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TMI Blog2013 (8) TMI 926X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 ('the Act1), had been violated by the appellant and thus, the A.O./DRP erred in making an addition of Rs. 39.35 Crs. u/s 92C on the basis of the order of the Transfer Pricing Officer u/s 92CA(3) dated 31.10.2011 in the case of the assessee company. 4. The learned A.O./DRP erred in rejecting the "Aggregation Approach" followed by the Assessee Company only for the benchmarking of International Transaction of export of manufactured goods of Equipment Division by holding that the assessee company had failed to demonstrate how the international transactions were closely interlinked. 5. The learned A.O./DRP erred in rejecting the Transactional Net Margin Method (TNM) as the most appropriate method for determining the Arm's Length Price (ALP) of the International Transactions relating to export of manufactured goods to the AEs without appreciating that the TNM was the most appropriate method for determining the ALP. 6. The learned A.O./DRP erred in holding that the Cost Plus Method (CPM) was the most appropriate method for determining the ALP of the International Transactions relating to export of manufactured goods to the AEs and thereby making an upward adjustment of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and thereby could not be considered as a comparable uncontrolled transaction as per Rule 10B. 13. The learned A.O/DRP erred in confirming the comparison of the segmental profitability of the assessee company from "Export to Associated Enterprises" and "Domestic Sales" ignoring the following: (i) Differences in products sold (type 85 specification) (ii) Differences in the nature of business i.e. the exports to AE was a "Very Large Volume and Stable Business" where forecast were available for 3 years in advance (i.e. in the nature of Wholesale Business) whereas the domestic business was low value and highly uncertain margins business with small volumes (i.e. in the nature of Retail trade) and because of this difference in nature of two businesses, the exports to AE were entitled to certain price discount. (iii) products sold in the Non AE sale segment included sale of traded goods as well as substantial sale of spares which was not comparable with the products exported to AE (iv) the segments compared represented two different geographical markets and, therefore, such comparison was unwarranted considering the differences is locations and markets (v) The Domestic Sales segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harged by the Associated Enterprises on Domestic Sales. 18. The learned A.O./DRP erred in not granting the benefit of adjustment of + / - 5% as provided in Section 92C(2) of the Income Tax Act, 1961 by applying the amended provisions as per Finance Act 2009. 19. The learned A.O./DRP erred in not appreciating that the assessee company had no reason to manipulate prices and hence, the addition made of Rs. 39.35 crs was not warranted. 20. The learned A.O./DRP erred in confirming the disallowance of expenses of Rs. 13,06,214/- as attributable to earning of exempted dividend income u/s. 14A by applying Rule 8D and erred in not appreciating that there was no dominant and immediate connection between the expenditure incurred and exempted income and therefore there cannot be any adhoc disallowance out of general expenses. 21.The learned A.O./DRP erred in confirming the disallowance of EDP Service Charges to the extent of Rs. 1,11,14,287/- (Rs. 77,80,001/- 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufactured goods of Equipment Division on the premise that internal data was available for comparison. 2.3 The learned Transfer Pricing Officer failed to appreciate that the inherent nature of exports business with Associated Enterprises and domestic business was entirely different. The export business to AE was "Very Large Volume and Stable Business" where forecast were available for 3 years in advance. The manufacturing facility of Appellant could sustain only on account of such export business. The domestic business was low value and highly uncertain margins business. The volumes in domestic business were small and on its own could not sustain the manufacturing facility of the Appellant Company. Accordingly these businesses were not comparable by their very nature. 2.4 The learned Transfer Pricing Officer erred in holding that the functions of Marketing, Advertisement, pre and post -sales support, credit monitoring and collection follow ups and risks of Product 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her he erred in not appreciating that the segments compared by him represented two different geographical markets and therefore such comparison was unwarranted considering the differences is locations and markets. 3.4 Without prejudice to above, the learned Transfer Pricing Officer erred in not appreciating that the Comparison of margins earned from exports to Associated Enterprises with Domestic Sales segment was incorrect as the domestic sales segment also had substantial Related Party Transactions. He erred in holding that the entire imported material purchased from Associated Enterprises was being consumed in manufacture of goods exported to Associated Enterprises and therefore the domestic sales segment was free of any related party transactions which is contrary to the facts of the case. 3.5 The learned Transfer Pricing Officer erred in observing in Para 63 of the order that Appellant Company has not demonstrated that there were sizable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [2008] 119 TTJ 721 (Bang.) (c) Sony India (P.) Ltd. v Dy. CIT [2008] 118 TTJ 865 (Delhi) Ground of objection No. 7 : 7.1 The learned Transfer Pricing Officer erred in not granting the benefit of adjustment of + / - 5% as provided" in Section 92C(2) of the Income Tax Act, 1961 by applying the amended provisions as per Finance Act 2009. Ground of objection No. 8 : The learned Transfer Pricing Officer erred in Considering PLI as "Gross Profit over Total Cost" instead of "Net Operating Margin over Sales". He erred in not appreciating that the assessee company was free to select any PLI and the PLI selected by the Assessee Company had commercial basis and reasoning. Ground of objection No. 9 : 9.1 The learned Transfer Pricing Officer erred in not appreciating that the assessee company had no reason to manipulate prices. Further he erred in not appreciating that the effective tax rates in Sweden as well 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 which were objected to by the assessee vide Objection No. 11 and 13 before the DRP which is not the issue before us. Thus, taking in cognizance of the order of Dispute Resolution Panel and in conformity with the directions given, final order u/s 143 (3) r.w.s. 144C(13) was passed as under:- 5. Order u/s 92CA(3) of the I.T. Act, 1961. 5.1 A reference u/s 92CA(1) of the I.T. Act, 1961 dated 06.08.2010 in the case of M/s. Alfa Laval (India) Ltd., Mumbai Pune Road, Dapodi, Pune 411 012 (hereinafter: ALIL) for A.Y.2008-09 for the computation of arm's length price in relation to the international transactions detailed in the audit report in the Form No.3CEB (hereinafter: Audit Report) was received from the A.C.I.T., Circle 8, Pune on 12.08.2010. 5.2 A notice u/s 92CA(2) of the ITA, 1961 along with a detailed questionnaire was issued to the assessee on 18.01.2011, 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 (&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of equipments to the AEs, and why further the internal comparable of sale of equipments in the domestic market be no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,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 Rs. 742.37 Crs and the profit before tax was Rs. 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 Length Price (ALP) and hence, no addition is warranted. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was Rs. 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 Rs. 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 segment." The various issues raised by the assessee are discussed hereunder- 6.3(A) W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appropriate method for determining the ALP for the earlier years upto A.Y. 2007-08. The Transfer Pricing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 substantial difference in the turnover of the assessee company and the above two companies and therefore, the said two companies cannot be considered as comparable entities. 6.3(A) VI The stand of assessee has been that the various reasons given by the Transfer Pricing Officer for rejecting five out of the eight companies selected by the assessee are not correct. Firstly, in respect of Gansons Ltd. and Kilburn Engineering, the Transfer Pricing Officer has mentioned that there is substantial difference in the turnover of the said two companies and the assessee company. Hence, by applying the turnover fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of manufacturing industrial equipments and accordingly, Thermax can be considered as a comparable entity. Moreover, Thermax was accepted as a comparable entity for asst. yrs. 2006-07 and 2007-08 and hence, there is no, reason to deviate from earlier view. In view of above, we find that TNMM is the most appropriate method for determining the ALP and accordingly, the TPO is not justified in rejecting the said method and thereby making the addition by way of adjustment as discussed above. 6.3(B). Applicability of Internal TNMM. 6.3 (B) (I) learned TPO has rejected the TNMM on the ground that the assessee has considered external comparables for determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 TNM method is not justified at all. If at all, the domestic segment is to be compared with the export segment, then it should be at net profit level and not gross margin level. After all, every company is concerned about its net profit. Income tax is also levied on the net profit and not on gross profit. There are certain expenses which are incurred by the companies which have a major impact on its business. But some of such expenses are not considered while determining the gross margin. Therefore, the comparability of the gross margin gives a distorted picture since certain important costs elements are ignored. 6.3(B)(IV) It is also submitted on behalf of assessee that for any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the domestic segment, as per the internal TNM method as well the transactions relating to export of equipments are at ALP. 6.3(C) Let us also we address ourselves to the preposition whether Cost Plus Method (CPM) selected by the Transfer Pricing Officer is the most appropriate method for determining the ALP as addressed by the revenue authorities & supplied by Ld. DR. The learned Transfer Pricing Officer has considered CPM as the most appropriate method for determining the ALP. According to the Transfer Pricing Officer, the functions performed and the assets utilized for manufacturing equipments in the domestic and export segments are the same. The Transfer Pricing Officer has m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial 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 basis', essentially in respect of same or similar property or services though, the benchmark so arrived at could not be applied on the global basis i.e. the average of gross profit earned from same or similar transactions with AEs. The application of CPM has to be on transaction basis rather than on global basis, and this fundamental scheme of CPM is also evident from the plain wordings of r. 10B as well as held by ITAT, Mumbai in the case of Asstt. CIT v. Tara Ultimo (P.) Ltd. [2011] 47 SOT 401. Accordingly, if the said principle is accepted, the entire basis adopted by the Transfer Pricing Officer for making the addition is not justified. The Transfer Pricing Officer has determined the average G.P. of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 which it has to pay commission to the bank. (e) Volume differences -The assessee had explained to the learned Transfer Pricing Officer that there are volume differences in the two segments. It was explained to the Transfer Pricing Officer that for AE business, there were five AEs providing cumulative business of about 180 Crs. while in the case of domestic segment, the top five customers provided cumulative business of Rs. 35 Crs. 6.3(C)(IV) Considering the various differences in the two segments, we find that the CPM adopted by the Transfer Pricing Officer is not correct. ITAT, Pune in the case of Drilbits International (P.) Ltd. (supra) wherein similar facts were involved and the learned Transfer Pricing Officer had rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 learned authorized representative for the assessee submitted that the GP worked out by the Transfer Pricing Officer of the domestic segment is not correct. The Transfer Pricing Officer has considered the turnover of domestic segment at Rs. 164.57 Crs. However, he has not appreciated that this amount included the sale of traded spares of Rs. 30.00 Crs. as well. As regards, sales to AEs there are no sales of spare parts. It is only a case of sale of equipments. This fact was explained by the assessee and the detailed submissions before the DRP are given as detailed on page 280 - 281 of Paper Book 2 filed by the assessee. Hence, in case, the comparison of the two segments is to be made, the turnover of the domestic segment should be reduced by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonnel, 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 has to factor the said expense while determining the sale price of the equipments in the domestic market. However, according to the Transfer Pricing Officer, under CPM gross margins are considered wherein only direct and indirect costs of production are to be taken into account. Therefore, the marketing and sales related costs do not affect the computation of ALP. The marketing and sales costs are not part of the direct and indirect costs of production. But, the Transfer Pricing Officer has not appreciated these factors while determining the gross margin. The gross margin is determined by considering the sales and reducing the direct and indirect costs of production. Thus, sales are a major factor while determining gross margin. (d) The Transfer Pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 180 Crs. while the top five domestic customers have cumulatively placed order worth Rs. 35 Crs. Considering the huge volume difference, the assessee requests for an adjustment. Considering the huge volume discount and adjustment of about 20% should have been given by the Transfer Pricing Officer. 6.3(D)(VI) Other adjustments -Assessee has to provide performance guarantee for the domestic sales. The assessee has to incur bank commission expenditure for providing such guarantee and the guarantee commission is 0.5% of the total value of the order. The Transfer Pricing Officer has not given any adjustment on this count. Further, as the AEs provide assessee sales forecast of the next three years. Accordingly, the assessee can plan its production and therefore, it does not have to incur any inventory carrying co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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' cannot be applied to the TP cases in view of this express legal provision. The application of 'Most Appropriate Method' is a question of law on given facts every year. Transfer Price is a question of fact, which could be different for different year. The issue of consistency supposes that, application of assessee's TP method on facts of that year was correct. This amounts to deciding the issue, which Assessment Year is not before the ITAT. The ITAT cannot impliedly decide the issue pertaining to other year, which is not before it. The "principle of consistency' has to be carefully applied to Income tax proceedings as principle of 'res judicata' is not applicable to it and same comparable companies may not be selected every year. In this regard, he placed re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 international transactions of purchase and sales of the assessee, direct method such as CPM would be more appropriate than transactional method as TNM method. 7.3 The assessee has stated that it is advisable to compare net margin than gross margin because assessee's many expenses like marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 required to be made. Thirdly, the assessee has sought for these adjustments merely on theoretical arguments. The assessee has neither proved neither before the lower authorities nor before the ITAT with data as to extent of adjustment required to be made on these grounds. If such adjustments are necessary then the dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 hand, I agree with Mr. Wall's assertion that since APCI had only one customer, namely the Assessee, if APCI lost that customer, it would have been for all intents and purposes finished in business and hence bore the biggest market risk. This is what in fact happened. To suggest, as Dr. Weight did, that since APCI was handed a g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 separately. This point has been clarified in the TP study report. The assessee has computed the operating margin of equipment division and project division independently and even the comparable entities are identified separately for the two divisions. The list of companies selected as comparables for the equipment division is detailed on page 121 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 case. 8.3 The learned D.R. had relied upon decision of Onward Technologies Ltd. v. Dy. CIT [2014] 147 ITD 534, wherein, the asst. year involved was A.Y. 2006 - 07. The assessee had adopted TNM method and even the Transfer Pricing Officer had adopted TNM method for determining the ALP. There was a dispute regarding the manner of applying TNM method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording 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 utilized in the domestic and export segment, CPM is not the correct method for determining the ALP. The assessee further submitted that the various figures considered by the Ld. DR are not correct and this is clarified as per the chart enclosed on page 248 of Paper Book 1. The learned D.R. has considered G.P. of Rs. 73 Crs. in the domestic segment while a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. According to him, as per the conditions in Indian market, the margins in export segment are always higher than the domestic segment. In this regard, we find that in theory, the domestic and export segment can be compared. However, there are various differences between the two segments and considering the same, the two segments cannot be compared. This view is forti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 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 detailed on page 281 of Paper Book 2. On one hand, the learned CIT D.R. has argued that since material imported from AE is used to export segment as well as domestic segment, both segments are comparable. While on the other hand, he refuses to accept existence of such raw materials (i.e. related party transactions) in the domestic sales segment. Further as per th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9/-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 Rs. 2,50,000/-. Assessing Officer is directed accordingly. 10. Next issue is with regards to disallowance of EDP service charges of Rs. 1,11,14,287/-. In the year under consideration, Assessing Officer has made disallowance of EDP service charges of Rs. 1,11,14,287- on the ground that said expenditure was in capital nature. The stand of the assessee has been that the said expenditure was paid by it to its associated enterprises under cost sharing arrangement for sharing informati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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