1. These appeals have been preferred by the Revenue under section 260A of the Income-tax Act, 1961 (hereafter the “Act”) impugning a common order passed by the Tribunal in I.T.A. 3287/Del/2011 and 5546/Del/2012 (Asst. CIT v. Kehin Panalfa Ltd., [2015] 4 ITR (Trib)-OL 492 Pelhi)). The said appeals were also preferred by the Revenue against the orders passed by the Commissioner of Income-tax (Appeals) hereafter CIT(A) on March 29, 2011 and August 27, 2012 allowing the appeals preferred by the assessee against the assessment orders passed by the Assessing Officer (hereafter “AO”) in respect of the assessment years 2004-05 and 2005-06 respectively.

2. The controversy involved in the present case relates to the transfer pricing adjustment (hereafter TP Adjustment) made by the Assessing Officer in respect of international transactions relating to the purchases made and the royalty paid by the assessee to Keihin Corporation, Japan (hereafter “KC”). The relevant facts relating to the assessment year 2004-05 are narrated as under

3.1 The assessee is engaged in the manufacture and sale of air-conditioners for cars manufactured by the Honda Siel Cars India Ltd. During the relevant previous year, the assessee entered into “international transactions” for purchase of parts and components; payment of guidance fee; payment of royalty; and payment of fees for technical know-how. As the international transactions were more than Rs. 5 crores in value, a reference was made to the Transfer Pricing Officer (hereafter “TPO”) for determining of the arm's length price (hereafter “ALP”) under the provisions of section 92CA of the Act.

3.2 The assessee submitted a transfer pricing report calculating the arm's length price by using transactional net margin method (hereafter “TNMM”) and using the ratio of operating profit to capital employed as the profit level indicator (hereafter “PLI”). The Transfer Pricing Officer accepted transactional net margin method as the appropriate method but rejected the profit level indicator adopted by the assessee. He used operating profits to the total cost as the appropriate profit level indicator and computed the profit level indicator of comparables at 8.29 per cent, as against the assessee's profit level indicator of 6.22 per cent.

3.3 The total operating income or revenue of the assessee for the relevant period was Rs. 72,24,22,000. Applying the margin of 8.29 per cent as determined by the Transfer Pricing Officer on the basis of selected comparables. The Transfer Pricing Officer concluded that the total operating expenses ought to have been Rs. 66,71,17,924. Since the actual operating expenses incurred by the assessee during the period were Rs. 68,00,88,000, the Transfer Pricing Officer held that a transfer pricing adjustment of Rs. 1,29,70,076 ought to be made in respect of expenses attributable to the international transactions. In so far as the payment of royalty of Rs. 1,24,41,118 is concerned, the Transfer Pricing Officer had held that no royalty would be payable if the transactions were on arm's length basis as according to the Transfer Pricing Officer, the assessee was functioning as a contract manufacturer. The Transfer Pricing Officer observed that all the sales were being made by the petitioner to the Honda Siel Cars India Ltd. and 99.99 per cent, of the said company were held by the Honda Motors Co. Ltd. (Japan), which also held 41.33 per cent, of KC (the associated enterprise in the present case). KC in turn held 74 per cent, shares in the assessee. The Transfer Pricing Officer reasoned that since the products being manufactured by the assessee were specifically designed for Honda cars produced by the Honda Siel Cars India Ltd. and the technical designs and intellectual property rights were held by their parent or group companies, the assessee was in effect manufacturing for its related enterprise and, therefore; payment of arty royalty on sales would be unreasonable. The Transfer Pricing Officer made observations to the effect that the payment of royalty had, in fact, inflated the operating costs and was “villain of the piece”.

3.4 The Assessing Officer passed an assessment order dated December 26, 2006 making an addition of Rs. 1,29,70,076 on account of transfer pricing adjustment made by the Transfer Pricing Officer. The assessee had reflected Rs. 1,24,41,000 as expenses on royalty. The Transfer Pricing Officer computed the arm's length price for royalty as nil, which was subsumed in the transfer pricing adjustment of Rs. 1,29,70,076. In addition, the Assessing Officer disallowed 25 per cent, of the expenses on account of royalty amounting to Rs. 22,53,000 as being capital in nature.

3. With respect to the assessment year 2005-06, the Transfer Pricing Officer did not draw any adverse inference with respect to the international transactions except the transaction relating to payment of royalty. The Transfer Pricing Officer followed a similar reasoning as adopted in respect of the assessment year 2004-05 and passed an order dated October 24, 2008, directing the Assessing Officer to make an addition of a sum of Rs. 1,97,40,726 being the amount of royalty, for the financial year 2004-05. The Assessing Officer, following the directions of the Transfer Pricing Officer, made an addition of the aforesaid sum and passed an assessment order dated December 29, 2008.

4. The assessee preferred appeals before the Commissioner of Income-tax (Appeals) against the assessment orders dated December 26, 2006 in respect of the assessment year 2004-05 and the assessment order dated December 29, 2008 in respect of the assessment year 2005-06.

5. The Commissioner of Income-tax (Appeals), by an order dated March 29, 2011 allowed the assessee's appeal against the assessment order dated December 26, 2006. Before the Commissioner of Income-tax (Appeals) the assessee contended that the computation of the transfer pricing adjustment was flawed, inasmuch as, the Transfer Pricing Officer had also attributed transfer pricing adjustments relating-to uncontrolled third party transactions to the international transactions. The international transactions in issue constituted only 23.38 per cent, of the total expenses and, therefore, the adjustment on, account of operating expenses attributable to international transaction would necessarily be in the same proportion. According to the assessee, the same would amount to Rs. 30,33,593. The expenses attributable to the international transaction (i.e., 23.38 per cent, of the total expenses) amounted to Rs. 15,90,66,935 and after the transfer pricing adjustment, the expenses on arm's length basis were computed at Rs. 15,60,33,342 (i.e., Rs. 15,90,66,935 − 30,33,593). The assessee, further contended that 5 per cent, of the arm's length price computed as above would amount to Rs. 78,01,667. The assessee urged that the transfer pricing adjustment fell within the aforesaid range and, therefore, by virtue of second proviso to section 92CA, no transfer pricing adjustments were liable to be made. This contention was accepted by the Commissioner of Income-tax (Appeals) and the transfer pricing adjustments made by the Assessing Officer were deleted.

6. The Commissioner of Income-tax (Appeals) also held that the Transfer Pricing Officer was in error in holding that no royalty was payable. The Commissioner of Income-tax (Appeals) held that the functions performed by the assessee included procurement and inventory management, production and manufacturing planning, co-ordination of production and sales, import of goods, maintenance of production facilities and quality control functions; therefore, the assessee could not be considered as a contract manufacturer. The Commissioner of Income-tax (Appeals) also held that the Transfer Pricing Officer exceeded its jurisdiction by rejecting the agreements entered into between the assessee and the KC and not computing the arm's length price in accordance with the Act.

7. The Commissioner of Income-tax (Appeals) also allowed the appeal preferred by the assessee against an order dated December 29, 2008 passed by the Assessing Officer in respect of the assessment year 2005-06 for the same reasons as indicated in respect of the appeal relating to the assessment year 2004-05.

8. The Revenue appealed against the decisions of the Commissioner of Income-tax (Appeals) before the Tribunal. Before the Tribunal, the assessee conceded that it had no objection to the decision of the Transfer Pricing Officer regarding the adoption of profit-level indicator of operating profit to total cost. However, the assessee urged that the adjustments computed in respect of the entire expenses could not be loaded on the international transactions. The Tribunal upheld the orders passed by the Commissioner of Income-tax (Appeals) and rejected the appeals by a common order dated May 6, 2014.

9. The learned counsel appearing for the revenue contended that the Tribunal has grossly erred in apportioning the adjustment on account of expenses over the uncontrolled transactions and international transactions. He urged that in respect of the assessment year 2004-05; the entire adjustment on account of the difference in operating expenses of Rs. 1,29,70,076 as determined by the Transfer Pricing Officer ought to have been adjusted only against the international-transaction, which admittedly constituted only 23:38 percent, of the operating income or revenue! He next eferred to the technical collaboration agreement dated Septemher 12, 1997 entered into between KC and the assessee and contended that the royalty paid by the assessee was in excess of the amounts as computed under the said agreement.

10. In so far as the contention that the amounts paid were not in accordance with the agreement between the assessee and the KC is concerned, we find that no such contention had been urged by the Revenue either before the Commissioner of Income-tax (Appeals) or before the Tribunal. Therefore, in our view, no such plea can be permitted to be taken for the first time in these proceedings.

11. The contention that the adjustment on account of expenses as determined by the Transfer Pricing Officer must be attributed entirely to the international transaction is bereft of any merits. During the financial year 2003-04 relating to the assessment year 2004-05, the assessee had reported an operating income of Rs. 72,24,22,000. The total expenses for the said period amounted to Rs. 68,00,88,000. Admittedly, the international transactions in question amounted to Rs. 15,90,66,935 which were only 23.38 per cent, in value of the total expenses. The Transfer Pricing Officer had determined the profit level indicator (operating profit over total cost) of comparable cases at 8.29 per cent, against 6.22 per cent, as declared by the assessee. Applying the profit level indicator of comparable cases, the adjusted total expenses were computed at Rs. 66,71,17,924, thus, indicating an adjustment of Rs. 1,29,70,076. As is apparent from the above, the said adjustment related to the entire expenses and not just the international transactions alone. Since the international transactions only constituted 23.38 per cent., a transfer pricing adjustment proportionate to that extent could be made in respect of such international transactions. Thus, only an adjustment of Rs. 30,33,593 could be attributed to the international transactions in question. The same was accepted by the Commissioner of Income-tax (Appeals) as well as the Tribunal. We do not find any infirmity with their decision. We also find no infirmity with the view of the Commissioner of Income-tax (Appeals) and the Tribunal that the assessee had acted like any other original equipment manufacturer (OEM) and could not be treated as a job worker or a contractor.

12. We find no substantial question of law that arises for our consideration in these appeals. Accordingly, the appeals are dismissed. No order as to costs.