Honda Motorcycle & Scooters India Pvt. Ltd v. Asistant Commissioner Of Income Tax, Circle-2, Gurgaon

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. Case No. : I. T. A. No. 345 of 2015 Reserved On : October 05, 2016 Pronounced On : December 23, 2016 Honda Motorcycle & Scooters India Pvt. Ltd. .... Appellant vs.Asistant Commissioner of Income Tax, Circle-2, Gurgaon ....Respondent CORAM : HON'BLE MR. JUSTICE S. J. VAZIFDAR, CHIEF JUSTICE.HON'BLE MR. JUSTICE DEEPAK SIBAL. * * * Present :Mr. Deepak Chopra, Advocate andMr. Deepak Agrawal, Advocate for the appellant. Mr. Tajender K. Joshi, Advocatefor the respondent. * * * DEEPAK SIBAL, J. : In the main appeal, the appellant-assessee had sought to raisethe following substantial questions of law :- Monika2016.12.23 12:08I attest to the accuracy andauthenticity of this document “1.Whether the Tribunal erred in law inremanding the issue relating to transferpricing adjustment by holding that the TPOhad not given any reasons for rejection ofthe CUP method which finding is perverseand contrary to the record ? 2.Whether the Tribunal erred in not allowingthe adjustment of abnormal operatingexpenses while determining the netoperating margins of the Appellant while applying the TNMM method ? 3.Whether the Tribunal erred in considering Bajaj Auto Ltd. As perfect comparable ? 4.Whether the Tribunal erred in not allowing the claim of depreciation on moulds ? 5.Whether the Tribunal erred in not allowing the claim of sales tool expenses ?” Through our order dated 26.08.2016, the appeal was ordered to be dismissed. Thereafter, an application seeking review of the said orderwith regard to the opinion expressed by us qua the second question wasfiled. Correction in the order qua the answer given by us to question no.5was also sought to the extent that the assessment proceedings, on remand,be ordered to be done by the Assessing Officer instead of the TransferPricing Officer (TPO). On 24.09.2016, we had re-called our order dated 26.08.2016 tothe limited extent that the second question of law would be decided by usafresh. The correction in the order dated 26.08.2016 qua question no. 5 wasmade that on remand, the issue which was the subject matter of question no.5 would be determined by the Assessing Officer and not the TPO. We now proceed to answer the second question raised in theappeal. Before the TPO, the appellant-assessee had claimed anadjustment in the operating margin of the assessee on account of a strike inthe assessee Company. It was submitted that the strike adversely effectedthe production/sales of the assessee but the fixed costs continued to be theMonika2016.12.23 12:08I attest to the accuracy andsame. Therefore, abnormal fixed cost incurred during the strike was soughtauthenticity of this document to be excluded from the operating costs for computing profit margin. The TPO was of the view that during the relevant year, theassessee had made sales of ` 1952 crores as against sales of ` 1697 crores inthe immediate preceding year. This data, according to him, proved thatthere was no effect of the strike on the manufacturing turn over of theassessee and as a matter of fact, in the relevant year, the sales had increasedby ` 255 crores. It was further found by the TPO that as per the risk profilesubmitted by the assessee, it was the assessee, which was to bear the risk ofmanpower and according to him, the loss, if any, from the strike, was onesuch risk. In view of the above, the TPO rejected the claim. A draft assessment order was passed by the Assessing Officeron the basis of the order by the TPO, which was challenged by the assesseebefore the Dispute Resolution Panel (DRP). Such challenge having beenrejected by the DRP, the assessee filed an appeal before the Tribunal, whichalso rejected the assessee's claim. A draft assessment order was passed by the Assessing Officeron the basis of the order by the TPO, which was challenged by the assesseebefore the Dispute Resolution Panel (DRP). Such challenge having beenrejected by the DRP, the assessee filed an appeal before the Tribunal, whichalso rejected the assessee's claim. On the second question, which we are dealing with, theTribunal was of the view that there was no occasion to reduce the operatingcosts from the total operating costs for the strike period as on account ofthe strike, there would have been some corresponding reduction of cost aswell. The Tribunal further found that the assessee had not demonstratedthat the operating expenses during the months preceding and succeeding thestrike period were at any higher level and that as per the production chartsubmitted by the assessee, there was production even during the strike The Tribunal further held that on the happening of anyabnormal event like a strike, it would be the net operating profit margin ofthe comparable companies, which would need adjustment to bring both theinternational transactions and comparable costs at the same pedestal andthat such adjustment was not to be made in the net operating profit marginof the assessee. Since the assessee had failed to bring on record anymaterial to the effect that profit of any of the comparable entities wasaffected due to any strike in their premises, the claim of the assessee wasnegatived. Rule 10B(1)(e)(ii) and (iii) of the Income Tax Rules, 1962,which are relevant, read as under :- “Determination of arm's length price underSection 92C. Rule 10B. (1) For the purposes of sub-section(2) of section 92C, the arm's length price inrelation to an international transaction [or aspecified domestic transaction] shall bedetermined by any of the following methods, beingthe most appropriate method, in the followingmanner, namely :- (a)xxxxxx(b)xxxxxx(c)xxxxxx(d)xxxxxx (e)transactional net margin method, by which (i)xxxxxx (ii)the net profit margin realised by theenterprise or by an unrelated enterprise from acomparable uncontrolled transaction or a number of such transactions is computed having regard tothe same base; (iii)the net profit margin referred to in sub-clause (i) arising in comparable uncontrolledtransactions is adjusted to take into account thedifferences, if any, between the internationaltransaction [or the specified domestictransaction] and the comparable uncontrolledtransactions, or between the enterprises enteringinto such transactions, which could materiallyaffect the amount of net profit margin in the openmarket:” As per the above quoted Rules, the net profit margin of thecomparable company is required to be adjusted to bring the internationaltransaction by the assessee Company and that of the comparable company atthe same pedestal. According to us, the Tribunal, after rightly observing that theadjustments in the net operating profit margin on account of any strike etc.was to be made in the profit margin of the comparable company, erred inrejecting the case of the assessee Company on the ground that the assesseehad failed to bring on record any material to show that the profit of thecomparable companies had been hit by a strike. The profit margin of thecomparable company was required to be adjusted after taking into account astrike like situation as had taken place in the assessee company. Our order dated 26.08.2016 would show that qua question no.1, we have upheld the order of the Tribunal remitting the matter to the TPO to be decided afresh. While deciding question no. 1, the second questionwould also be considered and decided by the TPO on making appropriateadjustments in the profit margin of the comparable company after takinginto account a strike like situation in the comparable company as had takenplace in the assessee Company. ( S. J. VAZIFDAR ) CHIEF JUSTICE December 23, 2016monika ( DEEPAK SIBAL )JUDGE Our order dated 26.08.2016 would show that qua question no.1, we have upheld the order of the Tribunal remitting the matter to the TPO to be decided afresh. While deciding question no. 1, the second questionwould also be considered and decided by the TPO on making appropriateadjustments in the profit margin of the comparable company after takinginto account a strike like situation in the comparable company as had takenplace in the assessee Company. ( S. J. VAZIFDAR ) CHIEF JUSTICE December 23, 2016monika ( DEEPAK SIBAL )JUDGE Whether speaking/reasoned ? Whether reportable ? Yes/No. Yes/No.