TMI Blog2014 (8) TMI 1153X X X X Extracts X X X X X X X X Extracts X X X X ..... However, on the other hand, for the impugned assessment year the TPO has not made any adjustment in the PLI of manufacturing segment nor trading segment, though he found that an adjustment of ₹ 97.82 Crores was required for royalty payments. Since the Co-ordinate Bench in its order for AY: 2007-08 has made a specific observation that analysis based on combined transactions alone could be adopted, it is necessary for us to have a look at the position for the impugned assessment year where segmental results in trading and manufacturing was considered by the TPO to be well within Arms Length. Going by the methodology adopted by the learned TPO, the combined results as mentioned by us above, gave the assessee a PLI of 4.878% for international transactions. In such a scenario, considering the argument of learned DR, that ALP of the royalty payments though not ‘nil’ had a value which required to be properly fixed, a fresh look by the TPO/AO is required. AO/TPO has to see whether in a case where there is no ALP adjustment required for manufacturing/trading segment or combining both of them, a separate consideration of ‘Royalty’ for ALP adjustments is required and if so what co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO referred to TPO in accordance with Sec.92CA of the IT Act. 4. For justifying the values of the international transaction entered into by it, assessee had adopted TNMM method and the TP documents submitted by the assessee were at an entity level. Learned TPO was of the opinion that activities of the assessee had to be segmented and TP analysis was required to be done for each segment separately. As per the TPO Rule 10C(1) mandated adoption of most appropriate method. TPO rejected the entity level and analysis of international transaction done by the assessee. He segmented the activities of the assessee to manufacturing activity and trading activity. Though, he included royalty payments made by the assessee as a part of expenditure, while computing the operating profit under the manufacturing segment, learned TPO chose to have a separate analysis for determining the ALP of royalty payment. Royalty payment that was selected for a separate ALP study were effected by the assessee to M/s Toyota Kirloskar Motor Pvt.Ltd., Japan and M/s Toyota Motor Asia Pacific Pte Ltd., Singapore both of which were AE of the asseseee and the amount involved was ₹ 97,82,11,238/-. While maki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis of royalty payments under CUP method was not warranted. Further, as per the assessee, trading and manufacturing were not distinct activities, but highly linked transactions and closely related to each other. In any case as per assessee the ALP of royalty could never have been considered as nil, as done by the TPO that too without being aided by any comparables. Assesseee also contradicted the conclusion of TPO that it had not derived any economic benefit from the know-how received from the associated enterprises, for which royalty payments were effected. 7. However, DRP was not appreciative of any of the above contentions. It over ruled the objections raised by the assessee. Thereafter, the AO completed the final assessment on the lines perused in the draft assessment. 8. Now before us, learned AR submitted that similar issue had already come up before this Tribunal, in assessee s own case for assessment year 2007-08 in ITA No.1315(B)/2011 dated 11-07-2014. Relying on this order, learned counsel for the assessee submitted that the Tribunal had disapproved the segmentation of the functions. As per the learned AR, the Tribunal had accepted the contention of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with respect to royalty payments effected by the assessee. In the first place what we find is that the Coordinate Bench of this Tribunal in its decision in assessee s own case for the assessment year 2007-08 referred supra, had clearly held that segmented approach was not warranted in assessee s case, since the trading and manufacturing transactions undertaken by the assessee were so interlinked and interconnected, requiring it to be evaluated together. We find that there was no change in the business model of the assessee for the impugned assessment year. Hence, the order of the Tribunal for assessment year 2007-08 would be very relevant portion. Paras.41 to 47 of the order of the Tribunal is re-produced here under; 2. We have given a very careful consideration to the rival submissions. On the issue as to whether the international transactions have to be considered separately or independently without aggregating them as part of the segment to which they relate, we find that the term international transaction has been defined in section 92B of the Act to mean and include transactions between two or more AEs, either or both of whom are nonresidents, in the nature of purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions need to be evaluated together rather than individually. In this regard, we find that the submissions made by the Assessee before TPO as well as before DRP have not been considered at all. The TPO proceeded on the basis that ALP of each transaction has to be examined independently/individually by placing reliance on the decisions of Tribunal in the case of Star India Ltd. (supra) and UKB(I) (P) Ltd. (supra). We agree with the submissions of the learned counsel for the assessee that these decisions have in fact accepted in principle that aggregation of transactions have to be done where they are interlinked but have on facts found that transactions were not interlinked and therefore held that ALP of transactions have to be determined individually. The following decisions relied upon the learned counsel for the assessee also supports the plea of the learned counsel for the assessee. : i. M/s.Thyssen Krupp Industries vs. ACIT (ITA No.7032/Mum/2011), ii. Hindustan Unilever Ltd. vs. ACIT (ITA No.7868/Mum/2010), and iii. DCIT vs. CMA CGM Global India (P) Ltd. (ITA No.5979/Mum/2010) 44. The DRP without examining the submissions on behalf of the assessee has simply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that prevailed in that year. We find that the facts in the present assessment year are also identical and there has been no change whatsoever in the business model of the assessee. In these circumstances, we are of the view that the decision rendered by the Tribunal would be applicable for this assessment year also. Respectfully following the decision of the Tribunal, we hold that the trading and manufacturing segment of the assessee are not distinct and are inter-related warranting combined transaction approach. 46. We have already seen in para 9 of this order that the TPO has arrived at the bifurcation of the manufacturing and trading segmental operating results. In view of our conclusions that the trading and manufacturing segments are interlinked and therefore a combined transaction approach has to be adopted, we combine the results so arrived at by the TPO, which is given in para 9 of this order. If the segmental results are combined, the operating revenue of the assessee would be 3767.91 crores and the operating profit would be ₹ 94.34 crores. Thus, the operating profit margin on sales would be 2.517. 47. Even assuming that the adjustment on account of operationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TA No.1068/2011 dated 29.03.2012. In the aforesaid decision, the assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know-how/ brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, the Hon ble Delhi High Court held that the transfer pricing guidelines laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage re-structuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) the form and substance of the transaction are the same but arrangements made i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly studying these objections, the DRP cryptically approved the TPO s position of nil ALP. In AY 2009-10 however, the DRP has discussed in elaborate detail the assessee s objections on similar grounds and has arrived at the conclusion that the assessee not only received the technology support as well as the related intangibles in terms of production processes, but has also benefitted from these technological practices, standards and know-how which were not created locally by itself. The Toyota Production System, standardized on a world-wide basis, has also been studied for its operational efficiency by premier academic institutions. I am inclined to agree with this conclusion after examining the facts of the appellant s case and the evidences available. The TPO s argument that no benefit was derived by the appellant from the technology for which royalty was paid is not supported by facts and evidences. The fact that the royalty rate was within the permissible limit specified by the Govt. of India and approved by the RBI is an additional argument in support of the legitimacy of the said payment. 10.4 In view of the above discussion, the TPO s determination of the ALP of the roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19 Total cost 825.69 3116.13 Operating profit 25-51 176.64 Profit on sales 3% 5.36% The total revenue if both segments are considered together would come to ₹ 4.843.97 Crores and operating profit 202.15 Crores. Profit on sales which is the PLI adopted, would be 4.878%. Learned TPO, himself at Annexure-A of his order has given a finding that arithmetic mean of the PLI of the comparables considered by him for manufacturing segment after adjustment was 7.73% At Annexure-F, he has given a finding that PLI of the trading segment of the comparables was 6.42%. Learned TPO has also given a finding that both these were within the +/- 5% range allowable under the Act. It is also not disputed that while computing the manufacturing segment results the TPO himself had accepted royalty as a part of cost. This is clear from the segmental result given by the TPO at para-3 of his order which is not reproduced here for brevity. Going by the methodology adopted by the learned TPO, the combined results as menti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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