TMI Blog2013 (8) TMI 926X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be rejected, There are differences as accepted by the Transfer Pricing Officer and therefore, in view of the decision of Drilbits International Pvt. Ltd.,[2011 (8) TMI 1083 - ITAT PUNE ] CPM should not be applied, according to us. Addition u/s 14A - Held that:- Most of dividend received was under the Reinvest operation i.e. the dividend was automatically reinvested by the respective mutual fund. No portion of salary paid to staff and other expenses were incurred in relation to exempt dividend. According to assessee, there is nothing on record to suggest that assessee had incurred expenditure for earning of exempt income. Taking all facts and circumstances disallowance u/s 14A is restricted to ₹ 2,50,000/-. Assessing Officer is directed accordingly. Disallowance of EDP service charges - Held that:- Assessee claims to have made this payment to its Associated Enterprises for usage of service and assessee is not aware of software's or licences as well as infrastructure which is acquired by associated enterprises in rendering the service. This issue need disapprove until the matter. Let this expenditure be looked in light of above and submissions of assessee. Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the ALP of the International Transactions relating to export of manufactured goods to the AEs and thereby making an upward adjustment of ₹ 39.35 crs to the value of the international transactions relating to export of manufactured goods. 7. The learned A.O./DRP erred in holding that - a. The TNM was not the most appropriate method for determining the ALP because there were functional and other differences in terms of the products manufactured by the assessee company and the comparable entities because of which TNM could not be applied. b. Gansons Ltd. and Kilburn Engineering Ltd. could not be compared with the assessee company because of the substantial difference between the turnover of those companies and the assessee company. 8. The learned A.O/DRP failed to appreciate that - a. The TNM was considered to be most appropriate method for determining the ALP in the earlier years and since the facts and circumstances had not changed in this year as compared to the earlier years, there was no reason to reject the TNM as the most appropriate method. b. In the earlier years, almost the same companies selected in this year were accepted as comparables for de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pared represented two different geographical markets and, therefore, such comparison was unwarranted considering the differences is locations and markets (v) The Domestic Sales segment had substantial related party transactions and therefore could not be used as a comparable (vi) differences in Functions Performed, Risks undertaken and Assets owned (vii) The various decisions cited by the assessee company as per which such comparison was not justified 14. The learned A.O. / DRP failed to appreciate that - a. The various overheads which the assessee company incurred in connection with the domestic sales and not in relation to exports could not be ignored while applying CPM. b. In any business, the sale price to be quoted depends on various costs and expenses an assessee has to incur in making the sale and in case of transactions when such costs are reduced, the sale price may also be reduced. c. The overhead expenditure like marketing, advertisement, pre and post - sales support, credit monitoring and collection follow ups and risks of Product Liability, Market and Business Development, etc. etc. which the assessee incurred in relation to domestic sales were not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - net of depreciation thereon) by holding that the above expenditure was in the nature of capital expenditure. 22. The Appellant Company craves leave to add, alter, modify and delete any or all of the above Grounds of Appeal.' 2. In this case, the assessee is engaged in the business of manufacture and sale of industrial products such as decanters, separators, etc. The assessee filed return of income for A.Y. 2008-09 on 29-9-2008 by showing total income of ₹ 132,05,11,382/-. The return was processed u/s 143(1) of the Act. The case was selected for scrutiny by issuing a notice u/s 143(2) of the Income Tax Act, 1961 on 19/08/2009. Thereafter, the case was transferred from ACIT, Circle-8, Pune to Addl.CIT, Range-8, Pune vide order F. No. PN/CIT-V/Tech/022/Assign./ 2011-12/682 dated 09.06.2011 issued by CIT-V, Pune. Fresh Notices u/s 142(1) were issued and the matter was discussed. After discussion with assessee's representatives, verification of details filed and the Books of Accounts, Bills etc. the following adjustments were proposed in draft order u/s 143(3) r.w.s. 144C(1) dated 29.12.2011 by the Addl. CIT, Range-8, Pune: 1. Difference in arms length price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct Liability, Market and Business Development, revenue recovery risk etc which were undertaken by the Assessee Company in respect of its domestic sales along with other factors such as substantial volume of sales / supply to Associated Enterprises together with Long Term Commitment had no bearing on Price Determination. He erred in holding that the price of the product is decided by the presence of brand, demand and supply situation and the marketing intangibles of the company and the product does not command a price by way of what are related costs incurred by the Company on its individual functions. He erred in not granting any adjustment towards the above differences while acknowledging that such differences existed but erred in holding that they did not affect the price of product sold and the Gross Profit Margin. 2.5 The learned Transfer Pricing Officer erred in holding that all the above differences in functions performed, risks assumed and assets owned affected the Net Profit Margin and not the Gross Profit Margin. 2.6 He erred in not appreciating that the above differences in functions performed, risks and assets certainly affected the sales price of the product (as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RPT within the segment when Appellant had vide Para 3.3.1 to 3.3.3 of Letter dated 18th Oct 2011 clearly submitted that the RPT within the segment were more than 25% in value. 3.6 Without prejudice to above, he erred in not considering the revised Segmental results submitted by the Assessee Company vide its submission letter dated 27th September 2011 wherein the Assessee Company had submitted the corrected segmental working. Ground of objection No. 4 : 4.1 The learned Transfer Pricing Officer erred in rejecting the external comparable companies selected by the Assessee Company in totality by giving reasons for such rejection only in case of 5 companies out of the total 8 companies considered as comparable by the Assessee Company. 4.2 The learned Transfer Pricing Officer erred in appreciating that the Appellant Company had followed similar bench marking exercise in all the earlier years and the Department had accepted the same in earlier years. The learned Transfer Pricing Officer did not show consistency and uniformity in the application of methods as compared to earlier years. 4.3 Without prejudice to the above, the learned Transfer Pricing Officer erred in not cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as Denmark where most of goods were exported by the assessee company exceeded 25% and it was not a situation that the group had tried to maximize its tax savings by manipulating these prices. 9.2 He erred in not following the ratio of decision of Mumbai Bench of ITAT in the case of Dy. CIT v Indo American Jewellery Ltd. [2010] 41 SOT 1 (Mum.). 9 3 Without prejudice to above, the learned Transfer Pricing Officer erred in enhancing income of the appellant company under section 92CA on a notional basis when in fact no such income was earned by or had accrued to the Appellant company and such adjustment was against the real income theory as endorsed in various earlier Supreme Court judgments. Ground of objection No. 10 : 10 1 The learned Assessing Officer in his order u/s. 144C(1) of the Income Tax Act, 1961 erred in proposing to disallow expenses of ₹ 13,06,214/- as attributable to earning of exempted dividend income u/s. 14A by applying Rule 8D. Ground of objection No 11 : 11.1 The learned Assessing Officer in his order u/s. 144C(1) of the Income Tax Act, 1961 erred in proposing to disallow contributions of ₹ 2,79,450/- to Workers Medical Relief Fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.01.2011, requiring the assessee to file details /explanations with regards to the computation of the arm's length price. In response to the notice, Authorized representative on behalf of the assessee attended and submitted the requisite details. According to him, it was found that the Company, Alfa Laval (India) Limited ('ALIL') is a subsidiary of Alfa Laval AB, Sweden which held 64.10% equity stake in ALIL for the FY 2007 -2008. The balance shares in ALIL were held by institutional investors and the general public. ALIL is a leading supplier of plate spiral exchangers, centrifugal separators decanters, sanitary flow products and complete project systems in India. The net sales of the company for the year ended March 31, 2008 were ₹ 742, 37, 66, 066 (Previous Year -Rs. 651, 49, 77, 521) and the profit before tax was ₹ 1,39, 00, 93, 884 (Previous Year ₹ 1,080, 032, 359). The ratio of profit before tax to sales for the F.Y.2007 -2008 is 16.91% and the operating profit to total cost is 25.09%. 5.3 The international transaction entered into by the assessee during the A.Y. 2008-09 are as follows- Sr. No. Deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segmental accounts in respect of the various segments of the assessee with the working at the gross profit level, as well. The details were submitted by the assessee vide submission dated 27.09.2011. It was seen from there that the gross profit over cost in respect of the domestic segment of equipments was at 43.70%, and that in case of export of equipments to AE was a 19.76%. This gross profit calculation has been done by the assessee considering all the direct and indirect cost of production as has been envisaged in Rule 10B(1)(c) of the Income-tax Rules, 1962. 5.5 It was found that such gross profit in case of domestic sales of equipments being 43.70% and that being 19.76% in respect of exports of equipments to AEs, there is a difference of 23.94%, and by this margin assessee has earned less gross profit from its international transaction relating to export of equipments to the AEs. In view of this, it was proposed to adopt cost plus method for benchmarking the international transaction relating to export of equipments to the AE, Accordingly, it was asked to show cause as to why cost plus method be not adopted for benchmarking the international transaction relating to export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the DRP, an addition of ₹ 39,35,00,000/- was made on account of adjustment in arm's length price by concerned Assessing Officer. Same has been opposed before us. Before us the learned Authorised Representative made various contentions as detailed in grounds of appeal before us which are being detailed in preceding paras. On the other hand, Ld. DR supported the order of the Assessing Officer and raised detailed arguments for the same which are being dealt in preceding paras. 6. Having considered the rival submissions and material on record, we find that the assessee company is engaged in the business of manufacture and sale of industrial products such as decanters, separators, etc. etc. The assessee is a subsidiary of Alfa Laval AB, Swiden. The total sales of the assessee in this year were to the tune of ₹ 742.37 Crs and the profit before tax was ₹ 139.00 Crs. In this year, the assessee entered into various International Transactions with its Associated Enterprises (AEs) and the details of the same are given at para 6.3 of this order. The stand of the assessee has been that the various transactions entered into by it with its AEs were at Arm's Leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was ₹ 208.65 Crs. and the domestic sales of the equipments was ₹ 164.67 Crs. The Transfer Pricing Officer has worked out the G.P. in the export segment at 19.76% and in the domestic segment at 43.70%. Thus, the Transfer Pricing Officer has mentioned that there is a difference of 23.94% and accordingly, he has proposed adjustments of ₹ 39.35 Crs. which is being challenged by the assessee company in this appeal. 6.3 The various issues raised on behalf of the assessee can be summarised and analysed as under :- A. Whether TNM method is the most appropriate method for determining the ALP and whether the Transfer Pricing Officer was justified in rejecting some of the companies selected by the assessee company as comparable entities. B. If external TNM is to be rejected, in that case, internal TNM should be adopted for determining the ALP. C. Whether Cost Plus Method (CPM) selected by the Transfer Pricing Officer is the most appropriate method for determining the ALP. D. If at all, CPM is to be considered as the most appropriate method for determining ALP, suitable adjustments should be made to account for differences between the export and domestic segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions of export of equipments. The facts for this year are similar to the facts involved for the earlier years. On the principle of consistency, the learned Transfer Pricing Officer should not have rejected TNM method as the most appropriate method. The courts have observed that when the facts involved art similar for various years and the department has accepted a particular stand in some of the years, there is no reason to take a different stand in the subsequent years. Assessee has placed the reliance on following decisions for this proposition. a. Radhasoami Satsang v. CIT [1992] 193 ITR 321 b. H. A. Shah Co. v. CIT [1958] 30 ITR 618 (Bom) c. Brintons Carpets Asia (P.) Ltd. v. Dy. CIT [2011] 46 SOT 289 (URO) d. Drilbits International (P.) Ltd. v. Dy. CIT [2011] 142 TTJ (Pune) 86 E. Skol Breweries Ltd. v. Asstt. CIT [2013] 142 ITD 49 6.3(A)III The Transfer Pricing Officer has rejected the TNM method on the ground that the comparability of the domestic segment and the export segment would give a better picture. The assessee has objected to the reasoning given by the Transfer Pricing Officer. As submitted above, the TNM method was accepted as the most approp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BGR Energy Systems Limited -Industrial Products Segment 6.69 9 Average 9.70 6.3 (A) V The learned Transfer Pricing Officer has given reasons for rejecting some of the above companies as detailed on page 36-41 of the Transfer Pricing Officer's order. The Transfer Pricing Officer has not given any reasons for rejecting GEI Hamon Inds. Ltd., Anup Engineering Ltd. and BGR Energy Systems Ltd. As regards, Thermax Ltd., the Transfer Pricing Officer has stated that Thermax is in the business of selling boilers while the assessee is in the business of selling different products. Similarly, in respect of Walchandnagar Industries Ltd., the Transfer Pricing Officer states that Walchandnagar is mainly engaged in foundry business and hence, it cannot be compared with the assessee company. The Transfer Pricing Officer has stated that GMM Pefaulders Ltd. is also engaged in selling different products vis-a-vis the assessee company and therefore, cannot be compared with the assessee company. Finally, in respect of Gansons and Kilburn Engineering, the Transfer Pricing Officer has mentioned that there is subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I) As regards, the objection of the Transfer Pricing Officer pertaining to Walchandnagar Industries Ltd., the stand of the assessee has been that he has not appreciated the facts of the case. Walchandnagar Industries Ltd., the stand of the assessee has been that he has not appreciated the facts of the case. The TPO on p. 39 of the order has mentioned that Walchandnagar is engaged in foundry business. The TPO has not appreciated that as per the details of sales given in the balance sheet of Walchandnagar, his main business is of sale of industrial machinery and the foundry business constitutes a very small percentage of the total sales. Hence, there is no reason to reject Walchandnagar as a comparable entity. Moreover, the Walchandnagar was considered as a comparable entity for asst. yrs. 2006-07 and 2007-08 and the same has been accepted by the Department. Thus, the TPO is not justified in rejecting the said company. 6.3(A) (VIII) In respect of Thermax Ltd., the TPO has stated that Thermax is engaged in sale of boilers and the products sold by Thermax and the assessee company cannot be compared. The assessee stated that it has -considered companies which are in the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted external comparables while determining the ALP. In the TP study report, the assessee has given the details of the comparable entities and after considering the net operating margin to costs of the comparable entities and it was contended that the assessee's margin was much better. However, there is no bar for adopting internal comparables. The learned Transfer Pricing Officer while adopting the CPM stated that the comparability of gross margins of the domestic and export segment gives better comparability. He has also stated that the comparability at the net margin level would not be a proper comparability for the reason that there are certain functions represented by certain costs which are there in the case of sales to third parties and supposedly not present in case of sales to the AEs. According to him, these factors are not relevant for determination of price at which International Transactions are entered into by the AEs, Thus, he has rejected the applicability of internal comparables for determining AEP under the TNM method. 6.3(B)(III) Assessee stated that the contention of the AO regarding adoption of internal comparables for determining the ALP under the TN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unction and also not exposed to credit risk on account of sale to the AEs naturally, the reward for performing these functions and bearing these risks should flow to the AEs in the form of reduced sale price. Thus, when the above referred functions are performed by the assessee in respect of sales in the domestic market, logically, the sale price of the equipments would be determined by considering the above functions performed and hence, the comparability of the net margins of the domestic and export segment gives a clear picture of the actual profit earned by the assessee from the said segments. In view of above discussion, we find that in terms of rule 10B(l)(e) of I.T. Rules, internal comparables are permitted while adopting the TNM method. The external comparable should be considered for determining the ALP as per TNM method, even if, internal comparable is adopted. There is nothing on record to suggest that transactions relating to sale of equipments to the AEs is not ALP. The net margin in export segment is 21.12%. While the net margin in domestic segment is 18.05% as detailed in chart given on page 248 of Paper Book 1. Since the net margin of the export segment is more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m so arrived at is taken to be an ALP in relation to the supply of the property or provision of services by the enterprise; 6.3(C)(II) In this background, the assessee submitted that as per Rule 10B, for application of CPM, following method is to be adopted (i) ascertaining the direct and indirect costs of property transferred, or services rendered, to the AEs; (ii) ascertaining the normal mark-up of profit over aggregate of direct costs and indirect costs in respect of same or similar property or services, or a series of transactions of same or similar property or services, to the unrelated enterprises; (iii) adjusting the normal mark-up, or gross profit, for differences, if any, in the material factors; (iv) applying the mark-up or gross profit so arrived at on the aggregate of direct and indirect costs. The way this rule works, the benchmark gross profit is to be applied on each transaction with the AEs, while, for computing the benchmark, one could take into account a series of same or similar transactions. In other words, while setting the benchmark, one can take into account several transactions with unrelated enterprise on what can be termed as 'global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to file tenders, follow up with relevant officials, keep a track of new projects undertaken by various entities, collection and follow up of the payments, etc. All these functions require a lot of man power and time and substantial funds are spent on the marketing functions. The assessee has around 13 branches all over India for its marketing functions and substantial expenditure is incurred by the assessee for obtaining the orders in the domestic segment. This is a major difference between the export and domestic segment. In case of export segment, the assessee gets the orders directly from the AE and the assessee does not have to incur any expenditure on marketing for obtaining the orders. (c) Credit Risk -In case of exports to AE, there is no credit risk and no bad debts at all. However, in case of domestic segment, there is an apparent credit risk. In fact, in this year, the bad debts pertaining to the domestic segment were claimed to the tune of ₹ 59.05 lakhs. (d) Product liability risk -In case of sales in domestic segment, the assessee has to provide performance guarantee which is not the case in the export segment. The assessee provides bank guarantee for whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be said to be an uncontrolled comparable entity and accordingly, the CPM adopted by the Transfer Pricing Officer is not justified. This view is fortified by discussion of ITAT Third Member in the case of Tecnimont ICB (P.) Ltd. v. Addl. CIT [2012] 138 ITD 23 where it was held that a controlled transaction can never be regarded as comparable transaction. Taking all facts and circumstances and in view of the principle laid down in the case of Tecnimont ICB (P.) Ltd. (supra) the Transfer Pricing Officer was not justified in considering the domestic segment of sale of equipments as a comparable transaction. 6.3(D) Now, let us deal with the issue whether CPM is to be considered as the most appropriate method for determining ALP and suitable adjustments should be made an account for differences between the export and domestic segment. 6.3(D)(1) As discussed above, the assessee had explained to the learned Transfer Pricing Officer that there were various differences in the two segments and appropriate adjustments are required to be made for arriving at ALP under CPM. The learned Transfer Pricing Officer has not given any such adjustments and has made the additions. The learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of differences selling and marketing costs. The Transfer Pricing Officer has not appreciated the argument of the assessee. According to him, in case of CPM, the gross margins are compared, the selling and distribution expenses are not to be considered while determining the gross margin. Hence, he has not allowed any adjustments on account of marketing expenses. (b) In respect of sales to its AEs, it does not have to undertake any marketing activities. The assessee Company does not have to undertake any marketing activities in respect of exports to the associated enterprises, whereas extensive efforts are required in marketing to capture the domestic market. The Company incurs expenditure on marketing of products including salaries of sales personnel, advertisement, etc. However, for the export transactions, these functions and the related expenses are performed/incurred by the associated enterprises. The function of marketing and sales is an important link in value chain as it involves tapping of market potential. (c) The assessee company does not have to incur any marketing costs in respect of sales to its AEs vis-a-vis, the sales in the domestic segment, logically, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no bad debt risk. The payments from the AEs are assured and there is no risk of any bad debt. However, in respect of sales to third parties, a bad debt is an inherent risk and it cannot be ruled out. Thus, this risk is also factored in while determining the sale price in the domestic market. Accordingly, the adjustment on account of bad debt risk of ₹ 59.05 lacs should have been made while determining the gross margin in respect of the domestic segment. 6.3(D) (IV) Royalty payments -The assessee has paid royalty only on the domestic sales as clarified by the assessee from details at page 288 - 289 of Paper Book 2 filed by the assessee The total royalty paid by the assessee in this year is ₹ 1.20 Crs. pertaining to equipment division and the same should have been considered while determining the gross margins of the domestic segment. 6.3(D)(V) Volume Discount -The assessee has an assured business from its AEs. However, in case of domestic segment, there is lot of competition and there is no guarantee that the assessee would be able to sustain its business. Further, top five AEs have cumulatively placed orders worth ₹ 180 Crs. while the top five domesti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be evaluated separately. In the assessee's case, 'equipment segment' and 'project segment' are two functionally different segments using different assets and assuming different risks. 'Equipment' segment is of manufacturing function whereas the 'project' segment is akin to execution of contracts. These segments cannot be aggregated. The assessee has stated that the Transfer Pricing Officer's application of CPM is incorrect on 'principle of consistency' as the Department had accepted TNM applied by the assessee in the earlier years. In this regard, the learned DR stated that the Rule 10C requires 'most appropriate method' be applied on the basis of the conditions provided in the sub rule. The conditions provided in sub-Rule (c) and (d) of Rule 10C and 'comparability' provided in these sub-Rules rws factors of comparability mentioned in Rule 10B(2) can be different every year. Therefore, it is possible that CPM would be different every year. In fact, it is inherent in the concept of the most appropriate method' that every year after examination, CPM may be selected. Therefore, principle of 'consistency' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s margin will take in to consideration, where profitability of both the segments are reflected and for the same reason, domestic segment profitability is compared with the export segment profitability. Thirdly, CPM being traditional method is preferred over TNM method. 7.2 Applicability of internal TNM method Assessee has submitted that application of internal TNM method would present better picture, as the Appellant in the domestic segment has received reward for performing additional function for marketing and assuming additional risk of credit risk, which are reflected in price received in the domestic segment and not reflected in the AE segment. The assessee has submitted that net margin earned in the export segment is better than net margin earned in the domestic segment. The learned DR stated that the assessee's argument is not borne by the facts. Firstly, if the assessee's argument on internal TNM method as more appropriate method is to be correct, then net margin in domestic segment should have been higher than net margin earned in the export segment. This has not happened, therefore CPM is more appropriate in the facts of the case. Secondly, for comparing intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it has furnished supporting computation on page 281 of the Paper Book. In this connection, attention was drawn to the observations of the Transfer pricing Officer on page 81 of his Order inter alia stated that The assessee has also demonstrated that with calculation inter-segment RPT's, basis of which is not known: that there are RPT transactions within the segment, however it is not known, how the same have been arrived at and nor they have been explained with the location keysor backed by documentary evidences. Therefore, the assessee's contention in this regard cannot be accepted, submitted by the learned DR. 7.6 Adjustments on account of geography, volume, Market, credit risk, product liability risk, royalty etc cannot be granted without data justifying adjustment, submitted on behalf of the Id. DR. The assessee has stated that, if CPM is used then it should be granted adjustments on account of the above mentioned differences. Secondly, The assessee has sought an adjustment on account of marketing expense which is contrary to assessee's stand. Accordingly, this expenditure does not have any connection with profit generation and no adjustment is require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uaranteed business does not necessarily mean that the sub contracting entity bears lesser risk because if the entity has only one customer and the customer is lost, there is a market risk. The relevant para 218 of said decision is reproduced below:- 218 Thirdly, when one evaluates the market risks both sides were exposed to, there is no doubt both bore risks. However, Dr. Wright's suggestion that, since the annual contracts did not address the question of who was liable for potentially poor set-up work or the warranty for such work, the Assessee took on that warranty risk is inconsistent with the evidence that adjustments were made each month for any work that had to be redone; it seems APC/'s payments were reduced as a result. In addition, the evidence was that the Assessee collected its fees in advance from its customers while APCI was paid 30 or more days later, so it would seem APCI may technically have been at greater credit risk due to delay in payment, although, practically speaking, when the party that makes the payment also benefits from two-thirds of the profit from it, it becomes rather hard to suggest that there was much risk of non-payment. On the other han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. (supra). (iii) Marubeni India (P.) Ltd. (supra). (iv) Vedaris Technology (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 316 (Delhi) In the above background, it was submitted by the Id. DR that reasonably accurate adjustment as required under Rule 10B(3)(ii) cannot be made and therefore risk adjustment should not be granted. 8. According to learned DR, the assessee company had aggregated its equipment segment and project segment and applied TNM method on the results of the entire entity. According to him such an approach of the assessee of aggregating its equipment and project segment is not justified. He has stated that since both the segments differ significantly, such an aggregation approach adopted by the assessee is not correct. In this regard, stand of assessee has been that the contention of the learned CIT D.R. that the assessee has aggregated its project and equipment division and thereafter had applied TNM method on entity basis is not correct. It has not aggregated the two divisions for applying the TNM method. It has aggregated all the International Transactions pertaining to equipment division and has computed the operating margin of the equipment division separat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R. has referred to the decision of ITAT Bangalore in the case of SAP LABS India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156. According to us in the said case the learned Transfer Pricing Officer in the proceedings had firstly applied CUP method for determining ALP. Thereafter, the Transfer Pricing Officer ultimately adopted TNM method and computed the ALP. The contention of the assessee was that since Transfer Pricing Officer had adopted a particular method for comparing the price deviation for the purpose of ALP, it was not open for him to switch to another method. In that context, Hon'ble ITAT held that the contention of the assessee cannot be accepted that once the Transfer Pricing Officer had selected one method, he cannot prefer any other method. In the case of SAP LABS India (P.) Ltd. (supra), it was not a case that a particular method was adopted for the earlier years and a different method was adopted in the subsequent year. In the said case, for the same year, while completing the asst., the Transfer Pricing Officer had initially adopted one method and finally computed the ALP under a different method. Thus, the facts of the said case are not applicable to the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he absence of any material change justifying the dept. to take a different view vis-a-vis the view taken in the earlier years the same position should be continued in the subsequent year. 8.4 The stand of the DR has been that the CPM is the most appropriate method as it provides direct comparison between the two segments viz export and domestic. According to the learned D.R. CPM being a traditional method is to be preferred over TNM method. In this regard, the assessee had given various reasons as to why, CPM could not be considered as the most appropriate method. It was pointed out that there are differences in the domestic and export segment and considering the nature and variety of differences, CPM ought to have been rejected as the most appropriate method. In case there are various differences, suitable adjustments cannot be made and therefore, CPM is to be rejected. For this proposition the assessee had relied upon ITAT, Pune decision in the case of Drilbits International (P.) Ltd. (supra). The assessee reiterates that there is no dispute that CPM is a direct method in comparison to TNM method. However, considering the differences in the functions performed and assets utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arm's Length Price of its International Transaction. While computing the ALP, one should not ignore the commercial issues which are very vital for determining the selling price of a product. While applying CPM, various expenses were ignored which has an important bearing on the sale price of the product. Therefore, comparison of gross margins lead to an incorrect comparison. 8.5 The learned D.R. further stated that internal TNM method is not correct because the net margin in export segment is higher than the net margin in domestic segment. The assessee has given the working of the net margins in the two segments which reveals that the net margin of the export segment is higher. This point clearly highlights the case of the assessee that if there was any undercharging on the sales to the AE, the net margin of the export segment would have been much lesser than the net margin in domestic segment. Considering the facts of the case, we find that in case, the domestic and export segments are to be compared, internal TNM has to be applied and as per which no addition is warranted. 8.6 According to the learned D.R. the comparison of export and domestic segment is justified. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tified. The facts of the case before ITAT, Delhi are distinguishable and accordingly, the said decision is not applicable to the case of Alfa Laval. Moreover, it is settled legal proposition that each case is decided in its facts and circumstances. 8.7 The learned D.R. further argued that the contention of the assessee that the domestic segment had more than 25% related party transactions was not substantiated. The learned D.R. also referred to the definition of substantial interest given in Section 40A(2)(b) and tried to link the same to the 25% threshold limit considered for related party transactions. He also stated that the working of the assessee was not properly substantiated. In this regard, we find that the working of related party transactions was submitted to the Transfer Pricing Officer along with the basis. The basis of allocation was also mentioned therein. It is not justified to state that no basis was given by the assessee. If the Transfer Pricing Officer had any objection, he could have enquired the assessee as to why the assessee had not substantiated its contention is not justified at all. This fact was also clarified to the DRP and the relevant submissions are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 13,06,214/-. In this case, Assessing Officer and DRP made disallowance of ₹ 13,06,214/- u/s 14A of Act. According to assessee, there is no document and immediate connection between expenditure incurred and exempted income. Therefore, no disallowance is called for on this account. Assessee claimed to have received tax free dividend and tax free interest of ₹ 1,24,16,019/-as mutual funds and tax free bonds which was exempt u/s 10 of the Act, 1961. It was the stand of the assessee that above investments were made out of owned funds and company had no interest bearing loans outstanding as at the end of year nor at the beginning of the year. Most of dividend received was under the Reinvest operation i.e. the dividend was automatically reinvested by the respective mutual fund. No portion of salary paid to staff and other expenses were incurred in relation to exempt dividend. According to assessee, there is nothing on record to suggest that assessee had incurred expenditure for earning of exempt income. Taking all facts and circumstances disallowance u/s 14A is restricted to ₹ 2,50,000/-. Assessing Officer is directed accordingly. 10. Next issue is with regards to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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