ORDER

Promod Kumar, Accountant Member. - This is an appeal filed by the taxpayer and is directed against the order dated 30-11-2006 passed by the Commissioner (Appeals) [CIT(A), in short], in the matter of assessment under section 143(3) of the Income-tax Act, 1961 ('the Act', in short) for the tax assessment year 2003-04.

2. Even though the grounds of appeal raised before us in the memorandum of appeal were primarily against the authorities below not adjudicating on merits the various pleas raised by the assessee, when this appeal came up for hearing, the assessee primarily argued the matter on merits. It was pointed out to us that the requisite information was furnished to the CIT(A) and that the same was not examined in the light of the applicable legal position and facts of the case. It was submitted that since all the relevant material is on record and since both the parties have argued the matter at length on merits as well, and with a view to ensure that this matter reaches finality within a reasonable time limit, the matter need not to sent back for fresh adjudication and that a decision be taken on the merits. Our suggestion for remitting the matter to the file of the CIT(A) for adjudication de novo was declined by the assessee. The Transfer Pricing Officer was also allowed to make his submissions before us on merits, and he was also heard. It is in this background that we are adjudicating upon the appeal. Various grounds of appeal, as set out in memorandum of appeal and which are reproduced below for ready reference, are primarily arguments in support of these two main grievances, which were pressed and argued before us, i.e. (a) against CIT(A) confirming the addition of Rs. 23.59 crores on account of transfer pricing adjustments; and (b) against CIT(A) not considering the + /-5 per cent variation in terms of the provisions of section 92(2) of the Act :

Ground No. 1

The learned CIT(A) has erred in not adjudicating on the following grounds of appeal on merits considering the various facts and various submissions made by the appellant before the CIT(A), the Assessing Officer and the Transfer Pricing Officer.

The learned Assessing Officer has erred in making a reduction to the loss of the appellant for the previous year ended 31-3-2003 by an amount of Rs. 23.59 crores based on the transfer pricing adjustment determined by the Additional Commissioner of Income-tax, Transfer Pricing and by the Assessing Officer.
The learned Assessing Officer has erred in not considering the comparable uncontrolled price ('CUP') method for the purpose of benchmarking the international transaction of import of materials.
The learned Assessing Officer has erred in not allowing the use of financial data pertaining to the financial years ended 31-3-2001 and 31-3-2002 in respect of comparable companies.
The learned Assessing Officer has erred in not considering data of Ford India Limited and General Motors Limited for the purposes of determining the set of comparable companies to that of the appellant.
In respect of the adjustment on account of high import levels undertaken by the appellant (to its operating margin for the previous year ended 31-3-2003), the learned Assessing Officer has erred in not considering that adjustment.
The learned Assessing Officer erred in not considering adjustments towards other differences between the appellant and the companies selected by the learned Transfer Pricing Officer.

Ground No. 2

The learned CIT(A) has erred in not considering the +/- 5 per cent variation from the arm's length price permitted to the appellant under the provisions of section 92C(2) of the Act.

Ground No. 3

The learned CIT(A) erred in not affording adequate opportunity to the appellant to furnish additional information during the appeal proceedings.

Ground No. 4

The learned CIT(A) has erred in holding that the ground of appeal relating to charging of interest under sections 234B and 234C of the Act is not maintainable.

The appellant craves leave to submit such further grounds at or before the hearing of the appeal so as to enable the Income-tax Appellate Tribunal to decide the appeal according to the law.

3. The material facts giving rise to this dispute before us are as follows. The taxpayer before us is an Indian company engaged in the business of manufacturing and selling passenger cars. It was incorporated in India on 23-12-1999, commercial production of cars started in November 2001, and the year before us is the first full year of operations of the company. In this year, the assessee entered into international transactions, aggregating to Rs. 269.98 crores, with two associated enterprises - namely Skoda Auto a/s, Czechoslovakia, and Volkswagen AG, Germany. The main transactions are of purchase of materials of Rs. 2,24,33,92,720 from assessee's parent company, and of payment of royalty and technical know-how fees, amounting to Rs. 44,57,21,276, to assessee's parent company i.e. Skoda a/s. The details of all the transactions with the associated enterprises, in the relevant financial period, are as follows :

1. Purchase of materials for Rs. 2,24,33,92,720 from Skoda Auto as
2. Purchase of finished goods for Rs. 9,11,891 from Skoda Auto as
3. Purchase of cars amounting to Rs. 24,60,435 from Skoda Auto as
4. Purchase of materials for Rs. 46,74,224 from Volkswagen AG
5. Purchase of tangible assets for Rs. 26,20,994 from Volkswagen AG
6. Royalty and fees for know-how of Rs. 44,57,21,276 to Skoda Auto as.

4. In the course of assessment proceedings, and as international transactions with the associated concerns exceeded Rs. 5 crores; a reference was made to the Transfer Pricing Officer under section 92CA of the Act. The Transfer Pricing Officer referred to the details filed by the assessee, which were forwarded to him by the Assessing Officer, and noted that the method of determining arms length price was stated by the assessee as TNMM (Transactional Net Margin Method) and CUP (Comparable Uncontrolled Price) Method. It was also noted that, according to the assessee, "out of five methods prescribed under section 92C of the Income-tax Act, 1961, the Transactional Net Margin Method (TNMM) was found by the assessee as the most appropriate method for determining arms length nature of import of raw materials, spares and accessories". It was further stated by the assessee that upon a comparison of operating profit margin of comparable entities on the basis of information obtained from the publicly available database and from the Registrar of Companies, to the extent available, it was found that the margin earned by the assessee is higher than the mean of those earned by comparable entities, and, therefore, based on TNMM, the value of international transactions, as per company's books of account, considered collectively, meets arms length. By way of noticed dated 1-9-2005, the Transfer Pricing Officer required the assessee to file all the necessary supporting details and also requisitioned working of profit level indicators in case of comparables using data for the financial year 2002-03, in case the TNMM is used for determining arms length price with regard to the international transactions with associated enterprises.

5. In the reply filed by the assessee, a reference was made to applicability of CUP method, and it was stated that ex-factory price of the subject kit/car whether for sale in Czech Republic, or in another country, would be the same i.e. Euros 6,800 but the price at which the cars are sold to the end buyers would ultimately depend on number of factors such as additional transport and, marketing costs, duties and taxes in the relevant jurisdictions besides importing company's margins and dealer's margin, depending upon the general norms prevalent. It was thus submitted that "as such, although a comparison of the prices at which these kits/cars are sold to associated enterprises would require several adjustments as mentioned hereinabove, to the extent the base price, namely the ex-factory price is the same regardless of the ultimate destination of products". The assessee also submitted that and internal comparison could be impeded on account of (a) widely differing circumstances surrounding the sales in different jurisdictions, on account of which the same car may sell at different premia in different countries; and (b) absence of information, such as functions performed and risks assumed by such other third party resellers and contractual terms relating to uncontrolled transactions. As for external comparables, the assessee submitted that "the subject products, being outcome of extensive research carried on by the AEs over the years, are unique and distinct bearing certain features and quality, and the absence of homogeneity cannot be overemphasized while considering comparability of prices of similar items". It was thus contended that the arms length price of purchases of material from the Skoda a/s is on arms length price, on the basis of CUP method.

6. The Transfer Pricing Officer also took note of the updated chart of net margins of the comparable companies, as filed by the assessee in the course of proceedings before him. The TPO was of the view that out of six comparables relied upon by the assessee, one comparable could not be accepted for want of availability of data for the relevant financial period and the preceding period. One of the comparables was rejected on the ground that it was the case of a company incurring sustained losses which indicated abnormality of circumstances with regard to that particular company. These two comparables were of Ford India and General Motors respectively. When these views were put to the assessee, it was submitted by the assessee that such an exclusion would not be justified as, under the TNMM method, the emphasis is on the line of business. It was also submitted that the assessee company is also a loss making company and one cannot always expect all business ventures will generate profits. The emphasis has to be on the business activity and there is no dispute that the assessee's business activity is generally the same as of the General Motors. It was submitted that 'one cannot pick and chose companies while samples'. The assessee emphasized before the TPO that the assessee's comparison with the remaining four comparables, i.e., Hindustan Motors Ltd., Honda Siel Cars India Ltd., Hyundai Motors Indian Ltd. and Maruti Udyog Limited, will be unjust as these companies are well established companies whereas the assessee-company is a new entrant to Indian car market. It was highlighted that these companies were established in the year 1942 (Hindustan Motors), 1981 (Maruti Udyog), 1996 (Hyundai Motors) and 1997 (Honda Siel Cars). It was also submitted that as a new company, asset and depreciation profile of the company is significantly on the higher side. It was also pointed out that in view of the accounting policy adopted by the assessee, technical know-how was written off over a period of three years as a result of which profits of the assessee-company were highly impacted. When assessee was asked to make relevant adjustments to the margins of comparables and furnish the same, the assessee also pointed out that imported raw material consumption in other cases ranged from 26 per cent to 56.83 per cent [Hindustan Motors - 31 per cent; Honda Siel - 48.2 per cent; Hyundai Motors - 25.29 per cent; General Motors 56.83 per cent and Maruti Udyog - 26 per cent], the imported raw material consumption in assessee's case was as high as 98.55 per cent. It was so for the reason that the assessee wholly relied on the raw material imports from the AE for manufacturing purposes. The assessee also pointed out that this higher import content also had cascading effect on the customs duty. It was also submitted that the basic cost of imported raw material was bound to be higher in view of high technology usage and involvement of higher labour costs as the concerned Associated Enterprise is in an EU (European Union) country. However, when the TPO required the assessee to data of the comparables, duly adjusted on account of variations pointed out by the assessee, it was submitted by the assessee that it is not possible to furnish the requisitioned information for the reason that such fine details of those comparables, as such an exercise would require, are not available in public domain. It was also submitted that, notwithstanding the above handicap, the assessee did make efforts to collect the data from corporate databases, websites and other sources, but the assessee could not succeed in these efforts. Without prejudice to these submissions, the assessee pointed out that on the basis of certain assumptions, as necessitated by the nature of exercise, the assessee has adjusted profits for eliminating the impact of high imports and profits so computed compare favourable with assessee's peers. The TPO further requisitioned the financials of the comparables relating to the periods of their incorporation and subsequent two years to prove that even they were reporting losses in that period. The assessee regretted the inability to do so as the relevant data are not in public domain, it was also submitted that the economic conditions, marketing conditions and laws pertaining to that period would be totally different vis-a-vis the conditions prevailing in the relevant period and this fact would also make the comparison meaningless. It was also submitted that in view of the technological advancements, which have huge impact on the price and profitability, it does not make sense to compare data of the assessment years in question vis-a-vis the data for a period of over a decade ago.

7. None of these submissions impressed the Transfer Pricing Officer. He justified exclusion of Ford India Limited as a comparable on the ground that data for the relevant period was not available. Reliance was placed on sub-rule (4) of Rule 10B of the Income-tax Rules which provides that data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which international transaction has been entered into. The admitted position was that data with regard to Ford India Limited was not available for the relevant period. It was thus concluded that Ford India Limited cannot be used as a comparable. As regards General Motors, the TPO noted that the General Motors has incurred sustained losses for last three years, which by it shows that there are certain abnormal circumstances and, for this reason alone, the data with regard to General Motors is not acceptable for examining arms length price. As for the high content of imported raw material, the TPO noted that despite specific requisition by the TPO, the assessee has not been able to give details of adjustments on profits on account of such higher import content in the raw material. The Transfer Pricing Officer, however, did not stop there; he proceeded to reject this argument on merits by observing as follows :

"With regard to the low profitability/loss of the assessee, the company has contended that the same is on account of higher imports as compared to the comparables. The higher import duties have resulted into losses. This argument is not acceptable for the reason that indirect taxes are generally passed on to the customers and inbuilt into the sales price. If the assessee was aware of such high duties, as an independent party would have behaved, it would have (properly) negotiated purchase price with the entrepreneur i.e., the parent company. It is ideally the parent company, which should have taken the burden of such high duties."

8. The TPO also noted that in the previous year, the assessee had not commented upon the high import contents. Finally, the TPO noted that the assessee had contended that margins of the above companies in the initial years of incorporation should be considered, and observed that while the assessee was given an opportunity to make the necessary adjustments, the assessee could not furnish the same. It was in this background that the Transfer Pricing Officer adopted the following comparables and, accordingly, computed arms length price :

9. On the above basis, the adjustment on account of Arms Length Price was computed as follows :

10. The Transfer Pricing Officer also noted that the assessee has also paid a royalty of Rs. 42 crores to its parent company. It was also noted that the assessee has not furnished details of royalty, including the cost incurred by the AE, i.e., the parent company, for developing the technology for which the assessee has paid the royalty. The TPO's requisition on the same, as also about the rate at which royalty was charged from other AEs by the parent company was turned down by stating that this information, which is treated as highly confidential by the parent company, is not available to the assessee. The assessee confirmed that the royalty is paid only to the parent company and no other AE is paid the same. It was also stated that terms of contract, of the royalty arrangement, were duly approved by the Government of India, through the Secretariat of Industrial Assistance vide its letter dated 2-11-1999. The fact of Reserve Bank of India's approval to the foreign collaboration, vide letter dated 4-4-2002, was also placed on record. The TPO was of the view that for the want of details of developing the technology, it could not be ascertained that the economic return in form of fee for technical know-how was commensurate with the cost incurred. He also noticed that the assessee has paid royalty even as the assessed incurred losses. In his view, this factors would have called for transfer pricing adjustments. He, however, noted that since TNMM is being used to apply the benchmark the assessee's margins, the arms length price adjustment being made on that basis will adequately cover the excessive expenditure on royalty and fees for technical know how. Accordingly, the TPO did not recommend any separate adjustment for the payments for royalties and fees for technical know-how, though he recommended adjustment of Rs. 23.59 crores as elaborated in preceding paragraph. Based on these recommendations, the Assessing Officer made an addition of Rs. 23.59 crores to the total income as per return of income. As against a returned income of Rs. 9,22,70,170 thus, the assessee was assessed to tax on an income of Rs. 32,81,70,170.

11. Aggrieved by the stand so taken by the assessment authorities, assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) noted that the assessee has not submitted entire data and information which was supplied to the Assessing Officer and the Transfer Pricing Officer. He also noted that the basis on which PBT, PBIT, PBDT are arrived at are also furnished.

The CIT(A) did take note of the assessee's submission that Transfer Pricing Officer was not justified in making observations to the effect that custom duty should have been passed on to the consumers and the assessee's reliance upon Hon'ble Bombay High Court's judgment in the case of CIT v. Sales Magnesites (P.) Ltd. [1995] 214 ITR 1 , and agreed that "there is no dispute that it is the businessman's domain as to what should he do, but nevertheless the businessman has to furnish the details of what he has done, for perusal of the revenue authorities". The CIT(A) again referred to non-availability of details about working of PBIT, PBDT and OPM and observed that "it is necessary to see whether any extraordinary items affected the final figure". The CIT(A) further observed that "the segment of car of Skoda (the appellant) is to be compared with an equal category of the cars involved in the comparable companies, because the comparable companies, for example Maruti Udyog, apart from equivalent category car of Skoda's, manufactures other cars as, well" and that "the revenues (receipts and outgoes) of the comparable are to be looked into while comparing the data of the appellant with that of the comparable and then apply TNMM". The CIT(A) then noted that the assessee was not able to give any data to support the arms length price computation on the basis of CUP analysis, and as such the ground was dismissed for want of details. As regards the grievance that the TPO did not allow the use of financial data for two proceeding years, the CIT(A) rejected this legal plea on the ground that the relevant details are not furnished. Similarly, with regard to exclusion of data relating to Ford India Limited and General Motors Limited, once again the CIT(A) dismissed the plea for want of filing of details. Similarly, on the grievance against the deciding adjustment for differences between the assessee-company and the selected comparables, the CIT(A) dismissed this plea also on the ground that the relevant information is not furnished. Finally, on the assessee's grievance that the TPO has not permitted relaxation of upto 5 per cent in arms length price under section 92C(2), the CIT(A) observed that there is no requirement to grant deduction upto 5 per cent in all cases of variation of arms length price and prices at which the assessee has entered into the transactions. It was observed that this leverage of 5 per cent is not to pursue the cases where difference between ALP and transaction price is less than 5 per cent but once it is found that the price at which transactions are entered have a variation of more than 5 per cent, the adjustment on account of difference between the ALP and the price at which transaction is entered into is to made in entirety. On the question of applicability of interest under sections 234B and 234C, the CIT(A) observed that the levy of interest under these sections is mandatory. The appeal of the assessee was thus dismissed. The assessee is not satisfied by the order so passed by the learned Commissioner (Appeals) and is in further appeal before us.

12. We have heard the learned representatives at considerable length. The Transfer Pricing Officer also appeared before us and made elaborate submissions. We have give due consideration to the rival submissions, and we have considered applicable legal position in the light of the material produced before us.

13. At the outset, we would like to take note of a preliminary objection taken by the Revenue that we should not deal with the matter on merits as the assessee has not cooperated in the first appellate proceedings. It is submitted that since the CIT(A) has rejected the appeal for want of certain details, we can at best, if satisfied that the assessee was prevented by reasonable cause to do so, remit the matter to the file of the CIT(A). The assessee before us seriously contended CIT(A)'s observations that the relevant details were not furnished before him. It was submitted that the CIT(A) requisitioned details which were nor germane to the issues raised by the assessee. It was submitted that the assessee had already admitted his inability to give any details about the adjustments on account of the fact that these were assessee's initial years of operations since the figures which are required to do such an analysis are not available in public domain. Similarly, while the impact of high import content could only be shown on the basis of certain assumption in the absence of precise details, these details were not accepted by the authorities below. It was submitted that the observations of the CIT(A), with regard to non-submission of information, are not factually correct, and, at the minimum, wholly misleading. The assessee contends that he was asked to produce such information as were not in his knowledge. It was submitted that beyond these requisitions, which the assessee was inherently incapable of complying with, and vague general requisitions about information, no details were sought. The appellate order thus came as a surprise to the assessee inasmuch as there was no adjudication on the purely legal issues raised before the CIT(A) on the ground that relevant information is not furnished. The assessee also contends that what is involved in this case are basic principles on the basis of which arms length price is determined, and, therefore, relevant facts on record being sufficient for the purposes, we should adjudicate on the correctness or otherwise of the impugned ALP adjustments and not simply set aside the matter to the file of the authorities below. It is also submitted that the assessee is a foreign company and the assessee being subjected to inordinate delays in allowing the matter to reach finality is undersirable. We are thus urged to decide the matter on merits. Learned Departmental Representative, on the other hand, vehemently supports the stand of the CIT(A) and submits that when the assessee is non-co-operative at the stage of the first appellate proceedings, there is no good reason to adjudicate on merits in at this level. In case the assessee can satisfy us that non-co-operation in appellate proceedings was for good reasons, we can at best remit the matter to the file of the CIT(A). It is submitted that our adjudicating on merits, at this stage, will be contrary to the scheme of the Act and will encourage the assessees who do not fully co-operate in the proceedings before the income-tax authorities. Without prejudice to this stand, however, learned Departmental Representative and the learned Transfer Pricing Officer made elaborate submissions on merits of the case.

14. We have noted that, as evident from submissions before the CIT(A) vide letters dated 28-7-2006 and 2-8-2006 - copies of which was placed before us in the paperbook pages 174-182, the assessee has made elaborate legal submissions and given factual details in support thereof, but the CIT(A) has simply brushed aside these submissions, as also submissions made during the hearings referred to in these documents, on the ground that complete details about certain computations are not furnished. As evident from these written submissions to the CIT(A), the assessee had also filed copies of submissions before the Transfer Pricing Officer as annexures to these written submissions to the CIT(A). In any case, nothing prevented the CIT(A) to call for records from the Assessing Officer and, examine all the necessary details as were before the assessing authorities. It is not even the case of the assessing authorities that the assessee has not shared the available information with them. The Transfer Pricing Officer has examined the contentions of the assessee on merits and rejected the same. The information which was not given to the Transfer Pricing Officer is the information which, according to the assessee, is not available with him and which he is not in a position to furnish. As far as the information part is concerned, CIT(A) should have adjudicated on whether or not, based on the information supplied by the assessee, the claim of the assessee was to be accepted in the light of the legal arguments raised by the assessee, and whether or not the assessee can indeed be faulted for not being able to supply the information which he has not supplied or which the assessee claims to be incapable of supplying. The CIT(A) has brushed aside fundamental questions, and proceeded to reject the appeal for want of details in general terms. The relevant details - or at least a part of relevant details, as we have noted above, were furnished by the assessee, and in any case all those details were in the assessment records. It is not, therefore, wholly correct to say that the assessee did not at all cooperate before the CIT(A) or that the assessee failed to furnish the necessary details to the CIT(A) and that, for this reason alone, we are denuded of powers to deal with the matter on merits and simply remit the matter to the file of the CIT(A). We therefore decline to sustain the preliminary objection raised by the assessee. We will consider the matter in entirety, and, we see no need to restrict the options available to us for doing justice in the matter.

15. We have noted that there are references to the determination of Arms Length Price on the basis of CUP (Comparable Uncontrolled Price) Method, but, in the course of hearing before us, learned counsel for the assessee admitted that the transactions which were relied upon were transactions that the parent company had with other AEs (Associated Enterprises) and the price of Euro 680 thus given is not the price at which transactions have been entered into between independent persons. This is the price that the assessee had adopted as internal CUP. The assessee also submitted that External CUP is not available because the product is unique. To our understanding, this argument is totally devoid of any, merits. To be considered as Internal CUP also, the transaction has to be an independent transaction, i.e., between two entities, which are independent of each other. The sale of car kit has admittedly taken place only between the associated concerns. Therefore, the price at which such transaction has taken place is irrelevant for CUP analysis; what is referred to as CUP (Comparable Uncontrolled Price) is price of a comparable but controlled transaction, since to be termed as an uncontrolled transaction, the transaction has to be between two entities which cannot influence or control each other's decision. The transactions between AEs obviously do not satisfy such a criterion. There is thus no Internal CUP, as claimed by the assessee before the authorities below and as stated in the information filed alongwith the Income-tax return. The assessee also accepts that there are no external comparables available. Under these circumstances, in our considered view, the authorities below rightly rejected the assessee's case that even as per CUP method, the transactions that the assessee entered into with its parent company were at an arm's length price.

16.Learned counsel submits that rejection of CUP method does not make a material difference to the outcome of this appeal. It is stated that, without prejudice to the assessee's reliance on CUP method, the assessee agrees with the TPO that the most suitable method of determining ALP in the present case is TNMM method and that when TNMM method is correctly applied to the facts of this case, no ALP adjustment is warranted on the facts of the case.

17. On the applicability of TNMM method, however, learned counsel for the assessee has raised a large number of issues and addressed the same at length. The stand taken before the authorities below, was reiterated. It was submitted that the proviso to Rule 10B(4) permits to the use of data of the relevant previous year if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. Learned counsel then makes elaborate submissions about the peculiarities of automobile market pattern. Based on the automobile industry report published by CRISIL - CRIS-INFAC report [Annual Review : Car & Utility Vehicles - May 2007] - a copy of which was filed in the course of the hearing, it was argued that several models of cars manufactured by comparables companies were phased out during the three years period while several other cars were being launched. It was emphasized that one years results being viewed in isolation would lead to absurd results. A reference was made to OECD guidelines which permit use of multiple year data. It was submitted that in order to make any meaningful comparison, it is necessary to use three year data as permitted under the transfer pricing legislation so as to neutralize the impact of cyclic fluctuations of different product cycles. An effort was made to demonstrate that in case data to be taken into account is of three years, even according to the comparables selected by the TPO, the results shown by the assessee will be in line with the results shown by such comparable companies. Reliance was placed on the decision of this Tribunal in the case of Phillips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226 (Bang.) . It was then argued that the authorities below erred in excluding Ford India Limited and General Motors Limited from the comparables. It was submitted that the transfer pricing legislation provides that the assessee should compare itself with functionally similar companies. It does not provide that functionally similar companies do not include loss-making companies. A reference was also made to the OECD Guidelines which suggests that it is important to take into account a range of results when using the transaction net margin methods as to reduce the impact of variations in the business characteristics of associated enterprises and any independent enterprises engaged in comparable uncontrolled transactions. A reference was made to Tribunal's decision in the case of Sony India (P.) Ltd. (sic) : wherein it is observed that merely on account of losses, exclusions may not be justified. It is then argued that the learned Assessing Officer has erred in not considering the said adjustment, on account of high level of import content in the raw materials. A reference was also made to rule 10B(1)(e)(iii ) which, inter alia, provides that adjustment to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprise entering into such transactions, which could materially affect the amount of net profit margin in the open market. A reference was also made to Rule 10B(3) of the Rules which provides that "An uncontrolled transaction shall be comparable to an international transaction if—(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." It is thus submitted that law clearly permits adjustments in margins of the enterprise entering into international transactions for any differences between such international transactions and the transaction of the comparables or between the enterprise entering into international transactions and comparable companies. With respect to the argument that the duties are always inbuilt in the sales price, it was submitted that the Indian automobile industry is highly competitive and given this competition it is not always possible to pass on such duties to the customers. It was submitted that financial year 2002-03 was its first year of complete operations and it was a new entrant to the competitive automobile industry vis-a-vis comparable companies who had been established players in the Indian market. A reference was once again made to OECD guidelines which state that business strategies must also be examined in determining comparability for transfer pricing purposes. A reference was also made to CRIS-INFAC report, to show the impact of customs duty on profitability of car manufacturers. Reliance was placed on Tribunal's decision in the case of EGain Communication (P.) Ltd. v. ITO [2008] 23 SOT 385 (Pune) wherein the Tribunal has accepted undertaking economic adjustments to improve comparability of the entities being compared. Undertaking of economic adjustments has also been upheld in the case of Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 107 ITD 141 (Bang.) (SB) , Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 (Delhi) , Sony India (P.) Ltd. (supra). It was then contended that there was a gross under utilization of capacity as a result of which profitability was affected. It was submitted that the assessee-company had utilized only 37.19 per cent of its capacity whereas average capacity utilization of comparable companies works out to 68.15 per cent. It was thus contended before us that the computation of TNMM was vitiated inasmuch as the comparison was without taking into account (a) multiple year data; (b) the results of Ford India Limited and General Motors Limited; (c) adjustments on account of high level of import content of raw material; and (d) adjustments on account of lower capacity utilization. In any event, according to the learned counsel, ALP adjustments can be done in the profits relatable to the international transactions alone and not to the profits as a whole. Finally, learned counsel submitted that even when TNMM method is to be adopted, adjustment of 5 per cent variation from the arm's length price is permitted to the appellant under the provisions of section 92C(2) of the Act. Our attention was also invited to some judicial precedents by the co-ordinate benches which cover this issue in favour of the assessee.

18. Learned Commissioner (DR) and learned Transfer Pricing Officer vehemently oppose the submission of the assessee. It is submitted that the assessee is raising issues which have not been raised before any of the authorities below. It is submitted that it will be highly improper for the Tribunal to entertain these arguments at this stage without further verification and ascertainment of facts. As for the multiple year data, it is submitted that Rule 10B(4) is clear that is that computation of margins is allowed based on current year data and use of preceding years data can only be an exception and not a rule. It is submitted that passenger car segment in the auto industry is one sector which has shown consistent growth and there is no reason to take into account the results of earlier years. Such an exercise would distort the ground realities, rather than show the same. It was submitted that the assessee has not substantiated that use of earlier year data has influenced the transfer prices. It was submitted that the assessee's arguments about regarding the business and product lifecycles in the automobile industry are new arguments at this stage, and, in any case, the Transfer pricing officer should have an opportunity to examine the matter on merits. On exclusion of General Motors from comparables, it was submitted that General Motors was showing huge losses for all the three years and these sustained losses show that these results are not in synchronization with the passenger car segment of the auto market as a whole. In such circumstances, the onus is on the assessee to show that inclusion of such data is essential for working out arms length price. On the question of adjustments on account of higher import content and under utilization of capacity, the stand of the Transfer Pricing Officer submitted that the emphasis, in the scheme of the legislation, is on open market conditions and it is only on account of demand and supply related factors that adjustments can be made. It was explained that the net profit margin can be adjusted only when the differences between the controlled and uncontrolled transaction could materially affect the amount of net profit margin in the open market. In the open market, it is only the demand and supply related parameters which could materially affect the net profit margin and nothing else. Therefore, the Appellant's plea that the adjustments need to be made on account of higher import duties and under utilization of capacity is devoid of legally sustainable merits. According to the learned TPO, merely because the Appellant is paying higher import duties does not affect its net profit margin in the open market. It was also contended that a plain reading of the legislative provisions would show that the adjustments are not confined to such profit as are relatable to the international transactions with the AEs but to the profits of the assessee as a whole. This demarcation of profits, according to the learned TPO, is unreal and unwarranted. On the question of relaxation of 5 per cent, learned TPO submitted that as evident from the press release, a copy of which was filed before us, it was a temporary measure not to pursue the cases in which variation between ALP and the transaction price is less than 5 per cent, but that does not mean that relaxation of 5 per cent is to be allowed even it is established that the variation between the arms length price and the transaction price is more than 5 per cent. He pointed out that the assessee had launched only one model of the car in the relevant period and, therefore, these discussions about the product cycles are not really much relevant. It was then submitted as for the turnaround by the General Motors, additional facts will have to be ascertained.

18A. In rejoinder it was submitted that growth of passenger car segment in the auto industry was not the issue, as has been made out by the learned Departmental Representative. What the assessee seeks to rely upon is not the economic cycle but the product cycle. It was submitted that the passenger car segment of the auto industry was somewhat cyclic in the nature that there are product cycles and there is clear impact of every new launch of product on profits. An effort was made to show this impact from the results referred to in the CRISIL report filed by the assessee. As regards exclusion of loss making companies, it was noted that the revenue authorities have agreed that a loss making company, for the reason of loss making alone, cannot be ignored as a comparable. Once again a reference was made to the CRISIL report which shows positive results of General Motors for 2003-04 and it was submitted that what is to be seen is similarity in functionality. It was also submitted that the General Motors had also launched new products, as was the case with the assessee-company. On learned DR's plea that adjustments can only be made in respect of demand and supply factors, it was submitted that if be the case, no adjustments can be made at all. On 5 per cent variation in ALP, it was submitted that the year before us was first full year of assessee's operations and second year of transfer pricing legislation being in force. As regards computation of profits from international transactions, it was contended that the emphasis is on 'international transactions' and, therefore, profit adjustment is to be done on the basis of profit from international transactions alone. We were thus urged to quash the arms length price adjustments sustained by the CIT(A) and hold that, in accordance with the TNMM method, no adjustments in called for in the income returned by the assessee.

19. One of the things which is clearly discernable from the facts of this case is that so far as the year before us is concerned, which was incidentally first full year of assessee's operations, the import content of the raw materials was as high at 98.55 per cent. This is materially different from the import content of the raw material in the cases of the comparables selected by the revenue authorities. The import content of raw material in these cases ranged from 26 per cent to 56.83 per cent [Hindustan Motors - 31 per cent; Honda Siel - 48.2 per cent; Hyundai Motors - 25.29 per cent; General Motors 56.83 per cent and Maruti Udyog - 26 per cent]. This variation is particularly important since the business model of a car maker having 98.5 per cent import content in raw material normally cannot be the same as of a car maker having import content of 26 per cent to 56.84 per cent. While the latter show substantial indigenous inputs in the raw material, the former is virtually an assembly job of the imported knocked down kits. These business models are so fundamentally different that, in our understanding, no comparisons are possible unless the impact of the import contents are eliminated, or unless it is the case, as was the case before the Tribunal in Sony India Ltd.'s case (supra), that the decision to have such a huge import content was a conscious decision taking into consideration all commercial considerations including the obvious benefits of a better quality which is bound to reflect or translate into higher seller product. No doubt, a higher import content of raw material by itself does not warrant, an adjustment in operating margins, as was held in Sony India Ltd.'s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. As was observed by a coordinate bench of this Tribunal in the case of E Gain Communications (P.) Ltd. (supra) "the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". We do not agree with the Assessing Officer that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the business models of the comparables that the Transfer Pricing Officer has adopted in this case. The adjustments then are required to be made for functional differences. The other way of looking at the present situation is to accept that business models of the assessee-company and the comparable companies are the same and it is on account of initial stages of business that the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and profits in fit cases. We also do not agree with the authorities below that the onus is an the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in public domain. In such a situation, i.e., when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of assessee's operations and complete facilities ensuring a reasonable indigenous raw material content was not in place. The assessee's claim is that it was in these circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the Assessing Officer was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a coordinate bench and we are in respectful agreement with the views of our esteemed colleagues. This additional argument was not available before the authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the Transfer Pricing Officer to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the Transfer Pricing Officer for fresh adjudication in the light of our above observations and particularly dealing with the contention that the present year being first full year of operations, the assessee was forced to have higher import content in raw material as the manufacturing facilities, and vendor development, was not complete, as also dealing with the contention that the business model in this year of operation was fundamentally different from the business model of the comparable concerns. The Transfer Pricing Officer will also consider whether the import content of the raw material have substantially come down in the succeeding years and will take into account the conclusions that can be drawn from such a decline or consistency, as the case may be, of the import content in the raw material. In case the Transfer Pricing Officer comes to the conclusion that adjustments in operating profits margin on account of peculiarities of business model resulting in higher import duties, the Transfer Pricing Officer will consider the manner in which impact of the same can be reasonably neutralized in a practical manner. One of the suggestions that the assessee has advanced before us is to take into account impact of the non-cenvatable import duty additionally borne by the assessee. The Transfer Pricing Officer has to consider the same, and other options which can be put into service to neutralize the impact of such higher costs. While so deciding the matter afresh, the Transfer Pricing Officer shall also give a due and fair opportunity of hearing to the assessee, shall deal with the contentions of the assessee in a fair and objective manner by way of a speaking order, and in accordance with the law and judicial precedents as may be available at that time. As we remit the matter to the file of the Transfer Pricing Officer, we are alive to the fact that it is difficult to miss, even on a cursory glance, that many of the arguments and facts in support of arguments are indeed taken up before us for the first time, and, to that extent, the authorities below never had an opportunity to examine these aspects of the matter. Take, for example, the submissions regarding capacity under utilization. It was never taken up before the Transfer Pricing Officer in the first place. Similarly, the issues regarding product cycles and impact of these product cycles on operating profit margins was never before the Assessing Officer. The relevance of multiple year data hinges on acceptance of this theory about relevance of product cycle. The CRISIL report which has been repeatedly referred before us was apparently not available to the Transfer Pricing Officer. In these circumstances and bearing in mind the fact the year before us was only second year of implementation of transfer pricing regime and it was a new area of taxation laws in which law had not developed, we think that it will meet the ends of justice that the assessee has liberty to raise all these arguments before the Transfer Pricing Officer so that the Transfer Pricing Officer can examine all the relevant contentions and decide the same by way of a speaking order in accordance with the law. As we are remitting these issues to the file of the Transfer Pricing Officer, and as these issues are somewhat academic at this stage which will be relevant only when the assessee's plea regarding adjustment on account of higher import duties being warranted by peculiarities of operations in this year, we refrain from making any observations on the merits of the case. With the above observations, we hereby remit the matter to the file of the Transfer Pricing Officer so far as question of determination of Arms Length Price under the TNMM method is concerned.

20. The only other issue that is argued before us is the adjustment for +/- .5 per cent. Learned representatives agree that this issue is now covered in favour of the assessee by a series of Tribunal decisions including decision in the case of Sony India Ltd. (supra) even as learned Departmental Representative vehemently supported the stand of the authorities and justified the same. We, therefore, uphold assessee's grievance in this respect and direct the Assessing Officer to bear, in mind the same while deciding the matter afresh. To summarise, (i) the applicability of CUP method is rejected on the facts of this case; (ii) on the question of determination of ALP as per TNMM method, the matter is remitted to the file of the TPO with specific directions; and (iii) the grievance against denial of 5 per cent adjustment is upheld in principle in accordance with the coordinate bench decisions.

21. In the result, the appeal is partly allowed in the terms indicated above.