Margins derived on export of parts to AE are not comparable with margins derived from sales in domestic market

CIT V. Keihin Fie (P.) Ltd. (Bombay High Court)

Hon’ble Bombay High Court held that Margins derived on export of parts to AE can not compared with margins derived from sales made in domestic market.

Outcome: In favor of Assessee

Issue:

Whether on the facts and in the circumstance of the case and in law, the Tribunal was correct in law in holding that the two segments viz: manufacturing and trading are comparable to determine the Arms Length Price (ALP) of the trading goods exported to AE?

Facts:

1. The Assessee is engaged in manufacture of carburettors and Air Suction Valves (ASVs) [finished goods] used in the manufacture of motorcycle and other two wheelers. The Assessee is also engaged in trading activity of selling parts and components (parts) of finished goods, which are used in its manufacture. The sales of finished goods in the domestic market is 97% of its total sales and balance 3% is of its sales, is of parts.

3. During the year, the assessee has entered into an international transaction of export of parts to its AE and adopted TNMM as the most appropriate method to determine ALP.

TPO’s Contention:

1. TPO has accepted the assessee’s TNM method; however, bench marked the net margins derived from export of parts (trading activity) with the net margins derived from domestic sales which resulted in an addition of Rs. 62.72 lakhs.

CIT (A)’s Contention:

1. CIT (A) holds that it was incorrect to benchmark its margins from export of parts with margin in domestic sales of all its goods which consisted primarily of manufactured finished goods i.e. to the extent of 97% of total sales.

2. Also, found that the internal comparable, if any, should have been with profits derived from sale of parts alone.

3. Thus, deleted the addition of Rs.62.72 lakhs.

ITAT’s Contention:

1. Hon’ble ITAT upheld the findings of CIT (A) and dismisses the Revenue’s Appeal.

Hon’ble HC’s Decision:

1. Hon’ble High Court find that both the CIT (A) and the Tribunal, on facts, had found that the margins derived on export of parts to AE are not comparable with the margins derived from sales made in the domestic market. Besides, on facts, it was also found that not only the parts and finished goods are not comparable, but the class of customers to whom they sold is also different. Therefore, export of parts which go into the manufacture of finished goods were not comparable with the finished goods and to benchmark the margins from export of parts with margin in domestic sales of all its goods which consisted primarily of manufactured finished goods i.e. to the extent of 97% of total sales is not correct.