TMI Blog2018 (4) TMI 501X X X X Extracts X X X X X X X X Extracts X X X X ..... where there is no product dissimilarity and the geographical differences, if any, does not affect the quality of products sold by the assessee because of identical technical similarity, the issue arises is whether two transactions are comparable. Further, FAR dissimilarity, if any, warrants adjustments in the domestic segment since the assessee was selling the products through its associated enterprises on cost plus mark-up and had not to bear any risk, then the margins shown by the assessee in the export segment, need no adjustment. As pointed out in the paras hereinabove, adjustment, if any, is to be made in the domestic segment, wherein the assessee has already shown lower margins. Geographical differences do not stand as the market in which the goods were sold were comparable. Further, we have also held that it could not be said that FAR of sales in domestic segment and exports to associated enterprises were dissimilar; in addition to the same, is the input costs which are same and identical. Where comparable is available to the assessee by way of domestic sales made by it, then the margins of same should be applied in order to benchmark the margins earned by assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital; 2. b) the Comparables have been identified following the provisions of Rule 10A(a), Rule 10B(2), Rule 10B(3) and Rule 10B(1) comparing functions, assets and risks, wherein there is no case for any adjustment; which needs to be made to the financial results of either assessee company or the comparables. 2. c) it has not considered the fact that the profit level indicator used for comparison was operating profit before interest and thus any impact of credit policy on interest cost was automatically excluded from the case of the assessee companies and the comparables; 2. d) it allowed the claim of the assessee in routine manner despite the fact that the OECD guidelines in general and specifically in para 3.47 to 3.54 do not consider such adjustments to be applied in an automatic and routine manner? 3. Whether the DR Panel was correct in law in allowing proportionate adjustment when the International Transactions are common to both the segments and have to be aggregated to arrive at an ALP and when capacity adjustments have granted to Assessee Company? 4. The assessee in ITA No.582/PUN/2014 has raised the following grounds of appeal :- The foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant's international transactions. Incorrect Rejection of Comparable Companies 5. On the facts and circumstances of the case, and in law, the learned AO / TPO erred and the Hon'ble DRP further erred in incorrectly rejecting company which is comparable to the Appellant while determining the ALP of the international transactions of the Appellant. Restricting the Adjustment Proportionate to the International Transaction 6. On the facts and circumstances of the case, and in law, the learned AO / TPO erred in incorrectly computing the adjustment while following the direction of the Hon'ble DRP to restrict the adjustment with respect to transfer pricing grounds to the proportion of the value of the international transactions. Import of Capital Goods 7. On the facts and circumstances of the case, and in law, the learned AO / TPO erred in making and the Hon'ble DRP further erred in upholding the adjustment with respect to the import of capital goods from the AEs. 7.1. On the facts and circumstances of the case, and in law, the learned AO / TPO erred in wrongly making an adjustment to the Appellant's income on account of transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the hands of assessee was on account of repairs to buildings. The assessee had incurred an expenditure of ₹ 13,43,920/- and as per the Assessing Officer, this included major repairs of capital in nature and hence, 15% of the expenses were treated as capital in nature at ₹ 2,04,493/- and depreciation on the said amount was allowed @ 10%. The assessee filed objections before the Dispute Resolution Panel (DRP) against the order of TPO, who in turn, gave directions under section 144C(5) of the Act. The TPO in line with the directions given by the DRP, Pune excluded Tata Motors from the final list of comparables. The TPO as per the direction No.3 of DRP, with regard to adjustment regarding the import of capital goods, confirmed an amount of depreciation on value of ₹ 18,05,882/-. Further, working capital adjustment was allowed and the TP adjustment on account of proportionate adjustment was restricted to ₹ 40.76 crores and amount of depreciation on value of ₹ 0.18 crores. Accordingly, the Assessing Officer made an addition of ₹ 40.94 crores in the order passed under section 143(3) r.w.s. 144C(13) of the Act. The other additions on account of amor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tries. In this regard, the assessee took help of its associated enterprises for booking the orders, wherein the assessee gets orders from Germany for developing countries. The said trucks could not enter Germany because of emission norms and were directly sent to South African countries. Some parts were being imported and used for both the domestic and export markets. He further pointed out that the TPO had aggregated all the transactions and applied entity-wise TP provisions i.e. the first transaction was import of raw material, wherein cost of third party materials was charged to the Indian entity by its associated enterprises and surcharge for handling was also charged; but in respect of other supplies, the associated enterprises had not charged any surcharge. The learned Authorized Representative for the assessee pointed out that the assessee had applied CUP method for import of raw material and before the TPO, screen shots were filed, since there was no paper invoices in Europe and only electronic invoices were issued. The TPO rejected the same. Before the DRP, the assessee claimed that it had filed additional evidence i.e. certificate from the CA (WTS certified accountant) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld to the developing countries, for which the services of associated enterprises were utilized. The assessee had applied internal TNNM method, where margins of sale in the Indian market and exports to developing countries were considered. He referred to the additional evidence filed before the DRP, where the segmental on actuals were filed; the sales were actual and material cost comes from the system. He referred to the observations of DRP that the goods sold in India and goods sold to Germany could not be compared. The learned Authorized Representative for the assessee referred to para 2.1.40 at pages 15 and 16 of the order of DRP. He referred to the additional evidence filed before the Tribunal at pages 194 to 196 to pointed out that majorly the sales were being made to the developing countries i.e. South Africa, Ethiopia and Indonesia. He stressed that no trucks were sold to Germany but the invoices were in the name of German associated enterprises, but the goods were shipped directly to the customers. He pointed out that assessee manufactures cargoline shell trucks in this year. As per norms, trucks in Europe should comply with Euro-V norms in the said year. Our attention was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d allowed the said aspect in favour of the assessee but the Assessing Officer has not calculated it correctly. In this regard, he made a request that the Assessing Officer be directed to compute the international transactions correctly. The issue in ground of appeal No.8 is charging of interest was held to be consequential. In conclusion, he stressed that where the trucks are being sold to the developing countries though the orders were through Germany company, but the trucks were straight away sent to the developing countries and hence, the items manufactured by the assessee for the domestic market and its exports should be benchmarked by applying internal TNMM method as the same items were sold. In respect of role of associated enterprises, it was pointed out that certain raw material was procured through associated enterprises, which in turn, associated enterprises charged the purchase cost along with minor surcharge and handling charges from the assessee and the said transaction was at arm's length price. Reliance was placed on the ratio laid down by the Bench of Tribunal in bunch of appeals in Wriggley India Pvt. Ltd. Vs. Addl.CIT and others in ITA No.5224/Del/2010 and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther principles on inter-dependence, the learned Authorized Representative for the assessee pointed out that if the transactions were so inter-dependant, then no aggregation of the transactions. He referred to the order of TPO and pointed out that he has failed to give a finding that there is no other way but aggregation and in the absence of the same, he pointed out that the order of TPO was incorrect. In respect of export to associated enterprises, the learned Authorized Representative for the assessee pointed out that by this mechanism, the assessee was making less profit in India as far as Cost Plus Mark up was concerned. He stressed that where the profile was same and the transaction was same, wherein the assessee was manufacturing and selling trucks, both in the domestic market and in the developing countries, then internal TNMM method had to be applied. He stressed that all the transactions were independent, so there is no question of aggregation of the said transaction. 15. Coming to the appeal filed by the Revenue, the learned Departmental Representative for the Revenue pointed out that the issue was against exclusion of Tata Motors and allowing working capital adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted enterprise of the assessee was in Germany, which was sourcing the raw material to be used for the manufacture of trucks both in the domestic market and in the exports to the developing countries. The assessee was raising the bills on the said Germany company i.e. on its associated enterprises for export of finished goods, but the trucks were being sent to the developing countries by the assessee directly. The reason for the same was that the trucks in Europe had to be manufactured as per the Euro-V norms which were more stricter emission norms. The assessee was not in the manufacturing line of such trucks which could fulfill the norms of Euro-V emission norms. The case of assessee before us is that under such circumstances, the trucks manufactured by the assessee could not enter Germany and were being sent to the developing countries like South Africa, Ethiopia and Indonesia directly from India and hence, no geographical difference. In this regard, the assessee has furnished the evidence of delivery of the trucks to such countries directly to the customers of developing countries as against the bills raised by the associated enterprises in Germany. The goods undoubtedly, were s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coming to the second argument of the DRP and the TPO that FAR is dissimilar, so in respect of marketing and selling functions, wherein the sale in domestic market, the assessee has to engage in marketing activities, whereas for sales made through its associated enterprises, no marketing functions are performed by the assessee. The assessee explained that in case any adjustment has to be made for this function, then this would result in reduction in the margins of domestic segment but this would not change the conclusion that the export transaction was at arm's length price. We find merit in the said plea of assessee. Similarly, in respect of after sales function, where the said services were provided for sales made in the domestic market and the assessee was not performing any after sales function for sales made through its associated enterprises, there cannot be said to be any dissimilarity. The assessee pointed out that 500 Euros per truck were reduced from the sale price for each truck exported and an adjustment on this account would mean that sum of 500 Euros per truck is to be added to the export segment. However, in case such an adjustment is made, then it would enhance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale through associated enterprises, vis- -vis trucks sold directly in domestic market. In respect of FAR analysis, which was the reason on which internal comparability was rejected by the DRP, the case of assessee before us is that where the assessee was selling the same product in both the segments, difference in FAR could not obviate the internal comparability. The learned Authorized Representative for the assessee has furnished tabulated details in this regard and has stressed that even if the differences are considered but since the business of assessee in both the segments was manufacture and sale of trucks, then the mere difference in pricing mechanism would not vitiate the comparability of two segments. Another contention of the DRP for rejecting the CUP method was that the controlled transaction could not be compared to controlled transactions. The assessee was of the view that it was also erroneous although the assessee uses the same inputs to manufacture the trucks for both the segments and what had to be benchmarked the margins achieved by the assessee on common unit cost. 22. In the facts of present case, where there is no product dissimilarity and the geographical d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 and hence the import of raw material from associated enterprises was at arm's length price. The plea of assessee before us was that where the associated enterprises were charging at material cost i.e. charged by third party vendors plus nominal surcharge to cover cost of inbound freight, material handling, quality inspection, etc., then the same cannot be said to be not at arm's length price. In this regard, the assessee filed some screen shots from associated enterprises account i.e. electronic invoices raised by the suppliers for supplying the items to the associated enterprises, which in turn, were imported by the assessee. The said submission was not accepted by the TPO, since these were screen shots and could not be verified. The assessee before the DRP in this regard, submitted a certificate from WTS (certified accountant), which states that the material cost and surcharge on the parts sold to the assessee by the associated enterprises i.e. surcharge in the case of Germany at 18.79% and Austria at 18.53%. The additional evidence had been accepted by the DRP but the transfer pricing analysis adopted by the assessee was rejected. 25. The plea of assessee before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same could not be accepted in transfer pricing analysis. Another difference which was pointed out by the learned Departmental Representative for the Revenue was the method of applying surcharge by the associated enterprises which dependent on various factors and thus, varied. Because of such mark up variations arising due to inbound freight, mode of transport, packing material, then in such scenario, authenticity, reliability and basis of comparison would fail. 27. In view of the submissions made by both the parties and after considering the facts of the case, we find that the assessee has been changing its stand with regard to application of most appropriate method. The assessee has stressed that its transaction of import of raw materials is to be benchmarked separately by applying CPM method before the DRP. In this regard, the assessee has placed reliance on additional evidence filed before the DRP i.e. WTS Certificate. The plea of assessee is that CPM is to be applied with its current associated enterprise as tested party as goods were supplied at cost with surcharge. But the assessee in WTS Certificate mentions that surcharge varied from 13% to 20%. The import of raw materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is cost plus entity, wherein it is exporting finished products to its associated enterprises on cost plus margin of 25%. Under the transfer pricing provisions, an endeavour is to be made to compare like with like. In the case of assessee, it is undisputed that input cost both for domestic sector and export sector is same. However, the assessee was remunerated on cost plus basis in respect of its exports to associated enterprises, whereas in respect of domestic sales normal margins were earned. We have already decided the issue in the paras hereinabove that geographical differences do not stand as the market in which the goods were sold were comparable. Further, we have also held that it could not be said that FAR of sales in domestic segment and exports to associated enterprises were dissimilar; in addition to the same, is the input costs which are same and identical. In such circumstances, where comparable is available to the assessee by way of domestic sales made by it, then the margins of same should be applied in order to benchmark the margins earned by assessee for export segment. Accordingly, we hold that internal TNMM method should be applied as most appropriate method to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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