TMI Blog2014 (9) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... ities ought to have given objective findings on the submissions made by the assessee in this behalf - Besides DRP itself in preceding year has accepted the inclusion of assessee's comparable Spectra Industries Limited, in final list of comparable - TPO's order has not considered this aspect – there was no justification on record to deviate from what DRP has adopted – thus, the matter is to be remitted back to the Ao for fresh adjudication – Decided in favour of Assessee. - ITA No. 4811/Del/2012 - - - Dated:- 14-3-2014 - R.P. TOLANI AND B.C. MEENA, JJ. For the Appellant : Ajay Vohra, Neeraj Jain and Puneet Chugh. For the Respondent : Yogesh Kumar Verma. ORDER:- PER : R.P. TOLANI This is assessee's appeal against assessment order dated 8-8-2012 passed by the DCIT Circle 12(1), New Delhi u/s 143(3)/144C pursuant to DRP directions u/s 144C(5) of the Income-tax Act, 1961. Following grounds are raised: 1. That the assessing officer erred on facts and in law in completing the assessment under section 144C/143(3) of the Income-tax Act, 1961 ('the Act') at an income of ₹ 12,24,31,931 as against the returned income of ₹ 4,45,96,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer erred on facts and in law in levying interest under section 234B and Section 234C of the Act. 5. That the assessing officer/DRP erred on facts and in law in initiating penalty proceedings under Section 271(1)(c) of the Act. 2. The appellant is a subsidiary of Honda Trading Corporation, Japan ( HTC ) which, in turn, is a subsidiary of Honda Motor Co. Ltd., Japan. The appellant is engaged in the business of trading of a variety of products such as steel products, dies, components of automobiles, motorcycles, scooters and other automotive components, and equipment etc. 2.1 During the previous year relevant to the assessment year under consideration the appellant entered into, inter alia, the following international transactions: Sl. No. International Transactions Amount Receipt Method Applied (i) Export of parts 7,747,651 RPM/ TNMM (ii) Import of parts (584,158,892) TNMM (iii) Imports of steel/ resin (161,738,642) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37,371,546 Total operating expense 779,035,657 677,147,384 1,456,183,041 Operating profit -1,437,909 OP/Sales% -0.0988% OP/Cost% -0.0987% 2.6 Further, TPO rejected the audited segment profitability, duly certified by an independent firm of Chartered Accountants, submitted by the appellant during the course of assessment proceedings and preferred to consider the unaudited segment profit analysis which was submitted along with the transfer pricing documentation. 2.7 The TPO also conducted fresh search for comparable companies. One new comparable, namely, Bharat Power Corporation Pvt. Ltd. Was included in the final set of comparable and excluded Spectra Industries Limited from the final set of comparables holding that the company has diminishing sales. Accordingly, the TPO arrived at a new set of two comparable companies OP/Sales ratio of 8.82%, as under: March-08 March-08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exchange Fluctuation income 58,956 4,12,39,132 3,662 Total Operating Income (A) +(B) 78,12,927 83,52,69,146 66,11,57,325 Expenditure Cost of Service/COGS 70,37,203 75,90,83,619 66,02,40,565 Indirect Operating Expenses 1,06,232 1,08,81,348 90,65,424 Total Operating Expenses 71,43,435 76,99,64,967 66,93,05,989 Operating Profit 669,492 65,304,179 (8,148,664) OP/Sales % 8.64% 8.23% -1.23% 3.2 The TPO however disregarded the aforesaid audited and certified segmental accounts of the appellant, on the following grounds: (i) The segmentation is issued and signed by the sister concern of the AR of the appellant. Such segmentation did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on TPO's disagreeing with the segment report filed as annexure to TP study report. The same are as under: (i) Commission and Service charges segment has been further bifurcated into domestic segment wherein, the appellant has earned commission from the supplier of the goods which was an Indian entity and the purchaser was also an Indian entity. (ii) Trading segment has been further bifurcated into domestic segment, wherein the appellant has merely acted as a reseller/trader of goods purchased from an Indian entity and sold it to again an Indian entity. (iii) Interest income and income from sale of fixed assets being wrongly considered as operating income has been excluded from other operating income. (iv) Exchange fluctuation income/loss has been considered on actual basis in every segment. (v) Indirect operating expense has been rationally distributed among various segments on the basis of sales ratio. For this, the commission income has been grossed up with the average mark-up of 1.5%, so as to reflect the sales value. The grossed up value of commission income and value of trading sales has been considered for allocation of indirect ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not audit. This was only a procedural requirement and once the same was complied with, the audited segmental accounts should have been admitted as additional evidence by the DRP in order to impart substantial justice to the assessee. Therefore, the audited segmental results filed by the assessee is admitted and the matter is restored back to the file of Assessing Officer for denovo consideration in accordance with law 4.8 Accordingly, since the operating profit margin over sales earned by the appellant in undertaking the transaction of sale of goods purchased from associated enterprise, in accordance with the audited segment account, at 8.23% is within safe harbor range of +/- 5%, than the average operating profit margin of the comparable companies considered by the TPO at 8.82%, the international transaction undertaken by the appellant should be considered at arm's length. 4.9 Even if the methodology adopted by TPO i.e. to combine the international transaction of import of parts and equipment from associated enterprise with domestic transactions undertaken by the assessee, is considered; then also the average profit margin of 8.82%as compared to assessee's 3.92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns are linked together to create synergy in all your functions. The trading transactions cannot be judged piecemeal but trading segment must be benchmarked as a whole. 4.13 Ld. TPO failed to consider that ALP is to be determined under the TP regulations by benchmarking relevant international transaction separately and the comparison is to be made of the profitability of the international transactions on a stand alone basis; and entity level comparison is to be resorted to, only when such stand alone comparison is otherwise not feasible. 4.14 Reliance in this regard is placed on the following decisions, wherein it has been held that arms length price should be determined on a transaction to transaction basis: - Development Consultants (P.) Ltd. v. Dy. CIT [2008] 23 SOT 455 (Kol.) - Star India Ltd. v. Asstt. CIT [IT Appeal Nos. 3846 /3585 (Mum.) of 2006, dated 28-5-2008] - Aztec Software Technical Services Ltd. v. Asstt. CIT [2007] 107 ITD 141 (Bang.) (SB) 4.15 Reliance is also placed on the decision of Special Bench of Tribunal in the case of L.G. Electronics India Pvt. Ltd. vs. ACIT (ITA No.5140/Del/2011), wherein, it is held as under: 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /07 - ACIT vs. T Two International Pvt. Ltd. : ITA No. 5644/Mum/2008 - Addl. CIT vs. TejDiam : 130 TTJ 570 (Mum) - Abhishek Auto Industries Ltd. vs. DCIT : ITA No. 1433/Del/2009 - Starlite vs. DCIT: ITA No. 925/Mum/2006 - SMCC Construction India Ltd v. Addl. CIT: 44 SOT 63(Delhi) (URO) - Emerson Process Management (India) Pvt. Ltd. vs. DCIT (ITA No.7878/Mum/2011), - Phoenix Mecano (India) Ltd. vs. DCIT 49 SOT 515 - Hindustan Unilever Ltd. vs. ACIT (ITA No. 7868/Mum/2010) - 3i Infotech Ltd. vs. ITO (ITA No. 21/MDS/2013) - Sandoz (P) Ltd. vs DCIT (25 ITR(Trib) 347) 4.21 It is clear that assesses OP margin over sales earned by transaction of sale of goods purchased from associated enterprise, in accordance with the audited segment account, being within safe harbor range of +/- 5% of OP margin of the comparable companies considered by the TPO at 8.82%, the international transaction undertaken by the appellant should be considered at arm's length. 5. Incorrect selection of Bharat Power Corpn. Pvt. Ltd. 4.22 The TPO has considered Bharat Power Corpn. Pvt. Ltd. in the final set of comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Public Sector Undertakings. In that sense of the matter, the related party transactions are much more than the filter of 25%. We, therefore, order for the exclusion of this case from the list of comparables. 4.24 Thus Bharat Power Corpn. was incorporated only with an objective of providing services and supplies to Coal India limited and its subsidiaries companies, it has a fixed customer base with fixed demand and supply. It assumes lesser market risk and incurs less on account of marketing and advertisement. In view of the aforesaid, Bharat Power Corpnshall be excluded from the final set of comparable companies. (i) Products dealt by the company: Bharat Power Corpn is undisputedly engaged in trading of spare parts of mining and earth moving machineries. Further, Clause 9 of the Annual Accounts of the company also provides that the company deals in only one class of goods, spare parts for mining and earth moving machineries. Whereas assessee is operating in automobile industry and engaged in the business of trading of spare parts of automobile cars. In contradistinction Bharat Power is having a distinct product profile as it is in trading of spare parts for mining and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance in this regard is also placed on sub-clause (2) of clause B of Rule 10 of Income Tax Rules, reproduced as under: 10 B. .. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely: (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess in the set of comparables. Elimination of companies with diminishing revenue is not representative of the population. d. The retention of diminishing revenue companies alongside increasing revenue companies tends to even out the risk profile of comparable companies. e. If companies based on diminishing revenues/persistent losses are rejected than companies with abnormal growth in revenues/profits should also be rejected for Arm's Length Analysis. f. The diminishing revenues should not be criteria to reject companies that fulfill other comparability criteria as comparables. The comparability analysis should be based on FAR analysis and proper selection of comparables. g. A company with diminishing revenues over a period of time need not reflect that the performance of the company is deteriorating as it might still have positive profit margin. h. Neither of the companies selected by the tax payer has a BFIR reference nor is sick enterprise and has only incurred normal business losses as a part of their operations. The net worth of these companies is also positive. i. Further, if diminishing revenue companies are to be eliminated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justification to deviate from what DRP itself has adopted in preceding year. Re : Final comparable companies: 4.35 After excluding Bharat Power Limited and including Spectra Industries Limited as comparable company in the final set, the average profit margin of the final comparable companies works out to 0.425% S.No. Company Name PBIT/(Sales-rent_inc)*100 1 Stanes Motor Parts Ltd. 4.00 2 Spectra Industries Limited -3.15 Average 0.425% 4.36 Accordingly, since the operating profit margin over sales earned by the appellant in undertaking the transaction of sale of goods purchased from associated enterprise, in accordance with the audited segment account, at 8.23% is higher than the average operating profit margin of the comparable companies considered above at 0.425%, the international transaction undertaken by the appellant should be considered at arm's length. 4.37 Further, even if considering the operating profit margin computed by the TPO at (-) 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under: Trading Segment Sale of Imported Goods Export to associated enterprises Average Sales (A) 793,591,469 77,47,651 801,339,120 Operating profit over sales (B) 5% 53% Total operating profit (A*B) 3,85,55,625 40,92,138 4,26,47,763 OP/Sales (appellant) 5.32% OP/Sales (comparables) 8.82% 4.42 Consequently, as the operating profit margin over sales of the appellant, considering international transaction of export of goods and import of goods from the unaudited segment accounts at 5.32% is within safe harbor range of +/-5% of the average operating profit margin of the comparable companies considered by the TPO at 8.82%, the international transaction undertaken by the appellant should be considered at arm's length. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
