In the case of Schefenacker Mother son Ltd v. ITO, ITA No. 4459/DEL/07 for AY 2003-04 and schefenacker Mother son Ltd Vs
DCIT, ITA No. 4460/DEL/07 for AY 2004-05, the Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal), held that cash profit on sales “CP/Sales” or cash profit on total cost excluding depreciation “CP/ TCdep” can be adopted as an appropriate profit level indicator (PLI) under Transactional Net Margin Method (TNMM), to adjust for material differences in the assets utilised between tested party and comparable companies and thereby enable better comparability analysis.
Facts of the Case
- SML, a joint venture between Mother son Sumi Systems Ltd, India and Schefenacker International Gm B&H, Germany manufactures rear view mirrors and cable assemblies for the automobile industry.
- SML imports components from its associated enterprises (AEs) and also exports cable assemblies to AEs. Schefenacker Group Companies also supply technical know-how for design, technical engineering instructions, training, quality control etc. to SML in return for royalty.
- For Assessment Year 2003-04 and Assessment Year 2004-05, TNMM was applied adopting CP/S ales as the PLI to establish the arm’s length price of the international transactions on an aggregate basis.
- The justification given by the taxpayer for usage of CP/Sales as the PLI was to eliminate differences in technology used, age of assets used in production, differences in capacity utilisation and different depreciation policies adopted by various companies in the auto component industry.
- The Transfer Pricing Officer (TPO) rejected the PLI of CP/Sales and applied OP/ TC in Assessment Year- 2003-04 and OP/ Sales in Assessment Year 2004- 05 based on the following reasons:
-While applying TNMM, transfer pricing provisions do not provide an option to use a numerator other than net operating profit.
-Rule 10B(1)(e)(iii) of the Income Tax Rules, 1962 (the Rules) provides for adjustment to be made only to the results of comparable companies and not to the tested party.
-Making a depreciation adjustment has no sanction in law.
