TMI Blog2015 (10) TMI 1747X X X X Extracts X X X X X X X X Extracts X X X X ..... d to benchmark the international transactions with its associate enterprises. We hold that the TNMM method should be applied on aggregate basis for benchmarking international transactions of the assessee. Benchmarking international transactions with its associate enterprises on aggregate basis, TNMM method should be applied and since the margins declared by the assessee are higher than the margins declared by the comparables picked up by the assessee in its TP study report and consequently, the international transactions entered into by the assessee with its associate enterprises being at arm's length price, no addition is warranted in the hands of the assessee. Accordingly, we delete the addition. - Decided in favour of assessee. - ITA No.1454/PN/2010 - - - Dated:- 11-9-2015 - MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM For The Appellant : Shri Ketan Ved and Amit Singhal For The Respondent : Shri S.K. Rastogi, CIT ORDER PER SUSHMA CHOWLA, JM: This appeal filed by the assessee is against the order of Deputy CIT, Circle-10, Pune, dated 08.10.2010 relating to assessment year 2006-07 passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lea r ned DCIT err e d on the f a cts and in circumstances o f the c a s e p urs u a n t t o t h e dir ect ions of th e le a rned DRP in rej e cting the Trans a ctiona l N et Marg i n Met h od ( TN MM ) a s th e Most Appropr i ate Method of th e App e ll a nt for b e n c hm ar kin g t h e int e rn a tional tr a nsactions . 2. 5 Th e le ar n e d DCIT er r e d on the facts a nd in circumstanc e s o f th e case pursu a nt t o th e dir ec tions o f th e learned DRP in confirming th e r e jection of t h e ind e p en d e n t comparabl e companies s e lected by th e Appell a nt in i t s T r a n s f er P ri c in g Documentation without pro v iding any cogent r e asons. 3. Inappropriate approach adopted by the TPO 3 . 1 Th e l ear n e d DCIT e rr e d on the facts and in circumst a nc es o f th e ca s e in se l ec tin g th e C ost Plus M e thod [ CPM ] as the Most Appropri a t e M e thod fo r b e n c hma rki n g th e int e rnational ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d u c t ion. 5. Disregard of Rule 10B(2) and Rule 10B(3) of the Rules 5.1 The learned DCIT erred in law and facts and in circumstances of the case in disregarding the comparability factors specified under Rule 10B(2) of the Rules and the provisions contained in Rule 10B(3) of the Rules that specify that an adjustment should be made to account for differences between the transactions that may materially affect the price of such transactions. 5.2 The learned DCIT erred in law and facts and in circumstances of the case in not allowing adjustments for the significant and material differences in functions performed, assets employed and risk assumed by the Appellant while making internal comparison. 6. Benefit of the variation / reduction of 5 percent from the arithmetic mean 6.1 Without prejudice to the aforesaid grounds, the learned DCIT pursuant to the directions of DRP has erred in not granting the benefit of the variation/ reduction of 5 percent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act, while determining the arm's length price for the adjustments made to the international transactions of the Appellant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perating profit / sales of the comparable companies was 4.64%. Based on the said analysis, the assessee had concluded that its international transactions were at arm's length price. The TPO on the perusal of details and documents filed by the assessee was of the view that each of the transactions undertaken by the assessee were different in its nature and scope and as per the TP regulations, each of these transactions should have been benchmarked separately. The TPO was of the view that undue shelter had been taken by the assessee by aggregating these transactions together by detailing them to be closely inter-linked with each other. The TPO show caused the assessee in this regard that aggregation of the transactions and benchmarking them together, following TNMM method was not acceptable. The TPO further noted that the TP study report reveals that the company is specialized in manufacturing of electrical appliances i.e. water heaters, which were sold in the domestic market as well as were exported to the associate enterprises and also to non-associate enterprises. From the perusal of the details filed by the assessee on 22.09.2009, the TPO noted that the total third party sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO considered the submissions of assessee that though the assessee had used the imported raw material in case of products sold to non-associate enterprises, but the same were also used in respect of products sold to associate enterprises. Thus, eventually, the base remained the same, but even thereafter, the margins in respect of sales to associate enterprises were substantially thinner than the margins derived from sales to non-associate enterprises. The TPO further observed that where the margins from associate enterprises sales were compared with the margins from non-associate enterprises sales and even if the chances of controlled transactions affecting the purchase price were considered, the same was neutralized by starting at the same base. The TPO was of the view that merely because the enterprises were engaged in controlled transactions, the same should not be the reason of automatic rejection criterion. After analyzing of other differences pointed out by the assessee i.e. in functions and risk i.e. product differences, product risk and credit risk, the TPO was of the view that the internal comparables would be better placed for the purpose of comparability than the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal transactions on entity level, when internal comparables were available for benchmarking at gross margin level. It further held that the data used by the assessee for benchmarking was not reliable and therefore, the TPO was justified to proceed further to determine the arm's length price as per clause (c) of section 92C(3) of the Act. The DRP further held that none of the comparables chosen by the assessee were into manufacturing of water heaters and / or geysers. Thus, the TNMM analysis involves the comparables so chosen by the assessee was not the most appropriate method to benchmark the international transactions. While dealing with the objections of the assessee as to why the CPM method adopted by the TPO cannot be held as the most appropriate method, the DRP held that However, if we see the broad picture, it seems that in terms of functions, assets and risks, the internal comparable in any case would be better and closer for the purposes of benchmarking than the external comparables having no functional similarity. Moreover, the margins adopted are gross margins and as such they are not hampered by the external factors. As such, we uphold that in the given circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exported both to associate enterprises and non-associate enterprises. In addition, there were domestic sales of the products manufactured by the assessee. The learned Departmental Representative for the Revenue pointed out that the DRP had rejected the adoption of TNMM method as nature and scope of transactions were different and their separate margins could be worked out. The learned Departmental Representative for the Revenue further pointed out that the assessee had picked up five comparables and in none of the cases, comparables engaged in similar business as that of the assessee. 11. The learned Authorized Representative for the assessee in rejoinder pointed out that in assessment year 2011-12, identical transactions were conducted by the assessee and the TPO had accepted the method applied by the assessee and also the aggregation of international transactions. 12. We have heard the rival contentions and perused the record. The limited issue arising before us is the appropriate method to be applied for benchmarking the international transactions entered into by the assessee and whether the same has been applied on aggregation basis. The assessee during the year under co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parts, product development and ancillary services and reimbursement of expenses for exports. The assessee had followed the TNMM method in respect of first three transactions and CUP method in respect of fourth transaction. No adjustment has been proposed by the TPO and the international transactions with the associate enterprises have been found to be at arm's length price. Similarly, in assessment year 2007-08, order of the TPO under section 92CA(3) of the Act is dated 29.10.2010 and for assessment year 2008-09 is dated 31.10.2011 and the value of the international transactions with regard to the arm's length price has not been disturbed by the TPO. The perusal of the assessment order passed for assessment year 2010-11, dated 20.01.2015, the TPO has referred to the five international transactions as reported by the assessee in its TP study report i.e. import of components and raw materials, import of water heaters and spare parts, export of water heaters and spare parts, payment of management fees and reimbursement of expenses. The first four transactions reported by the assessee were benchmarked as per TNMM method and the last transaction i.e. reimbursement of expenses wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been accepted by the TPO itself in all the other years. The conduct of the business and the products manufactured are identical in the year under consideration, when compared to the other years i.e. assessment year 2005-06, 2007-08, 2008-09 and 2010-11. In the entirety of the above said facts and circumstances, we are of the view that the adoption of TNMM method was the most appropriate method for benchmarking international transactions with its associate enterprises and we find no merit in the order of Assessing Officer in adopting CUP method to benchmark the international transactions with its associate enterprises. We hold that the TNMM method should be applied on aggregate basis for benchmarking international transactions of the assessee. 14. We find support from the order of Tribunal in John Deere India (P.) Ltd. Vs. DCIT (supra), wherein the Tribunal vide order dated 20.02.2015 had decided the issue on both the aspects i.e. where a method has been consistently followed by the assessee why the same should not be applied to benchmark its international transactions and also the issue of application of TNMM method as compared to CUP method applied by the TPO. The Tribunal vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular approach or method to determine the taxability then there must be consistency and this view is expressed by the Hon'ble Supreme Court in the case of Radhasoami Satsang Vs. CIT 193 ITR 321 (SC). It is also certainly strange that in the A.Y. 2008 -09 the TPO has again accepted the TNMM method as an appropriate method which was adopted by the assessee and has not disturbed the result. We may refer here to the few decisions of the other Co-ordinate Benches in which it is held that when the facts involved are similar in various years and the Revenue has accepted the method adopted by the assessee in some years then there is no reason to take a different stand in the subsequent years without explaining the reasons how the facts in the said year are different than the preceding years: i. Alfa Laval (I) Ltd. 149 ITD 285 (Pune). ii. H.A. Shah Co. Vs. CIT 30 ITR 618 (Bom). iii. Brintons Carpets Asia (P) Ltd. 139 TTJ 177 (Pune) iv. Drilbits International Pvt. Ltd. 62 DTR 171 (Pune). v. Agility Logistics (P) Ltd. 145 ITD 566 (Mum). vi. Skol Breweries Ltd. 153 TTJ 257 (Mum). 18. Now, let us look into the T.P. study report fi led by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered as a comparable for determining the ALP in the case of the assessee. The TPO has also stated that KAMCL is a PSU and hence, on the point of management, the TPO expressed his reservation to accept the said company as a comparable. In respect of HMT Ltd., the TPO states that the said company is not only manufacturing of tractors but also engaged in other activity. The TPO has further noted that VST Tillers is also engaged in different business and therefore and cannot be accepted as a comparable. On one more comparable entity i.e. a Escorts Ltd. the TPO has stated that Escort is also selling farm equipments along with tractors and therefore the said company cannot be considered as a comparable entity. 20. The main objection of the assessee is on the approach of the TPO it is submitted that in the preceding year the TPO accept those companies as a comparable have determining the ALP when in that year also all the facts and figures were before him in the A.Y. 2006 -07 the TPO adopt the different approach. In respect of the reservation of the TPO to accept the Escorts as a comparable, the assessee s contention is that the main business is of selling tractors and hence, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Escorts Ltd. 1320.32 -12.02% 2 Tractors Farm Tractor Ltd. 1391.20 11.90% 3 Mahindra Mahindra Ltd. 3441.82 8.65% 4 VST Tillers Tractors Ltd. 131.14 9.40% 5 Punjab Tractors Ltd. 958.55 11.50% 6 International Tractors Ltd. 953.25 15.41% 7 HMT Ltd. 281.24 -4.84% Average 5.71 The average operating margin of 7 companies is at 5.71% as against 11.17% of the export segment of the assessee company. It is also seen that the assessee has share in the sale of tractors in domestic market also. We, accordingly, hold that the transaction of export of tractors to its AEs is at ALP within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in our view, has thus erred in adopting the CMA method as appropriate method. 51. We also find substance in the alternative plea of the learned Authorised Representative in the defective working out of the total of production of the goods sold to the AE by the learned TPO. The learned TPO has computed gross profit margins in the domestic segment at 23.54 per cent while in the export segment at 5.42 per cent. The difference between the two has been calculated at 18.12 per cent and the same is employed to the total cost of production of the goods sold to the AE and addition of ₹ 58,54,128 has been made. In this working, the learned TPO has failed to appreciate that during the year, the assessee has paid processing charges to the local contractors of ₹ 16,98,742 i.e. in respect of products sold in the domestic segment, hence the same should not have been allocated to the export segment. Besides, there is no reason to doubt the submission of the assessee that major time of the junior and serior staff is utilized for the domestic segment since while dealing with various public sector units by the assessee several follow ups like collection of the orders, physical desp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork (India) (P) Ltd. ITA No. 5307/Mum/2006, dt. 23rd Feb., 2011 (para 15) [reported at (2011) 56 DTR (Mumbai)(Trib) 1 -Ed.] on the rule of consistency and need for not taking the domestic comparables and need for taking up the external comparable in matters of the transfer pricing adjustments. It was held further that the uncontrolled transactions and the external comparables which was adopted by the officer in subsequent year holds relevant for current assessment year as well. We thus while setting aside order in question of the learned TPO, direct the learned TPO to accept claim of the assessee regarding the ALP based on TNMM. The issue raised in the related grounds is decided in favour of the assessee. 23. The Ld. Counsel has also placed his reliance on the decision of the ITAT, Pune in the case of Alfa Laval (I) Ltd. (supra). In the said case also the assessee had exported industrial products to its AEs as well as sold in the domestic market. The assessee had adopted TNMM but the said method was rejected by the TPO, and TPO substituted CPM in the place of TNMM. When the matter reached before the Tribunal it is held that CPM cannot be applied since there were various diff ..... X X X X Extracts X X X X X X X X Extracts X X X X
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