TMI Blog2013 (12) TMI 243X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's international transactions – The matter was restored for fresh decision. Additional expenses incurred for import of raw materials – Held that:- Following Skoda Auto India P. Ltd. v. Asst. CIT [2009 (3) TMI 249 - ITAT PUNE-A] – The issue was restored for fresh decision. Computation of Arm’s length price – Variation of 5% - Held that:- The issue was restored for fresh decision in view of amendment to section 92C made by the Finance Act, 2012. Material handling solutions – Whether Assembling/ manufacturing, sales/ distribution, providing technical and after sales services can be clubbed for benchmarking the international transactions - Held that:- It is only on account of the manufacturing activity that the activity of commissioning and installation of the equipment arises and pertinently all the aforesaid activities are negotiated and contracted for at one instance - The activity of installation and commissioning/engineering services is “closely linked” with the manufacturing activity and deserves to be aggregated and construed as a single transaction for the purposes of determining the arm’s length price as per the method adopted – In appropriate circumstances where clo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same by Rs. 6,36,05,887. The aforesaid adjustment to the international transactions determined by the Transfer Pricing Officer has since been considered by the Assessing Officer while computing the total income of the assessee. The Assessing Officer has computed the total income of the assessee as per section 92C(4) of the Act having regard to the arm's length price of the international transactions so determined by the Transfer Pricing Officer and accordingly an addition of Rs. 6,36,05,887 has been made to the total income. The subject matter of dispute before us revolves around the transfer pricing adjustment of Rs. 6,36,05,887 made to the international transactions undertaken by the assessee with its associated enterprises. Notably, the Assessing Officer passed the impugned order under section 143(3) read with section 144C(13) of the Act in pursuance to the directions issued by the Dispute Resolution Panel (in short DRP) vide its order dated May 20, 2011, whereby the determination of arm's length price by the Transfer Pricing Officer was affirmed. Against such framing of assessment by the Assessing Officer, the assessee is in appeal before us raising the following grounds of app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by comparable companies based on the financial data pertaining to the year ended March 31, 2007 only by rejecting the financial data of comparables for the financial years 2004-05 and 2005-06 considered by the appellant. Use of contemporaneous data 10. erred in computing the arm's length price using the financial information of the comparable companies available at the time of assessment, although such information was not available at the time when the appellant complied with these regulations ; Erroneous levy of interest under section 234B of the Act. 11. erred in levying interest under section 234B of the Act to the extent of addition to income on account of transfer pricing adjustment based on the updated financial data for the comparable companies ; Initiation of penalty proceedings under section 271(1)(c) of the Act. 12. erred in initiating levy proceedings under section 271(1)(c) of the Act. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the learned Assessing Officer to decide this appeal according to law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents and spare parts and renders technical and after sales service to the Indian customers. For the previous year ending on March 31, 2007 corresponding to the assessment year under consideration, the appellant was found to have entered into the following international transactions within the meaning of section 92B of the Act with its associated enterprises : Sr. No. Detail of transactions Amount (Rs.) 1. Import of raw materials, components and spares 10,68,36,349 2. Import of trading goods 15,66,43,926 3. Export of components and spares 1,01,50,152 4. Receipt of Technical service - Rs. 11,89,194 Professional service - Rs. 86,62,357 5. Rendering provision of marketing service 30,34,352 6. Provision of engineering/supervisory services 39,82,635 7. Development cost and/or remuneration for technical consultancy and know-how 62,29,938 8. Guarantee and issuing render fee 11,80,360 9. Reimbursement of expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time of hearing as noted earlier. 10. The second and more potent difference between the approach of the assessee and the Transfer Pricing Officer is as follows. In its transfer pricing study, the assessee aggregated the transactions itemised at 1 to 7 in tabulation appearing in para 7 of this order, for the purposes of benchmarking the same while determining the arm's length price using transactional net margin method. In other words, the international transactions in connection with (i) import of raw materials, components and spares for assembly/ manufacture of material handling products ; (ii) import of equipment components and spares ; (iii) export of components and spares ; (iv) receipt of professional/consultancy services ; (v) provision of marketing services ; (vi) provision of engineering/supervisory services ; and (vii) development cost and/or remuneration for technical consultancy/know-how were aggregated and considered as a composite transaction for the purpose of benchmarking it with the comparable uncontrolled transactions. The Transfer Pricing Officer noticed that the aggregated transactions included transactions relating to (i) import of trading goods which was ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Pricing Officer noticed that the arithmetic mean of the operating margin ratio of seven comparable companies was 10.64 per cent. and that of the assessee s manufacturing segment was (-) 7.05 per cent. As a result, the international transactions of the assessee relating to manufacturing activity were not found to be stated at the arm's length price and therefore, an adjustment was worked out. The difference in the arithmetic mean of operating margin of comparable companies and that of the assessee for its manufacturing activity was worked out at 17.69 per cent. (i.e. 10.64 per cent. minus (-) 7.05 per cent.). Accordingly, the adjustment required to the assessee's international transactions falling under the manufacturing segment was computed by applying 17.69 per cent. on the net sales of manufacturing segment adopted at Rs.35,95,58,438 which came to Rs. 6,36,05,887. In this background, now we may consider the objections raised by the assessee and the rival stand of the Revenue thereof. 12. Before us, learned counsel for the assessee, at the outset, pointed out that the income-tax authorities have erred in not accepting the plea of the assessee that the transfer pricing adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities. However, the factual matrix brought out by the assessee has not been controverted. 14. We have carefully considered the rival submissions on this aspect and find ourselves inclined to uphold the plea of the assessee. Ostensibly, the objective of determining the arm's length price under section 92C of the Act in relation to an international transaction carried out by an assessee with its associated enterprise is to supplant the provisions of section 92(1) of the Act, which prescribes that income arising from an international transaction shall be computed having regard to the arm's length price, and the meaning of the expression "international transaction" is contained in section 92B of the Act to mean a transaction between two or more associated enterprises. Therefore, it is a natural corollary that the adjustment arising as a result of transfer pricing analysis is to be confined to international transactions undertaken with the associated enterprises alone and not in relation to non-associated enterprise transactions. Similar point arose in the assessee's own case for the assessment year 2006-07 in I.T.A. No. 120/ PN/2011, (Demag Cranes and Components (India) P. Ltd. v. De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer. It is pointed out that the claim can be accepted in case it can be established that (i) the difference has a material bearing on the pricing of the transactions in question ; (ii) such adjustment can be accurately determined ; and (iii) such an adjustment would enhance its comparability. As per the learned Departmental representative, in the present case, the appellant has not established so, and therefore, the plea of the assessee is unjustified. In this connection, it has been emphasised, on the basis of rule 10B(1)(e)(iii) of the rules that the net profit margin arising in comparable uncontrolled transaction is permitted to be adjusted to take into account the differences between the international transaction and the comparable uncontrolled transactions and that too, only if such differences would "materially affect" the amount of net profit margin in the open market. The learned Departmental representative submitted that comparable companies were selected after comparing the functions, assets employed and risks assumed, and therefore, no adjustment is warranted in this case on account of working capital differences. 18. We have carefully considered the rival submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, which are enough to adjudicate the said request by the Assessing Officer/Dispute Resolution Panel. It is not the case of the Dispute Resolution Panel that the above claims of the assessee are incorrect. Alternatively, it is not the request of the Revenue's Departmental representative that these said issues should be remitted for another round of the proceedings before the Revenue authorities. In our opinion, the existence of difference at 3.41 per cent., which is worth Rs. 31,72,099, attributable to the 'working capital' ought to amount to the 'material difference' considering the existing unadjusted operating margin of the comparables at 7.18 per cent. In these circumstances, we are of the opinion that the said working capital differences constitutes quantitatively likely to materially affect the arm's length price/arm's length operating margin of the comparable. Therefore, the claims of the assessee are allowed. Accordingly, the grounds 4(a) is covered by the cited decisions and is allowed pro tanto." 19. In this background, learned counsel for the assessee has put on record a calculation sheet showing that the margin of comparable companies, after considering working capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Before the Transfer Pricing Officer the assessee specifically relied upon the decision of the Tribunal in the case of Skoda Auto India P. Ltd. v. Asst. CIT [2009] 122 TTJ (Pune) 699 wherein the adjustment in respect of import duty additionally borne by the assessee was considered in order to facilitate benchmarking of international transaction with the comparable companies. The income-tax authorities have denied plea of the assessee for the reason that in terms of rule 10B(1)(e) of the Rules, the adjustments are permissible only in respect of the comparable uncontrolled transactions and not in the case of tested party. 21. Before us, learned counsel for the assessee has pointed out that the adjustment has been denied by the lower authorities unjustly even when the commercial reasons were demonstrated. It has been pointed out that factually it was demonstrated before the Transfer Pricing Officer and the learned Dispute Resolution Panel that the raw material, spares and components were imported from associated enterprises of Rs. 10,93,36,384 as against total material consumed in the manufacturing segment of Rs.29,05,89,906, i.e., 37.63 per cent. imports as percentage of total co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinate Bench in the case of Skoda Auto India P. Ltd. [2009] 122 TTJ (Pune) 699 upheld the plea of the assessee relating to adjustment on account of additional import cost in order to facilitate benchmarking with the comparable companies. The following discussion in operative portion of the order is relevant (page 62 of 1 ITR (Trib)-OL) : "The perusal of the impugned orders shows that the abovecited guidelines by way of decision of this Bench of the Tribunal in the case of Skoda Auto India P. Ltd. [2009] 122 TTJ (Pune) 699 were not available to the Revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the Transfer Pricing Officer with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the Transfer Pricing Officer/Assessing Officer/Dispute Resolution Panel shall see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub-rule (3) of rule 10B of the Income-tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto." 24. Following the aforesaid precedent, facts being similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andling equipment imported by it and also components and spare parts to customers in India. The activities also include providing technical and after sales services to the customers. The international transactions carried out with associated enterprises, within the meaning of section 92B of the Act, and which are the subject matter of consideration, are enumerated by way of items 1 to 7 in the tabulation in para 7 of this order. The assessee aggregated the aforesaid transactions for the purpose of benchmarking the same with comparable uncontrolled transactions on the ground that all of them are closely interlinked to the activity of manufacture of equipments. In other words, as per the assessee, the seven transactions, viz., (i) import of raw materials, components and spares for assembly/manufacture of material handling products ; (ii) import of equipment components and spares ; (iii) export of components and spares ; (iv) receipt of professional/consultancy services ; (v) provision of marketing ; (vi) provision of engineering/supervisory services ; and (vii) development cost and/or remuneration for technical consultancy/knowhow have been considered to be a part of manufacturing ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fies that all transactions which are similar in nature need to be aggregated for the purpose of transfer pricing analysis. In this manner, the approach of the lower authorities is sought to be assailed. 29. On the other hand, the learned Departmental representative appearing for the Revenue has submitted that undisputedly the assessee carries out distinct activities of manufacturing of material handling equipment ; distribution of material handling equipment manufactured by its associated enterprises after importing ; export of components and spares to its associated enterprises, providing technical and marketing services ; supervisory services for erection ; and commissioning of equipment, etc. The learned Departmental representative pointed out that separate invoices are raised for such activities and that the linkage between these activities, if any, is only incidental and not "closely linked" so as to fall within the meaning of expression of "transaction" as per rule 10A(d) of the Rules on an aggregate basis. In this manner, the approach of the lower authorities has been defended. 30. We have carefully considered the rival submissions. Section 92B of the Act provides the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis." 31. In this background, considering the legislative intent manifested by way of rule 10A(d) read with rule 10B of the Rules, it clearly emerges that in appropriate circumstances where closely linked transactions exist, the same should be treated as one composite transaction and a common transfer pricing analysis be performed for such transactions by adopting the most appropriate method. In other words, in a given case where a number of closely linked transactions are sought to be aggregated for the purposes of benchmarking with comparable uncontrolled transactions, such an approach can be said to be well established in the transfer pricing regulation having regard to rule 10A(d) of the Rules. Though it is not feasible to define the parameters in a water tight compartment as to what transactions can be considered as "closely linked", since the same would depend on facts and circumstances of each case. So however, as per an example noted by the Institute of Chartered Accountants of India (in short the "ICAI") in its guidance notes on transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, we may now examine the facts of the present case. The primary activity of the assessee is to manufacture material handling equipments, viz., cranes and hoists. It is seen from the documents placed in the paper book that the assessee enters into a single negotiation with the customers, which, inter alia, includes manufacturing and supply of the material handling equipment, provision of commissioning and installation services, etc. Though the assessee raises different invoices for supply of equipments and separately for erection and commissioning charges, however, it is evident that the negotiations for the same are carried on at one go. In fact, at the time of hearing, it was specifically queried from the learned counsel as to whether the assessee is undertaking installation/commissioning activities independent of its own-supplied material handling equipments. It was clarified that the servicing and commissioning charges are earned only in relation to services performed for own-supplied manufacture/assembled material handling equipments. The aforesaid factual assertion is not disputed. Factually, it is the activity of manufacturing/ assembling of cranes, etc. done by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out with reference to the chart in this regard placed in the paper book and submitted that the segmental profitability was not computed on the basis of any separately maintained records, viz., books of account or vouchers but was computed by undertaking a statistical exercise. The costs were allocated as a proportion of sales/revenues and not an actual basis. In view of the aforesaid fact situation, we do not find that the availability of separate segmental profits in the present case can be a justifiable ground for the Transfer Pricing Officer to say that the transactions are not closely linked within the meaning of rule 10A(d) of the Rules. Thus, the activity of installation and commissioning/engineering services is closely linked with the manufacturing activity and deserves to be aggregated and construed as a single transaction for the purposes of determining the arm s length price as per the method adopted. 34. In view of the aforesaid discussion, in our opinion, the approach of the Transfer Pricing Officer, in outrightly rejecting the aggregation of all the transactions itemised at 1 to 7 in para 7 is flawed having regard to the facts and circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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