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12. Abhishek Auto Industries Ltd. v. DCIT
(2010) TII 54 ITAT-Del.-TP
S. 92, Income-tax Act
A.Y. : 2004-05. Dated : 12-11-2010
(i) In absence of allegation that the agreement approved by
regulatory authority is a sham, the tax authority cannot disregard the same.
(ii) For transfer pricing analysis internal compar-ables
are preferable over external compar-ables.
(iii) While applying TNMM, only profits related to the
transaction with AEs should be compared and not profits of the company as a
whole.
Facts :
ICo was engaged in manufacture of car seat belts for Indian
markets. For certain types of seat belts, ICo imported raw materials and
obtained technical know-how from its Associated Enterprise (‘AE’) for assembling
seat belts which were supplied to domestic car manufacturers. In its transfer
pricing documentation, ICo had mentioned that (i) raw materials imported from
its AE were not available from any other supplier, (ii) In the circumstances it
was difficult to ascertain its arm’s-length price.
As regards to payment of royalty and technical know-how fees,
ICo had mentioned that as the payment was in accordance with agreements approved
by appropriate regulatory authority (viz. Central Government), question of
complying with arm’s-length price did not arise. Further, in hearing before
Transfer Pricing Officer (‘TPO’), ICo presented comparison of gross
profitability between AE and non-AE transactions.
In TP proceedings TPO concluded that :
l No
transfer of technology had taken place as the payments were included in the
price of raw materials supplied by AE.
l TNMM
was the most appropriate method for applying on totality basis.
Accordingly, adjustments were made on the basis of difference
between profit of selected
comparables and overall profit from both AE and non-AE transactions.
Held :
The Tribunal held as follows :
(i) It was erroneous on the part of Tax Authority to
disregard the agreement which was approved by regulatory authority. Commercial
expediency is the domain of the assessee and in the absence of allegation that
the agreement is a sham, it cannot be rejected arbitrarily without assigning
cogent reasons.
(ii) Internal comparables are preferable over external
comparables. As profit margin from AE transaction was higher than that from
non-AE transaction, international transactions complied with arm’s-length
requirement.
(iii) While applying TNMM, only profits related to the
transactions with AEs should be compared and not profits of the company as a
whole.
