TMI Blog2016 (8) TMI 1351X X X X Extracts X X X X X X X X Extracts X X X X ..... In the case on hand it was brought to our notice that the TPO has accepted the TNMM as MAM for determining the ALP in respect of the royalty payment being aggregated transaction along with the other international transactions of the assessee. Therefore keeping in view of the facts and circumstances of the case, we do concur with the view of the CIT (Appeals) on this issue. Accordingly, the appeal of the revenue is dismissed. Comparable selection criteria - functional similarity - Held that:- The assessee is engaged in the manufacturing of textiles machines for textile manufacturers in India - assessee has bench marked its international transactions on consolidated basis by considering the purchases, royalty payment, sales as composite international transactions by applying TNMM at enterprise level, thus companies functionally dissimilar with that of assessee need to be deselected from final list. - I.T.(T.P) A. No.568/Bang/2012 & C.O. No.31/Bang/2015, I.T.(T.P) A. No.581/Bang/2012 - - - Dated:- 26-8-2016 - SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER For The Assessee : S/Shri P.K. Prasad and Umashankar, Advocates. For The Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by receiving the alleged intangible/know how against the said payment of royalty. Finally the TPO held that the royalty payment cannot be allowed because the assessee has failed to demonstrate the receipt of technology and consequential benefit of economic or commercial value. Accordingly, the TPO determined the ALP of royalty at NIL. On appeal, the CIT (Appeals) overturned the finding of the TPO and held that the assessee has produced the relevant record including the agreement under which the technical know how was granted to the assessee against the payment of royalty. The CIT (Appeals) has also accepted the bench marking of the international transactions by considering all the transactions and accordingly directed the A.O./TPO to compute the ALP of consolidated transactions with the AE and then make TP adjustment under Section 92CA of the Income Tax Act, 1961 (in short 'the Act') in respect of the turnover of the assessee at entity level. While passing the impugned order, the CIT (Appeals) has also rejected one of the comparables from the set of comparables selected by the TPO and also included two more comparable companies from the TP Study Analysis of the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only purchases from the AE and only insignificant amount of sale in comparison to the total purchase of the assessee which is more than ₹ 623 Crores. Therefore the royalty payment cannot be aggregated with the other international transactions for the purpose of determining the ALP. He has further contended that the royalty has been paid under a separate agreement and therefore has no relation with the purchases of the assessee from its AE. Thus the learned Departmental Representative has submitted that this transaction of payment of royalty and the transaction of purchases with the AE are not closely related transaction but are separate and independent international transaction therefore these cannot be treated as closely linked transaction for the purpose of transfer pricing adjustment. The learned Departmental Representative has forcefully contended that the aggregation and clubbing of transactions in the case of the assessee are not permitted with the transactions that are not closely linked transactions which cannot be applied in this case. 5.1 On the other hand, the learned Authorised Representative has submitted that the royalty is paid to the AE in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty against the transfer of technical know how, we do not find any error or illegality in the order of the CIT (Appeals). The relevant record and evidence was duly produced by the assessee before the authorities below to establish that the royalty in question was paid against the use of right to use of the technical know how belonging to the AE. Accordingly, we hold that the determination of ALP by the TPO cannot be considered as NIL. Even otherwise the jurisdiction of the TPO is to determine the ALP by testing the same with uncontrolled comparable price and not to examine the allowability of the claim by applying the benefit test or the conditions as provided under Section 37(1) of the Act. However, in the present case the purchase and raw-material from AE consist of ₹ 123 Crores as against the total purchases of ₹ 623 Crores. The export components to the AE is only ₹ 20,89,409 which is insignificant in comparison to the total sale of the assessee. Therefore the TNMM cannot be applied as MAM for determining the ALP of royalty payment in question but we find that neither the TPO nor the assessee was able to find such uncontrolled comparable case where an identical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view that no meaningful purpose would be served in segregating the trading and manufacturing segments, particularly when the assessee and the comparable companies are at par with regard to the nature and scale of combined activities. Needless to add that this finding / decision by its very nature has to be case-specific and year-specific as the decision is based on the facts and circumstances of this particular case and of this particular year and is not to be construed as laying down the principle in this regard. We, therefore, direct the Assessing Officer / TPO to compute the ALP at the entity / enterprise level by combining the trading and manufacturing segments. Thus it is clear that the Tribunal was of the view that in the fitness of things and in the facts and circumstances of the case where the comparable companies are also trading in spares and components then it would be appropriate to combine the trading and manufacturing segments for computing the ALP. A similar view was taken by the Tribunal after having a detailed discussion on the issue for the Assessment Year 2007-08 reported in 33 ITR (Trib.) 700 and concluded in para 46 as under : 46. We have alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring of this Appeal. 8. As regards the application of TNMM as MAM, in view of our finding in the appeal of the revenue becomes infructuous. However, we direct the TPO to consider the adjustment only by considering the international transactions of the assessee and therefore the proportionate cost which includes the raw material purchase and royalty can be considered for the purpose of adjustment. The benefit of second proviso to section 92C is also directed to be considered by the TPO. 9. The assessee in its appeal has raised the following grounds : 1. The order of Commissioner of Income-tax (A) in so far as prejudicial to the interest of the appellant is bad in law and to that extent the same is not sustainable in the eye of law. 2. The Commissioner (A) having accepted the proposition of the TPO that the exclusion of certain comparables being appropriate, ought to have refrained from retaining such excluded comparables while determining the Arithmetic. Mean of Margins. 3. The Commissioner (A) erred in computing the benefit of lower range of 5% provided under proviso to Section 92C(2) of the Act in determining the arm's length price. 4. Without pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental Representative and considered the relevant material on record on the admissibility of the additional grounds. Ld. A.R. has relied upon various decisions including the decision of this Tribunal dt.23.11.2015 in the case of Flextronics Technologies India Pvt. Ltd. reported in 65 taxman.com 258 as well as the decision in the case of M/s. Online India Pvt. Ltd. Dt.18.3.2015 in IT(TP)A No.1036/Bang/2011. The learned Authorised Representative has also relied upon the decision of the Special Bench of ITAT, Chandigarh in the case of Quark Systems Ltd. 38 SOT 307 and submitted that even if the assessee has taken a particular company as comparable in the TP study, the assessee is entitled to point out before this Tribunal that the said enterprise has wrongly been taken as comparable. The learned Authorised Representative has contended that the TPO has not applied the employee cost filter and therefore some of the companies selected by the TPO failed the test of employee cost filter of 25%. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of M/s. Google India Ltd. 29 taxman.com 412 and submitted that the Tribunal has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue Shri Kapila has vehemently argued that Datamatics was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT(A) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins. We are unable to accept above contention. In the first place, these are initial years of implementation of transfer pricing legislation in India and taxpayers as well as tax consultants were not fully conversant with this new branch of law when proceedings were initiated or even at appellate stage. Besides, Revenue authorities, including TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable. Statutory duty is cast on them to undertake above exercise. This has not been done in this case. We would only say that prima facie , as per the material, to which reference has been drawn by Shri Aggarwal, Datamatics does not appear to be comparable. Even if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the AE selected 9 companies as under : Company Name Year Sales PBIT /Sales Lagan Engineering Co. Ltd. 2007-08 14.27 6.66 Sirdar Carbonic Gas Co. Ltd. 2007-08 5.1 24.90 Naval Technoplast Inds. Ltd. 2007-08 26.14 5.97 Lakshmi Automatic Loom Works Ltd. 2007-08 39.38 4.24 Bharat Bobbins Ltd. 2007-08 11.66 31.56 Veejay Lakshmi Engg. Works Ltd. 2007-08 90.45 11.50 Nesco Ltd. 2007-08 69.7 18.17 Ahmedabad Victoria 2007-08 5.15 6.41 Anup Engineering 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Crore to ₹ 200 Crores because of inherent defective consequence and results of such a standard slab applied in the case however, we are of the view that in case of manufacturing sector, the turnover is a relevant factor for functional comparability of the companies as the economies of scale, bargaining power, more skilled employees and higher risk capacities are attached to the high turnover and further the high fixed assets and fixed costs is spread over to the high turnover giving the benefit of economies of scale. Accordingly keeping in view of the turnover of the assessee at 86 Crores the company having ₹ 1745 Crores turnover cannot be considered as a good comparable. Hence we direct the TPO to exclude this company from the list of comparable. (ii) Lohia Starlinger Limited. 18.1 The turnover of this company is ₹ 309 Crores in comparison to the turnover of the assessee at ₹ 86 Crores though there is a difference in the turnover of the two companies however it is not possible to find out the comparable company with the identical turnover and therefore the tolerance range is to be applied for such criteria of turnover. 18.2 The learned Author ..... X X X X Extracts X X X X X X X X Extracts X X X X
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