TMI Blog2018 (4) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Auditor's Note in the Accounts, which, according to assessee, is not relevant because from the accounting perspective, it is one line of business and accordingly, assessee was not required to disclose segmental reporting in its Note to the Accounts. The assessee filed the segmental accounting on both the segments before the authorities below, which have not been disputed by them. Therefore, there is nothing wrong in the analysis submitted by the assessee for the purpose of benchmarking of ALP. Both the segments cannot be clubbed together to determine the ALP. CIT(A), even on the alternative point considered that even if the TPO's approach of clubbing of both the segments is to be followed for the year under consideration and certain comparables which are not relevant to the issue are excluded, the assessee's would be entitled for full relief on account of T.P. adjustment. The reason given by the CIT(A) have not been disputed by the Ld. D.R. through any evidence or material on record. CIT(A) also considered that manufacturing activity in the IMFL segment largely comprises of contract manufacturing and bottling of liquor for other companies, for which, fixed return are recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Provision of market support services 1,09,14,596/- 3. Reimbursement of expenses received 1,13,07,791/- 4. Reimbursement of expenses paid 225,976/- 5. Reimbursement of expenses paid 503,353/- 2.1 The A.O. then referred assessee's case to TPO under section 92CA(1) of the I.T. Act, to determine the ALP in respect of these international transactions and an adjustment of ₹ 2,31,23,800/- was made by the TPO in relation to the international transactions pertaining to purchase of CAP from A.E. While so holding, the TPO - Clubbed the Bottled in India Scotch ( BIIS ) and India Made Foreign Liquor ( IMFL ) segments and compared the net profit margin (NPM) of the combined manufacturing operations of the Appellant with those of broadly comparable independent companies. The TPO also rejected 5 companies out of the set of 12 comparable companies selected by the Appellant for benchmarking the above transaction. Used the final year (FY 2004-05) financial data for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant. The IMFL is manufactured from a purified form of spirit/alcohol called the Extra Neutral Alcohol ( ENA ). The ENA is manufactured by the appellant in its own distillery in Behror, District Alwar, State of Rajasthan, India. The IMFL is sold by the appellant under the brand names Old Smuggler Rum, Old Smuggler Gin and Curtis No. 1. The IMFL is also manufactured and bottled by the Appellant on a contract basis for Seagram Manufacturing Private Limited ( SMPL ) under a Technical and Marketing Assistance Agreement ( TMAA ). The IMFL so manufactured and bottled is sold by the appellant under the latter's brand names (Royal Stag, Imperial Blue, and Fling Vodka). For this activity, the Appellant receives income in the form of a fixed fee on number of cases manufactured and bottled for SMPL. 3.3 It was further explained that for the purpose of benchmarking of international transactions pertaining to purchase of CAP from A.E, assessee has segregated its manufacturing operations into two different segments on the basis of their functional differences. This was also stated in the assessee's notes to accounts in the Audit Report. (1) Bottled in India Scotch ( BIIS ) and ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions. Similarly, when analyzing the transactions between the independent enterprises to the extent they are needed, profits attributable to transactions that are not similar to the controlled transactions under examination should be excluded from the comparison. The TNMM compares the profitability of the controlled transaction, measured in relation to (1) costs or sales or (2) assets, to the profitability of the uncontrolled transaction in similar circumstances. The focus is on transactions rather than business line or the operating income of the company. The expression in relation to means in connection with and implies connection between a thing in relation to something else. Thus, there should be relationship between profit and assets or between profit and costs or sales. That relationship may be expressed as a ratio between net profit to assets, or between profit and costs or sales. Reliance is also placed on the decision of E-gain Communication (P) Ltd. v. ITO [2008] 23 SOT 385 (Pune) in which it was held as under : It is thus evident from that both OECD Guidelines and US regulations insist on necessary adjustments for difference on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the purpose of analysis is consistent with the Rules. 3.5 The assessee also referred to OECD Transfer Pricing guidelines July, 2010, which advocates the same philosophy for application of TNMM. Para 3.9 of OECD guidelines reads as follows : 3.9 Ideally, in order to arrive at the most precise approximation of fair market value, the arm's length principle should be applied on a transaction-by-transaction basis. In addition, Para 2.58 of the OECD Guidelines states: 2.58 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction 3.6 The assessee again relied upon the order of the Pune Tribunal in the case of E-gain Communication (P.) Ltd. (supra), in which it was further held if the differences are such that they cannot be subjected to evaluation, then transaction may have to be eliminated for the purposes of comparison. It was also submitted that ITAT, Mumbai Bench has affirmed in the case of Addl. CIT v. Tej Diam [2010] 37 SOT 341 that while applying TNMM, comparison of only net profit margins realised by an enterprise from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Expenditure Change in stock (5,103,694) Manufacturing expenses 225,034,913 Personnel expenses 29,797,653 Net Profit Margin ('NPM') computation Particulars FY 2004-05 Administrative expenses 30,393,463 Selling Distribution expenses 162,238,311 Bank Charges 2,333,240 Depreciation 5,562,673 Exchange Difference (Net) (256,690) Total Expenditure 449,999,869 Net Operating Profit 62,588,748 NPM (percent) (Net Operating Profit/Total Income) * 100 12.21% 3.9 The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 Khoday India Limited X 11 Rajasthan State Ganganagar Sugar Mills Limited X 12 Thiru Arroran Sugars Limited X Arithmetic Mean 7.78% Transfer Pricing Adjustment Particulars Amount (Rs.) Operating Income (Manufacturing - BUS + IMFL) 132,04,08,637 Operating Expenditure 124,08,04,645 Net Profit 7,96,03,992 NPM % 6.02% Revenue related to manufacturing 132,04,08,637 NPM at 7.78% 10,27,27,792 NPM earned 7,96,03,992 Difference (Transfer Pricing adjustment) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) Flat CRT color TV's 29'. For manufacturing of Flat CRT color TV's 51' the Company imports components from its associated enterprise. The international transaction of the Company pertains to Flat CRT color TV's 51' segment. From the AS-17 perspective the Company is engaged in the manufacture and sale of Flat CRT color TV's. However, from the perspective of transfer pricing, to test the arm's length nature of the imports from its AE's it will be prudent to analyse the Flat CRT color TV's 51' segment. 3.12 It was, therefore, submitted that the TPO's finding that IMFL segment of the assessee include international transactions is mislead by an erroneous conclusion drawn from a third-party data. It was further submitted that during the appellate stage when Ld. CIT(A) asked the assessee to submit the updated margins for the year under consideration, the arithmetic mean NPM of the above 12 comparable companies worked-out at 5.91% based on which also the assessee's international transactions complied with the arm's length standard. The comparables selected by the assessee for the assessment year under appeal margin is as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in my view, is not appropriate. AS 17 cannot be said to be a governing law for the economic analysis to be undertaken for transfer pricing purposes. 20. The TPO appears to have been mislead by the notion that the appellant's IMFL segment also includes international transaction comprising of import of CAP. There is no concrete evidence that the TPO could place on record in this regard. 21. I have also considered the submissions of the appellant. The appellant has been able to aptly distinguish the two business segments (i.e. BUS and IMFL). The international transaction undertaken by the appellant only with respect of its BUS segment. Further, the allocation keys used for segregation of BUS and IMFL segments are robust and applied consistently on a year-on-year (YOY) basis by the appellant. This has been discussed in para 7.71 and 7.72. 22. I am of the opinion that the appellant's submissions that while applying TNMM, comparison of only net profit margins realized by an enterprise from an international transaction need to be considered. The above position is in accordance with the Rules and also supported by the OECD Guidelines and various ITAT decisions as su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed (5.73) 2 Brihan Maharashtra Sugar Syndicate Limited 4.28 3 GM Breweries Limited 2.01 4 IFB Agro Industries Limited 2.06 5 Radico Khaitan Limited 6.73 6 Sri Rama Distilleries Limited 34.08 7 Tilaknagar Industries Limited 4.20 8 Arthos Breweries Limited X 9 Blossom Industries Limited X 10 Khoday India Limited X 11 Rajasthan State Ganganagar Sugar Mills Limited X 12 Thiru Arroran Sugars Limited X Arithmetic Mean 6.80 Transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.61 3 GM Breweries Limited 1.87 4 IFB Agro Industries Limited 1.40 5 Radico Khaitan Limited 12.83 6 Sri Rama Distilleries Limited X 7 Tilaknagar Industries Limited 3.20 8 Arthos Breweries Limited X 9 Blossom Industries Limited X 10 Khoday India Limited X 11 Rajasthan State Ganganagar Sugar Mills Limited X 12 Thiru Arroran Sugars Limited X Arithmetic Mean 3.60% The appellant placed reliance on the following ITAT decisions : DCIT v. Quark System Private Limited (2010- TIOL-31 -ITAT-CHD-SB) Sap Lab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s more than 7.78 percent arm's length NPM arrived at by the TPO. The appellant's also filed detailed working calculations in relation thereto. Since Issue No. 1 has already been decided in favour of the appellant based on which the appellant is entitled for a full relief on account of transfer pricing adjustment, Issue No. 2 as discussed above does not require separate adjudication. However based on submissions and explanations provided by the appellant, I find merit in appellant's alternate contentions which have been briefly discussed in the above paragraphs 23 and 24 of my order. 4. The Ld. D.R. relied upon the order of the A.O./TPO. He has submitted that no segmental accounts have been prepared by the assessee. The assessee prepared combined accounts of both the segments. Therefore, no separate accounts of BIIS segment have been prepared. The risk and return of both segments are same. Product may be different but risk and return on both segments are same. The Auditor has taken both the segments together. The Ld. D.R. also referred to page 244 on AS-17. He has, therefore, submitted that once Auditor has reported both the segments together, the Ld. CIT(A), s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into international transaction with respect to purchase of Compound Alcoholic Preparation ( CAP ) which was considered by the TPO/AO. The TPO clubbed BIIS and IMFL segments and compared the net margin of the combined manufacturing operations of the assessee with those of the broadly comparable independent companies. The assessee, however, explained that under BIIS segment, assessee processes CAP imported by it from it's A.E. in Scotland. The CAP so imported, is further processed by the assessee into the scotch, whisky by way of dilution into desired Alcoholic strength bottled and sold in India. Further, in IMFL segment, it pertains to domestic business of the assessee. The IMFL is manufactured from a purified form of spirit/alcohol called the Extra Neutral Alcohol ( ENA ). The ENA is manufactured by the assessee in India and IMFL is sold under different names. The assessee, therefore, explained that there is a key indicative difference between the two business segments as reproduced above. It was, therefore, proved that raw material imported by the assessee is CAP which is matured under the climatic conditions of Scotland and cannot be manufactured in India. Then, the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that even if the TPO's approach of clubbing of both the segments is to be followed for the year under consideration and certain comparables which are not relevant to the issue are excluded, the assessee's would be entitled for full relief on account of T.P. adjustment. The reason given by the Ld. CIT(A) have not been disputed by the Ld. D.R. through any evidence or material on record. The Ld. CIT(A) also considered that manufacturing activity in the IMFL segment largely comprises of contract manufacturing and bottling of liquor for other companies, for which, fixed return are received and in case of bottling, profit is excluded, then also, the ALP declared by the assessee was correct. In the absence of any serious challenge to the findings of the Ld. CIT(A) on this issue also, no interference is called for in the matter. In view of the above discussion and in the light of findings of fact arrived at by the Ld. CIT(A), we do not find any justification to interfere with the finding of fact recorded by the Ld. CIT(A). No interference is called for in the matter. The Departmental Appeal has no merit and is accordingly, dismissed. 7. In the result, Departmental Appeal is dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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