The Pune Bench of Tribunal in Cummins India Ltd. Vs. DCIT (supra) has held as under:-

"16. The assessee for the year under consideration before us is engaged in the manufacturing activity along with other related activities and had aggregated international transactions as tabulated hereinabove and had benchmarked the international transactions by using TNNM method as most appropriate method by taking external comparables and adopted PLI as operating margins to sales. The TPO on the other hand, had made adjustment after rejecting the claim of aggregation and also while applying the TNNM method had compared the same with internal comparables i.e. domestic sales made by the assessee. Under section 92B of the Act, meaning of expression international transaction is provided i.e. a transaction between two or more associate enterprises. Rule 10A(d) of the Income Tax Rules, 1962 (in short the Rules) explains the meaning of expression "transaction" for computing the arm's length price to include number of closely linked transactions. Rule 10B of the Rules prescribed the manner in which the arm's length price is to be determined by following any of the method prescribed. The combined reading of Rule 10A(d) and 10B of the Rules reflect that number of transactions can be grouped and constituted as single transactions for the purpose of determining arm's length price, provided that such transactions are closely inter-linked. Further, even under the OECD Guidelines under the Chapter III, the proposition of aggregation of individual transactions is taken note of. In such background, it emerges that in appropriate circumstances, where there is existence of closely linked transactions, the same could be considered as one composite transaction and for this, common transfer pricing analysis needs to be carried out by adopting most appropriate method. Depending on the facts and circumstances of each case, it needs to be seen as to which transactions are to be held to be closely linked. Applying the said principle to the facts of the present case, where the primary activity of assessee was to manufacture and sell IC engines and components both for domestic market and for exports, then the activity of importing engine parts and components, payment of royalty for getting know-how, provision of miscellaneous service i.e. procurement support services to the associate enterprises to help the sourcing of components, receipt of IT support services, design services and payment of technical know- how fees, etc. is closely linked to the export of manufactured IC engines. The principle of aggregation of closely linked transactions for undertaking benchmarking analysis applying TNNM method has been approved by the Hon’ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT reported in 374 ITR 118 (Del). Accordingly, we hold that for benchmarking international transactions, various activities undertaken by the assessee under the head “manufacturing activities” need to be aggregated. The Assessing Officer/TPO is directed so."

32. Now, coming to the facts of present case, where the assessee was engaged in the activities of manufacture of passenger cars worldwide many models of Mercedes Benz were available. However, in the year under consideration the assessee was engaged only in manufacturing activity of C and E class brands of passenger cars. But in order to make available other brands available worldwide, to its customers in India and in the absence of manufacturing facility developed for such models, the assessee imports CBUs and resells the same to customers. The assessee has placed on record some models which were imported in the year under consideration are being manufactured by the assessee in later years, since the demand for such models had increased. In order to efficiently run its business, the assessee had adopted a methodology, under which the most popular models were being manufactured in India and in order to widen its customer base at par the requirement of customers or otherwise, the assessee was importing other models from its associated enterprises. Such import of CBUs and its resale was closely and interlinked to its basic activity of manufacture of passenger cars. Hence, the same has to be aggregated with import of raw materials and cannot be benchmarked independently.

33. The third segment was import of spare parts which were being imported from associated enterprises in order to fulfill warranty commitments of passenger cars sold by assessee i.e. both manufactured and imported CBUs and also in order to meet other requirements of customers. Undoubtedly, warranty commitments were being fulfilled by dealers but under a dealership agreement, wherein the dealer was to use only spare parts which were made available by assessee. Such imports were being made of spare parts in order to keep the standard of products sold and also to maintain efficiency of passenger cars. The assessee had fairly admitted that it was covering cost of such spares, which were to be provided free of cost to customers under warranty commitments, from the cost of cars sold by it. In such scenario, the import of spare parts was an activity which was also closely connected with sale of manufactured and imported passenger cars and the same could not be benchmarked independently. Accordingly, we hold that transactions of import of CBUs and import of spare parts were closely and interlinked to the manufacture of passenger cars by assessee and the said activity was to be benchmarked on an aggregate basis along with other transactions under the umbrella of 'manufacturing activity'.

34. Now, coming to the next aspect of the issue i.e. most appropriate method to be applied. The assessee is in appeal vide grounds of appeal No.3 and 4 in this regard. The assessee had applied TNNM method as most appropriate method in its TP study report, whereas the TPO had compared gross margins earned by assessee on import of CBUs with import of spare parts and applied RPM method. The plea of assessee before us is that both transactions are controlled transactions, hence cannot be compared.

35. Section 92(1) of the Act is the basic section where it is provided that any income arising from an international transaction shall be computed having regard to arm's length price.

36. Section 92F(ii) of the Act defines arm's length price to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.

37. Section 92C of the Act lays down different methods to be applied having regard to the nature of transaction or classes of associated persons or functions performed, etc. Hence different methods to be applied are enumerated under section 92C of the Act.

38. Section 92C(2) of the Act provides that most appropriate method referred to in sub-clause (1) shall be applied for determining arm's length price, in the manner as may be prescribed. For this, we have to look to the Rules framed by the Legislature. Rule 10A(ab) of the Rules defines uncontrolled transaction to mean a transaction between enterprises other than associated enterprises, whether resident or non-resident. Rule 10B(2) of the Rules provide the comparability of international transaction with an uncontrolled transaction with reference to various conditions. Hence, under TP provisions it is very important that comparison should be made between uncontrolled transactions ideally. The import of spare parts by assessee from associated enterprises and import of CBUs from associated enterprises in such a scenario i.e. where it is a controlled transaction cannot be compared. The TPO had erred in applying RPM method and comparing the margins earned by assessee on import of spare parts with the margins earned by assessee on import of CBUs and found that the assessee had earned margins of 24.42% on import of CBUs as against gross margins earned from resale of CBUs at 11.33% and proposed an upward adjustment of Rs. 2.56 crores. There is no merit in the stand of TPO in this regard. In support, first of all, we refer to the observations of CIT(A) while benchmarking international transactions of payment of royalty, wherein he had held that controlled transaction was to be compared with uncontrolled transaction. Further, the Tribunal in assessee's own case while deciding appeal for assessment year 2002-03 in ITA No.1080/PN/2013, order dated 06.06.2016 had observed that the TPO had compared royalty paid by Maruti Udyog Ltd., which was a controlled transaction. It was further observed by the Tribunal that transfer price determined while benchmarking controlled transaction with another controlled transaction could not be considered at arm's length price because arm's length price signifies transfer price without possibility of being influenced by associated enterprises. The Tribunal further held that for the application of CUP method, it was necessary that transaction being compared should be controlled. However, the TPO had compared royalty paid by Maruti Udyog Ltd. to Suzuki Motors Corporation, Japan with royalty paid by assessee to DCAG. Since, Maruti Udyog Ltd. and Suzuki Motors Corporation were associated enterprises and such controlled transactions could not be used for benchmarking arm's length price. Similar proposition was applied by Tribunal in assessee's own case in ITA Nos.1108 & 1109/PUN/2013, relating to assessment years 2003-04 & 2004-05, order dated 21.03.2018.

39. The Third Member in the case of M/s. Technimont ICB Pvt. Ltd. Vs. Addl. CIT (supra) had held that controlled transaction 'even at arm's length price' cannot be used for benchmarking another controlled transaction.

40. Further Pune Bench of Tribunal in the case of Bobst India Pvt. Ltd. Vs. DCIT (supra) has held as under:-

"7.9 ..... Without prejudice to above we find that according to TPO/AO has not given cogent reasoning for rejecting TNMM identified by the Appellant as the most appropriate method for benchmarking its international transactions pertaining to domestic operations. The approach adopted by the TPO i.e. using controlled transaction of the Appellant itself (receipt of commission on marketing of spares) for benchmarking the international transaction pertaining to receipt of commission for marketing of machines is not appropriate as per the Indian TP regulations. Accordingly international transaction of the appellant pertaining to receipt of commission for marketing of machines benchmarked by assessee by aggregating the same with other international transactions pertaining to domestic operations using TNMM should not be rejected."

41. The Pune Bench of Tribunal in Cummins India Ltd. Vs. DCIT (supra) has held as under:-

"31.....issue which arises in the present appeal is whether the rate of commission realized by the assessee from a transaction with one associate enterprise could be the basis for applying internal CUP for computing the arm's length price of other international transaction with another associate enterprise. The said issue stands covered by similar issue being decided in Tecnimount ICB (P.) Ltd. Vs. ACIT (2011) 11 taxmann.com 49 (Mum.), (2012) 138 ITD 23/24 taxmann.com 28 (Mum.), wherein the issue was decided and addition was deleted. Applying the said ratio to the issue before us, we hold that there is no merit in the adjustment made by the Assessing Officer / TPO in respect of international transactions relating to receipt of commission from associate enterprises."

42. Following the above said principles, we hold that approach adopted by TPO in comparing margins of controlled transaction i.e. import of spare parts and import of CBUs from associated enterprises and proposing adjustment on account of arm's length price of international transactions does not stand and the same is cancelled. Hence, the TPO had erred in applying RPM method. In any case, under the garb of RPM method, TPO has compared sale of spares with sale of passenger cars. Further, it may be pointed out that TPO compared margins of fully developed vehicles with margins of spare parts, but the two items cannot be said to be functionally comparable and hence, there is no merit in the stand of Assessing Officer / TPO in this regard.

43 The next step is the application of most appropriate method in order to benchmark international transactions undertaken by assessee. In this regard, we find that assessee had applied TNNM method by selecting certain concerns as comparables. Though the TPO in show cause notice had proposed to reject five companies out of total 12 companies identified by assessee in its TP study report, but there are no final observations of TPO / TO in this regard. The same also was not necessitated because the TPO had applied RPM method. In such scenario, where the TPO has failed to look into the comparability aspect of margins of assessee with mean margins of comparables, we remit this issue back to the file of Assessing Officer / TPO to consider submissions of assessee in this regard and after applying aggregation approach, compute the margins of assessee company and compare it with mean margins of concerns which are functionally comparable to the assessee. The assessee shall cooperate and furnish the details and Assessing Officer shall decide the limited issue after affording reasonable opportunity of hearing to the assessee. The Assessing Officer shall pass consequent order applying transfer pricing provisions and determine arm's length price of international transactions undertaken by assessee. Consequently, grounds of appeal No.3 to 6 raised by assessee are thus, allowed as indicated above.

44. The learned Authorized Representative for the assessee pointed out that in case grounds of appeal No.2 and 4 are allowed, then ground of appeal No.7 would become academic, hence the same is dismissed.

45. The ground of appeal No.8 raised by assessee is against allowing +/-5% range, which is directed to be allowed.

46. The ground of appeal No.9 is not pressed, hence the same is dismissed.

47. The issue in ground of appeal No.10 against charging of interest under section 234B of the Act is consequential, hence the same is dismissed.

48. The issue raised in additional ground of appeal No.11 is against transfer pricing adjustment to be limited to international transactions with associated enterprises only. The learned Authorized Representative for the assessee also stated that the said ground of appeal would become academic if ground of appeal No.4 is decided in favour of assessee. Hence, same is dismissed.

49. The learned Authorized Representative for the assessee further stated that ground of appeal No.12 is academic in nature and the same is dismissed.

50. Now, coming to appeal of Revenue. The first issue raised vide ground of appeal No.1 is against disallowance of expenses in relation to capitalized cars based on the conclusions arrived at for the assessment year 2002-03. The assessee has also raised cross objection No.1 in this regard i.e. against non consideration of facts in respect of disallowance of expenses in relation to capitalized cars on the conclusion arrived at for assessment year 2002-03 when the facts for the year under consideration were different.

51. The learned Departmental Representative for the Revenue fairly admitted that the said disallowance was also made in assessment years 2002- 03 to 2004-05 and the matter has been remitted to Assessing Officer for fresh consideration.

52. The assessee on the other hand, has pointed out that this disallowance has not been made in any of the subsequent years.

53. We have heard the rival contentions and perused the record. The assessee while carrying out its business of manufacturing and selling of passenger cars, in order to promote sale of cars, was required to keep cars for the purpose of display in various events, photo shoots, road shows, tournaments and advertisement campaigns. The assessee also provided its cars to top management employees of India as well as for the official use. The perquisite value of cars was brought to tax in the hands of respective top management employees in accordance with the provisions of the Act. The assessee has capitalized 17 cars, out of which 14 were under the manufactured cars, one was sales return car and two were imported cars. The Assessing Officer show caused the assessee as to why capitalized cars which were manufactured by assessee should not be taken to sales account and capitalized at sales value. The assessee pointed out that the same could not be recorded as sales. The assessee also furnished breakup of cost of capitalized cars debited to Profit and Loss Account. The assessee had capitalized sum of Rs. 20,37,367/- per car, being actual cost of manufacture and claimed the same as expenses in Profit and Loss Account. The Assessing Officer asked the assessee to give calculation of average cost of manufactured car which the assessee filed at Rs. 20,80,000/- for every manufactured car. It was pointed out to the Assessing Officer that manufactured cars were of different classes and the assessee had taken actual cost of manufactured cost. However, the Assessing Officer adopted average cost as cost per car of Rs. 20,80,000/- to make additional disallowance of expenses of Rs. 6,02,000/- each for 14 cars. The CIT(A) applying the principles laid down in assessment year 2002-03 remitted the matter back to the file of Assessing Officer to apply the said directions, against which the Revenue is in appeal. The contention of learned Authorized Representative for the assessee before us is that findings for assessment year 2002-03 are not applicable for assessment year 2005-06 as the facts are at variance. It was further pointed out by him that the Tribunal had directed the Assessing Officer to verify certain details in relation to expenses on capitalized cars which were not submitted by assessee and also to verify certain reconciliation items. However, in the captioned assessment year, the assessee had capitalized the cars manufactured by it based on manufacturing cost and the method adopted by Assessing Officer of capitalizing at average cost of manufacturing car should not be adopted. The assessee pointed out that apart from C and E class, it also manufactured S class cars, which were costlier and hence, average cost could not be applied.

54. The Tribunal while deciding the issue in assessment years 2003-04 and 2004-05 had also examined similar issue of action of CIT(A) in remitting the issue back to the file of Assessing Officer to decide admissibility of claim of expenditure of capitalized cars and had held that there is no error in the said findings of CIT(A). The assessee had furnished additional evidence in this regard and the Assessing Officer was directed to decide the same in accordance with law. In order to maintain consistency of approach on similar issue raised in earlier year and also in the present year, though there are no additional evidence filed during the year but we deem it fit to restore the issue back to the file of Assessing Officer, who shall decide the same in accordance with issue being decided in earlier year. Accordingly, directions of CIT(A) are amended to that effect and the ground of appeal No.1 raised by Revenue and cross objection No.1 filed by assessee are dismissed.

55. The issue in grounds of appeal No.2 and 3 raised by Revenue is against transfer pricing adjustment made to royalty payment by taking the rate @ 3% as against rate of 5% paid by assessee and also disallowing balance royalty expenditure, post TP adjustment considering the same to be capital in nature.

56. Brief facts relating to the issue are that and as pointed out by us in the paras hereinabove, it is reiterated that the assessee had paid royalty for technical know-how received from its associated enterprises at the running royalty rate of 5% on value addition in India. The assessee had paid royalty to the extent of Rs. 5,51,20,397/-. The assessee had adopted combined approach and selected TNNM method as most appropriate method to benchmark international transactions of payment of royalty in its TP study report. However, the TPO had not accepted application of TNNM method and had considered CUP method as most appropriate method to benchmark the transactions by comparing royalty payment made by assessee @ 3% with royalty payment made by Maruti Udyog Ltd. to Suzuki Motors Corporation, Japan @ 3%. The TPO thus, had made adjustment of Rs. 2.20 crores for the year under consideration.

57. The CIT(A) had allowed the claim of assessee as royalty paid by Maruti Udyog Ltd. was a controlled transaction and had held that a controlled transaction could not be compared with another controlled transaction. The CIT(A) had also noted that in assessment years 2007-08 and 2008-09, royalty payment @ 5% was held to be at arm's length price.

58. The Revenue is in appeal against order of CIT(A).

59. The case of assessee before us is that similar issue has been decided in assessment year 2002-03, wherein the Tribunal dismissed the appeal of Revenue and upheld the order of CIT(A) in holding that royalty was intrinsically inked with production and sales activity as in the absence of production and sales and sale of products, there would be no question of arising payment of royalty. Further, the Tribunal also noted that no separate benchmarking was undertaken to determine arm's length price of royalty in assessment year 2007- 08 till 2011-12, payment of royalty was held to be at arm's length price. Further, the Tribunal in assessment years 2003-04 and 2004-05 (supra) had applied same principle and dismissed the appeal of Revenue.

60. We find that facts and issues raised vide grounds of appeal No.2 and 3 in the year under consideration are similar to the issues raised in assessment years 2002-03 to 2004-05 and following the same parity of reasoning, we hold that payment of royalty is to be aggregated with production and sales activity and could not be benchmarked separately. Further, we also hold that there was no merit in the orders of Assessing Officer / TPO in applying CUP method and comparing the rate of royalty paid by assessee with the rate of royalty paid by Maruti Udyog Ltd. to Suzuki Motors Corporation, Japan, which was controlled transaction. Consequently, grounds of appeal No.2 and 3 raised by Revenue are dismissed. However, the benchmarking of said transactions along with other transactions needs to be computed by Assessing Officer / TPO by applying TNNM method as directed in earlier grounds of appeal. The Assessing Officer shall also include the payment of royalty while applying transfer pricing provisions in order to benchmark international transactions with its associated enterprises.

61. The next issue raised vide ground of appeal No.4 is whether the CIT(A) was justified in treating royalty payment of Rs. 3.30 crores as revenue expenditure, where the assessee had acquired enduring benefit.

62. Both the learned Authorized Representatives fairly pointed out that the issue raised vide ground of appeal No.4 is covered by orders of Tribunal in assessment years 2002-03 to 2004-05. The Tribunal vide para 98 in assessment year 2002-03 and vide paras 23 and 24 at pages 30 to 32 in assessment years 2003-04 and 2004-05 had decided the issue. We are referring to the findings of Tribunal in assessment years 2003-04 and 2004-05, wherein vide paras 23 and 24, the said issue has been decided in favour of assessee and the grounds of appeal raised by Revenue were dismissed, but for the sake of brevity, we are not reproducing the same. Accordingly, the ground of appeal No.4 raised by Revenue is dismissed.

63. Now, coming to the last ground of appeal No.5 raised by Revenue is against order of CIT(A) in directing the Assessing Officer to allow Project Assistance Technical charges as deductible expenditure under section 37(1) of the Act. The said disallowance was made in the hands of assessee as made in earlier years also.

64. The Tribunal vide para 49 at page 24 of the order relating to assessment year 2002-03 and in paras 25 and 26 at pages 32 to 34 relating to assessment years 2003-04 and 2004-05 has decided the issue. We are referring to the said observations of Tribunal, but are not being reproduced for the sake of brevity.

Following the same parity of reasoning, we uphold the order of CIT(A) and dismiss the ground of appeal No.5 raised by Revenue.

65. The cross objection Nos.2 and 3 filed by assessee are not pressed, hence the same are dismissed as not pressed.

66. In the result, appeal of assessee is partly allowed, appeal of Revenue is dismissed and cross objections of assessee are dismissed.

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