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TMI Blog2020 (1) TMI 618X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions. The TPO noticed that the assessee aggregated four major international transactions in the 'Manufacturing segment', namely, Export of Finished goods; Import of raw materials and components; Import of Finished goods for resale; and Receipt of Commission and applied the Transactional Net Margin method (TNMM) for demonstrating that such international transactions were at ALP. The assessee with Profit Level Indicator (PLI) of Operating profit/Operating cost worked out its Operating profit margin before depreciation, interest and taxes at 11.44%. Three companies were chosen as comparable with their average PLI of OP/OC at 11.31% on the basis of multiple year data. The TPO did not accept the assessee's view point, inter alia, on the determination of the PLI on the basis of Operating profit before depreciation, interest and taxes. He worked out the Operating profit rate of the assessee, after depreciation but before foreign exchange loss, at 0.30%. Out of the three comparables chosen by the assessee, the TPO retained two and added a new company in the list of comparables, namely, CTR Manufacturing Industries. He also did not approve the profit rate of comparables based on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in respect of the whole segment rather than restricting it only to the international transactions. This issue is no more res integra in view of several judgments rendered by various higher forums including the Hon'ble jurisdictional High Court holding that the transfer pricing adjustment should be restricted only to the international transactions and not the entity level transactions. The Hon'ble jurisdictional High Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. (2019) 414 ITR 704 (Bom.) has held that the transfer pricing adjustment made at entity level should be restricted to the international transactions only. Here, it is pertinent to mention that the Department's SLP against the judgment in the case of Phoenix Mecano (India) Pvt. Ltd. has since been dismissed by the Hon'ble Supreme Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. (2018) 402 ITR 32 (St.). Similar view has been taken by the Hon'ble Bombay High Court in CIT Vs. Thyssen Krupp Industries Pvt. Ltd. (2016) 381 ITR 413 (Bom.) and CIT Vs. Tara Jewels Exports (P). Ltd. (2010) 381 ITR 404 (Bom.). We, therefore, direct to restrict the transfer pricing addition only in respect of transactions with Associated Enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of revenue as Tapchangers and Remote Tapchanger Control Cubicles at Rs. 71.92 crore. Per piece sale price is Rs. 2,13,948. The amount of revenue from sale of Plastic Film Capacitors, being, one of the items as the assessee is dealing in, is only Rs. 9.95 crore. Thus, in terms of percentage, the revenue from sale of comparable item of CTR Manufacturing Industries, being, Capacitors is less than 9%. This shows the level of divergence of the products dealt with by the assessee on one hand and CTR Manufacturing Industries Limited on the other. 10. The TPO, for including this company in the list of comparables, has relied on the fact that the assessee itself included this company as comparable in the assessment year 2006-07 onwards. We have gone through the details placed on record by the assessee, which show that in the Financial year relevant to the assessment year 2006-07, CTR Manufacturing Industries Limited was having a separate reportable segment of Electronics and electrical capacitors in addition to Transformer ancillaries and Others. The assessee considered only the segment of Electronics and electrical capacitors for the purposes of inclusion. Similar position went on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Annual report of this company has now been placed on record, whose perusal divulges that Total sale as reflected in its Profit and loss account stands at Rs. 3667.48 lakh. Segmental reporting at page 31 reveals revenue from Manufacturing at Rs. 585.59 lakh and Trading at Rs. 3081.88 lakh. The assessee has insisted only on the inclusion of the Manufacturing segment of this company. We have further gone through the break-up of the Manufacturing segment of this company at page 30 of the Annual Report, which discloses that the sale of Capacitors, the product which the assessee is dealing in, is Rs. 309.65 lakh. In addition, there are other items of sale in the Manufacturing division, shown at page 28 of the Annual Report, to the tune of Rs. 275.93 lakh, which comprises of Switchboards and CTs at Rs. 38.31 lakh; Motor Control Centres and Control panels at Rs. 205.85 lakh; Busducts and Accessories at Rs. 30.34 lakh; and Scrap at Rs. 1.43 lakh. In percentage terms, sale of Capacitors of this company is roughly 52% of the total sales while the sale of other products is 48% approximately. The assessee is engaged in the manufacturing of Capacitors. When we examine the details of other produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se were functionally similar to that of the assessee as held by the Tribunal in its order for the assessment year 2006-07. The DRP directed the AO to consider these companies as comparable if they satisfy the filters adopted by him. It was further directed that 'if any company fails a single filter used by the TPO, such company should be excluded from the list of comparable companies'. The AO, in para 5.4 of his final assessment order, has reproduced the relevant paragraphs from the TPO's order giving effect to the direction of the DRP on this issue. The TPO did not consider Keltron Resistors Limited and Keltron Electrons Ceramics Ltd. as comparable for the reasons given in his order, against which the assessee has no grievance. The TPO did not consider Keltron Components Complex Limited as comparable on the basis of extra-ordinary peculiar year under consideration. The assessee is aggrieved by the non-inclusion of this company. 15. We have heard both the sides and gone through the relevant material on record. The AO/TPO has considered this company as not comparable due to extra-ordinary financial events taking place in this year on the strength of the auditor's report for the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lgamation is adjusted in a later year, the earlier year of the company can be considered as comparable provided the comparability is otherwise not dented. 18. Reverting to the facts of the instant case, we find on reading the first lines of the above reproduction that the three fellow subsidiaries got amalgamated with Keltron Components Complex Limited and: `While preparing the financial statements for the year 2008-09 the company prepared the amalgamated balance sheet.' Thus it is evident that the effect of amalgamation was absorbed in an earlier year. This fact is further established on going through the Annual report of the Keltron Components Complex Limited as on 31-03-2009, which categorically records the fact of amalgamation of the above referred three companies with it as having been made effective from 01-04-2007. It has also been mentioned in such Annual report of the preceding year that: `Consequent to the amalgamation of the companies, and when the amalgamation was made effective, ....(i) The transferred companies were dissolved without the process of winding up; (ii) That properties, rights and power as well as liabilities and duties of the transferor companies includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered as comparable. For this proposition, it relied on the order passed by the Tribunal in its own case for an earlier year. The ld. DRP did not accept the assessee's contention and upheld the TPO/AO's view point on the non-inclusion of this company. 20. We have heard both the sides and gone through the relevant material on record. This company came up for consideration before the Tribunal in the assessee's own case for the A.Y. 2007-08 in ITA No.1712/PUN/2011. Vide its order dated 10-02-2017, a copy placed at page 85 onwards of the paper book, the Tribunal accepted the assessee's contention on the otherwise comparability but remitted the matter to the AO for examining if it was a persistent loss making company. In case it was a persistent loss making company then the same has been directed to be excluded. The facts and circumstances of the instant year are mutatis mutandis similar. The TPO did not treat this company as comparable only on the issue of persistent loss making company by impliedly accepting the functional comparability. The claim of the assessee is that Gujarat Poly AVX Electronics Limited is not a persistent loss making company as has been held by the TPO. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... challenged the comparability of certain companies, we consider it expedient to first examine the nature of services rendered by the assessee in this segment. Page 4 of the TPO's order gives an overview of the services rendered by the assessee to various AEs in this segment, which have been stated to be: "in the nature of Information Technology Enabled Services which, inter alia, include Accounts Receivable Processing (ARP services), Global IT Support (IT Support Services), Bill of Materials Conversion (BOMcon Services), Marketing Logistics Support services (Support services), Designing Services, Restriction of Hazardous Substance (ROHS) and certain Environment Compliance Support Services". This is a generalized description of services without reference to the further details as to their comprehensive nature and also whether these are highend or low-end services and further the extent of rendition of such services individually. On a perusal of the amount received by the assessee from its AE for rendering the above services, it comes to the fore that out of total receipt of Rs. 9.88 crore under this international transaction, the assessee received a sum of Rs. 5.40 crore from Visha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in its order in the assessee's own case for the A.Y. 2008-09. 26. To sum up, we set-aside the impugned order and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transactions under the Manufacturing and ITES/Back-office services segments in terms of the discussion made supra in this order. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh determination. 27. Ground No.23 is against the disallowance of stock written off in Domestic Tariff Area (DTA) amounting to Rs. 17,55,138/-. The AO, following the view taken in earlier years, made the disallowance. The Tribunal in its aforenoted order for the Assessment year 2008-09 has remitted the matter to the AO for a fresh decision in accordance with the direction given in its order for the A.Y.2007-08. Following the consistent view taken by the Tribunal on this issue, we set-aside the impugned order and remit the matter to the file of the AO for deciding it afresh in accordance with the directions given in its order for the A.Y. 2007-08. 28. Ground No.24 is against the calculation of deduction u/s.10A and 10B of the Act. The AO recomput ..... X X X X Extracts X X X X X X X X Extracts X X X X
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