TMI Blog2013 (10) TMI 1454X X X X Extracts X X X X X X X X Extracts X X X X ..... ;) erred in making a transfer pricing adjustment of ₹ 35,17,37,000 to the income of the appellant by holding that the international transaction pertaining to its manufacturing segment, and contract research and development (R D) support services segment of the appellant do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act'). 2. The Ld. DRP / AO erred in determining the arm's length price of the international transaction pertaining to manufacturing segment by: 2.1 aggregating the appellant's manufacturing subsegments namely Manufacturing Local and Manufacturing TP, which was further segregated into Import of components for manufacturing and sale to Non Associated Enterprises ('AEs') and Manufacturing and export to AEs. Thereby, failing to appreciate the nuances of the appellant's segmented business operations and its differing impact on the functional, asset and risk profile of the appellant; 2.2 failing to appreciate the TP policy followed by the appellant in respect of its international transactions and its effect on the pricing of the international transactions and also failing to take cognizan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fice of Transfer Pricing Officer/AO to analyze the additional evidence submitted before the DRP relying on the assessee s own case for Assessment Year 2007-08. It was submitted by the ld. AR that assessee submitted similar additional evidences in Assessment Year 2007-08 wherein the ITAT has remanded the issue to the file of the Assessing Officer. The ITAT has taken the cognizance of additional evidences and remanded the matter to the office of TPO/AO for his analyses. The ld. DR principally concurred with the appellant for submission of additional evidences which were filed before the Dispute Resolution Panel, however, ld. DR contended that the same should not result in a change in transfer pricing approach viz. economic analysis as undertaken in the transfer pricing documentation. Ld. DR also submitted that at that stage, the appellant may plead that new approach, for example, transaction by transaction analysis that would result in change in tested party. On this ld. AR submitted that the assessee has prepared the TPO document for 2008-09 thereby complying with the contemporaneous documentation requirements as prescribed by Rule 10D(4) of the Income-tax Rules, 1962. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crore as compared to arm's length profit, i.e. had all the transactions been at arm's length, the assessee's profit would have been higher by the amount of ₹ 3229.84 crore. The difference constitutes approximately 13.5.% of total amount of international transactions. The transactions with unrelated parties are obviously at arm's length. Therefore, it can be concluded that entire difference between the arm's length profit and actual profit is attributable to transactions with the AE only. We, therefore, reject this contention of the assessee also. Further, the appellant would place reliance on various OECD guidelines, Indian TP Regulations and various judicial precedents on this issue. Para 3.9 of the OECD Guidelines states : Ideally, in order to arrive at the most precise approximation of arm's length conditions, the arm's length principle should be applied on a transaction-by-transaction basis ... (Emphasis Supplied) In accordance with the OECD Guidelines above, the international transaction of the appellant should be analyzed on a transaction-by-transaction basis. This view is also reflected in the Indian TP Regulations as given b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed by it in its TP documentation. Selection of tested party At this stage, the appellant would like to submit that the economic analysis conducted was in line with the guidelines issued by the OECD which explain a nine step process for transfer pricing analysis. The salient requisites of a cogent transfer pricing analysis fortified under the nine step comparability analysis provided in Para 3.4 of the OECD Guidelines, broadly include the following steps: Further, the appellant would refer to Rule 10B of the Rules which deals with determination of arm's length price ('ALP') under section 92C of the Act. Rule 10B (2) and Rule 10B (3) are reproduced below for Your Honour's ready reference: 10B(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into with an AE. The method does not lay down any guidelines as to which enterprise should be the tested party. The enterprise in respect of which the net profit margin is to be computed and compared can be any of the transacting AE and need not necessarily be the AE of the tax jurisdiction in which it operates (in this case, India). Further, it may kindly be noted that in order to establish the ALP, determination of the 'tested party' plays a very important and key role since one needs to identify comparables and compare the same with tested party. In this regard, Your Honour's kind attention is invited to the TP Guidelines issued by the OECD that also highlight the above point. Para 3.18 of the OECD Guidelines states that: When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Transfer Pricing for Developing Countries issued on October 2, 2012 wherein it was stated that: 10.3.1.3. The regulation prescribes mandatory annual filing requirements as well as maintenance of contemporaneous documentation by the taxpayer in case international transactions between associated enterprises cross a threshold and contains stringent penalty implications in case of noncompliance. The primary onus of proving arm's length price of the transaction lies with the taxpayer. Indian transfer pricing administration prefer Indian com parables in most of the cases and also accept foreign comparables in cases where foreign associated enterprises is less or least complex entity and requisite information are available about tested party and comparables. (Emphasis supplied) The concept of tested party was also dealt in detail in a recent judgment of the Ahmedabad Tribunal in the case of General Motors India Private Limited [TS-21S-ITAT- 2013 (Ahd)-TP) wherein the tribunal has concluded that the foreign AE should be considered as the tested party being the least complex of the transacting entities and has relied on the UN TP Manual and various judicial precedents on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g regulations state that the tested party will be the participant in the controlled transaction whose operating profit attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable data and requiring (the fewest and most reliable adjustments, and for which reliable data regarding uncontrolled comparables can be located. Consequently, in most cases the tested party will be the least complex of the controlled taxpayers and will not own valuable intangible property or unique assets that distinguish if from potential uncontrolled comparables. Thus, in a sense, the tested party would have lesser risk as compared to the other transacting party or the real entrepreneur. The above concept of tested party has also been confirmed by the Hon'ble Delhi Tribunal in the ease of Ranbaxy Laboratories Ltd. v. Additional Commissioner of Income-tax, Range-15. New Delhi [110 ITD 428] = (2008-TII-01-ITAT-DEL-TP) wherein the ld. Tribunal held that, that ld. CIT failed to appreciate that under the transfer pricing mechanism tested party out of two parties of a multinational involved in the transaction, that least complex par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid segments and the economic analysis therein is based on the functions performed, assets owned/utilized and risks assumed ('FAR') of the transacting entities. The appellant has followed the same approach of segmentation for its manufacturing segment as well but the same was rejected by the Ld. TPO and the DRP. Manufacturing segment - Economic analysis from supplier's perspective Further, the appellant would take the opportunity to draw Your Honours' attention to the findings of the Hon'ble Delhi Tribunal in case of Kyungshin Industrial Motherson Ltd. [2010-TII-61-ITAT-DEL-TP] wherein the primary contentions of the appellant involved analysis of supplier profitability for imports and limiting the variation on account of transfer pricing only to the proportion of related party transactions. Incidentally, both these issues were not addressed by lower authorities for the want of data. In the said ruling, the Hon'ble Bench acceded to the appellant's plead for accepting these additional evidences and remanding the matter to lower authorities for fresh adjudication without any other specific direction. In the instant case, the appellant had also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arm's length nature of its international transaction in adherence to the principles of arm's length and then analyse pricing policy of the assessee in the light of the said evidence which was not in the possession of the assessee earlier. It is needless to mention over here that while deciding the issue afresh the A.O. will afford opportunity of being heard to the assessee. In view of the decision of ITAT in assessee s own case and also in view of the decision of ITAT relied upon by the assessee, cited supra, in the case of Kyungshin Industrial Motherson Ltd. in ITA No.1396 (Del.)/2009 and in view of the decision of Special Bench in the case of Quark Systems India Pvt. Ltd. reported in 38 SOT 307 (B), we find it appropriate to set aside the matter to the file of the Assessing Officer to first ascertain to his satisfaction that the instances furnished by the assessee by way of supplementary evidences are indeed comparable to the case of the assessee to corroborate the arms length nature of its international transaction in adherence to the principles of arms length and then analyse pricing policy of the assessee in the light of those evidences. Thus, the grounds no.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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