TMI Blog2015 (3) TMI 304X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables as above is tested as against the operating profit margin on sales of the assessee at 2.517%, then the same would be within the (+)/(-) 5% range of the arithmetic mean and therefore no addition by way of adjustment to the ALP can be made. In this view of the matter, we are of the view that the addition sustained by the DRP deserves to be deleted and is hereby deleted - Decided in favour of assessee. - M.P. No.7/Bang/2015 [in IT(TP)A No.1315/Bang/2011] - - - Dated:- 20-2-2015 - Shri N. V. Vasudevan And Shri Jason P. Boaz,JJ. For the Applicant : Shri C.H. Sundar Rao, CIT-I(DR) For the Respondent : Shri H.N. Khincha, C.A. ORDER Per N.V. Vasudevan, Judicial Member This is a miscellaneous petition filed by the Revenue u/s. 254(2) of the Act, praying for some clarification on the order dated 11.7.2014 passed by this Tribunal in the appeal of the assessee in IT(TP)A No.1315/Bang/2011. 2. The only issue that arose for consideration in the aforesaid appeal was determination of ALP of an international transaction carried out by the assessee with its AE. 3. The assessee is a company. It is in the business of manufacture and selling Multi Utility ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived from associated enterprises. The Assessee also purchases certain parts and components locally and exports the same to associated enterprises. The Assessee also imports CBU s and sells the same locally. The Assessee selected Transactional Net Margin Method(TNMM) as the most appropriate method. The TP analysis was done at the entity level combining all the transactions including those as a distributor. The Assessee in his transfer pricing analysis took as comparable companies 7 companies who had business similar to that of the Assessee i.e., they were also engaged in manufacturing of motor vehicles as well as trading in parts and accessories. The profit level indicator (PLI) adopted was cash profit to sales. The Assessee arrived at the cash and operating profit margin of the 7 comparable and arrived at an arithmetic mean of 5.28% and 2.87% respectively of cash profit margin and operating profit margin of the 7 comparable. The Assessee s cash profit margin and operating profit margin were arrived at 11.36% and 8.84% respectively. It was submitted by the Assessee that on a comparison at the entity level, the profit margins of the Assessee was much higher than the arithmetic mean o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. The taxpayer had identified 7 comparables at the enterprise level by taking manufacturing segment as well as trading segment results. The 7 comparables chosen by the assessee were as follows:- Sl No. Name of the Company 1 Ashok Leyland Limited 2 Eicher Motors Ltd. 3 Force Motors Ltd. 4 Hindustan Motors Ltd. 5 Mahindra Mahindra Ltd. 6 Swaraj Mazda Ltd. 7 Tata Motors Ltd. 10. The TPO accepted 5 companies as comparables. One of the filters applied by the TPO was that the comparable company should have at least 75% of its revenue from manufacturing of these goods. For applying the above filter for choosing comparable companies, the TPO relied on para 1.20 (Under the head functional analysis ) of the OECD Guidelines, 1995 which says that functional analysis is to identify and to compare economically significant activities undertaken by the independent enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 08 27004.49 24859.14 2145.35 7.94% Arithmetical Mean Margin 5.10% 13. Thereafter, the TPO made the downward revision of the profit margins of the comparable on account of operating efficiency. In this regard the TPO was of the view that the operational efficiency is indicated by how an enterprise controls its operating expenses other than cost of raw material. Thus if an organization is able to control the indirect expenses like employee cost etc, its profitability improves. Thus, before comparing the taxpayer with the comparable companies, their efficiencies also have to be equalized. Otherwise, the comparability exercise would be distorted. Adjustments have to be made for the differences in operational efficiency levels between the taxpayer and the comparable company. Thereafter the TPO drew the following conclusion with regard to the operational efficiency of the Assessee and that of the comparable companies. Description Other Operative Expenses as % of Sales Arithmetic Mean of Comparables (As per Annexure - C to the order of TPO) 19.64% Toyata-Kirloskar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred with un-associated enterprises / persons (e = c - d) ₹ 172 1,33,75,863 Arm s length cost of international transactions (f= b - e) ₹ 1019,11,02,237 Shortfall being adjustment u/s 92CA (g=d - f) ₹ 152,88,21,900 The above amount of ₹ 152,88,21,900 is considered as an adjustment U/s 92CA in the manufacturing segment. 16. The order of the AO was confirmed by DRP. 17. In ground Nos.12, 22, 23 24, the assessee raised the following grounds:- The learned Assessing Officer, learned Transfer Pricing Officer and Honourable Dispute Resolution Panel have erred in Gr.No.12: not appreciating that the trading and manufacturing segments are intertwined and inter-related warranting a combined Transaction Approach in arriving at the arm s length price. Gr.No.22: doing separate evaluation of royalty payment, technical fees and other payments by adopting CUP method without justifying how the same was most appropriate method. Gr.No.23: Concluding that arm s length price of royalty payment, technical fees and other payments as NIL without brining on record any comparable; Gr.No.24: Concluding that the taxpayer has not been able to show that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h have been set out in the earlier part of this order seems to support combined transaction approach where the transactions are closely linked or continuous that they cannot be evaluated adequately on an individual basis. In such a situation, rather than assessing the ALP of the transactions individually, the transactions could be evaluated together using the most appropriate method. 43. The above being the legal position, it becomes necessary to examine the international transactions carried out by the assessee with its AE during the previous year which have been categorized into 2 segments by the TPO in his order and find out if they are interlinked or interconnected so that the transactions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gments, particularly when the assessee and the comparable companies are at par with regard to the nature and scale of combined activities. Needless to add that this finding / decision by its very nature has to be case-specific and year-specific as the decision is based on the facts and circumstances of this particular case and of this particular year and is not to be construed as laying down the principle in this regard. We, therefore, direct the Assessing Officer / TPO to compute the ALP at the entity / enterprise level by combining the trading and manufacturing segments. 45. It is no doubt true that the Tribunal has observed that the ruling given in that year is based on the facts 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 transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o paras 50, 51 and 48 has submitted as follows:- 5. The above para reads to mean that the TPO is to recomputed the ALP in accordance with the methods laid down in the Act and also sates that the Assessee s stand is accepted opening it to a reading that the appeal has been allowed in favour of the Assessee as well as that of it being set aside for the TPO to do it in accordance with the methods recognized under the Act. 6. The Tribunal was also pleased to set aside the matter to the file of the TPO for AY 2008-09 when read with para 51 leads to a belief that the TPO is to recomputed the ALP. 7. Therefore, it is requested that the Hon ble ITAT may clarify and adjudicate the above issue. 22. The ld DR reiterated the stand of Revenue as contained in the petition. We have considered the contentions in the petition and are of the view that the same are devoid of any merit. The addition by way of adjustments to the ALP has been deleted by the Tribunal in para 47 of its order. The observations in para 48 to 51 has been very clearly mentioned to be purely academic. Therefore, the confusion as is sought to be brought out in the petition is without any basis and is rather mischi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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