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TMI Blog2012 (6) TMI 138X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, such international transactions carried out with its AE were inextricably related to its main manufacturing operations and the transactions were so closely linked and continuous that they could not be evaluated on a separate basis. Therefore, assessee considered all these transactions together in its TP analysis. As per the Transfer Pricing Report filed by the assessee, for the impugned assessment year (paper-book pages 94 to 135), the transactions entered by the assessee with AEs, were as under:- Name of the Associate Details of transaction Amount of transaction (in Rs.) Method adopted M/s SL Tech Corporation Import of 658100 Nos. of components/Raw Materials 52977685 TNMM M/s SL Engineering Company Ltd. Import 586336 Nos. of components/Raw Materials 1,98,61,201 TNMM M/sHSL Electronics Company Ltd. Import 349800 Nos. of components/Raw Materials 10,98,73,443 TNMM M/s SL Corporation Royalty , MSA Fee & Technical Assistance Fee 3,54,18,419 TNMM 4. For the purpose of justifying the transaction values, assessee ascertained the Arm's Length Price (ALP) using Transactional Net Margin Method (TNMM). The Profit Level Indicator (PLI) considered was operating p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of Rs. 13,22,13,231/- was required to be made for bringing the purchase cost at par with arm's length price. Assessee was put on notice of the above proposal, whereupon the objections submitted by it could be summarized as under:- (i) Transactions with AEs included purchases, sales, services, and royalty payment, i.e. both revenue and expenditure, which were intermingled. Therefore, fixing of ALP based on costs alone will not be correct. (ii) The non-AE cost was considered to be constant by the TPO and variations were entirely shifted to the transactions with AEs. This was incorrect since AE cost and non-AE cost were interdependent in respect of their composition and quantum. (iii) If the PLI of comparable companies were taken as basis, then sale value determined based on such PLI will be within the range of + 5%. (iv) Treatment of provision as not an operating cost was incorrect. (v) Foreign exchange gains/loss directly related to operating cost and hence could not be excluded. (vi) Determination of the + 5% range has to be done considering revenue from operations. 6. However, TPO was not impressed by any of the above objection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 251.04 C Operating Profit of assessee company 14.79 C If Operating income is 100 and Operating Profit is 10.52, operating cost = 89.48 If Operating income is 100 and Operating Profit is 5.56, operating cost = 94.44 ALP cost of assessee company 251.04 x 89.48 237.86 C 94.44 Less: Non AE cost (Total cost - AE cost 2498619360 - 15,74,83,824) 235.29 C ALP of AE purchase cost 2.57 C Less: Actual AE purchase cost 15.75 C Difference to be adjusted 13.18 C In respect of royalty and MSA fees, the TPO did not make any adjustment except for substituting the amounts stated by the assessee with the amounts mentioned in its Profit & Loss account. 7. The A.O. based on the order of the TPO, made a draft assessment and communicated it to the assessee in accordance with Section 144C(1) of the Act. The assessee filed objections against such proposal before the DRP. One of the main objections of the assessee was that TPO had applied the adjustment entirely on the international transactions without ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill to be dealt with. In any case, according to him, the methodology adopted by the Assessing Officer was not logical. He had excluded the non-AEs cost to work out the ALP of the purchases made from AEs and this had resulted in illogical conclusions. According to learned A.R., if the TPO's version was accepted, assessee need to have expended only 2.7 Crores for 15.75 Crores worth purchases made by it from the AEs. Learned A.R. pointed out that total raw material purchases of the assessee came to Rs. 175.88 Crores out of which purchases from AE came to only Rs. 15.75 Crores. Application of margin difference in cost in its entirety to the AE purchase and determination of ALP on absolute terms without applying the margins based on percentage rates had resulted in an anomaly. Adjustment required under TNM method could not be administered entirely on the international transactions when the profit margin was considered on a totality against the costs. The adjustment could not be on "absolute terms" but only on percentage terms. TNMM required determination of ALP based on margins and such margins have to be worked out based on PLIs as percentages. When the comparables had shown a margin o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re applied for arriving at the ALP of the purchase cost, were worked out based on PLIs and nothing else. According to him, assessee had on theother hand not adopted a clear method in the computation. Assessee had paid excessively on the items purchased from the AEs for reducing its profits. Insofar as addition of new comparables was concerned, D.R. submitted that the DRP had rightly rejected such comparables since TPO had never gone beyond the original comparable set given by the assessee. If such an exercise was allowed, assessee would keep on adding new comparables till an ALP was reached which would be favourable to it. As for adjustment in the operating margin of M/s Halonix Ltd. for difference in functionalities, D.R. submitted that this was a new ground which was never raised by the assessee before any of the authorities below. According to him, TNM method was adopted only because strict comparable companies with same functionalities might not have been available. Nevertheless, both the companies were in same line of business relating to light assembly for vehicles. 10. Ad libitum, learned A.R. submitted that he was concerned with application of absolute figures to determine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as obliged to sell through original equipment manufacturers only. In the first place, this issue was never raised by the assessee either before the TPO or the A.O. or the DRP. Secondly, ALP analysis is made under TNM method. TNM method is generally preferred where functions are not strictly comparable, but when the tested and comparables were in the same lines of business. Multiple type of manufacturing within the same line of business will not by itself call for any adjustment of risk factor for mitigation of functional disparities, especially where such disparities were miniscule. Here, the assessee was supplying to original equipment manufacturers and its business risk stood much mitigated when compared to its competitors like M/s Halonix Ltd. Any disadvantage the assessee was having on account of its inability to sell through retail distributors stood squared up by the lower risks undertaken, since it was having an assured clientele which fully lifted its productions. Therefore, we are of the opinion that this plea also cannot be accepted. 13. This leaves us to last issue whether the method of computation adopted by the A.O. while applying the TNM was correct. This has to be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relatable to transactions with non-Associated Enterprises and this has been taken by the A.O. as Rs. 235.29 Crores. He arrived at this amount by deducting from the operating cost of Rs. 251.04 Crores, a sum of Rs. 15.75 crores. The latter amount of Rs. 15.75 Crores is the cost of purchases effected by the assessee from Associated Enterprises. What we like to emphasize is that this was the cost of purchases only. For arriving at ALP of purchase, Assessing Officer has deducted from the total cost including material cost, the purchase cost of materials from Associated Enterprises. Total cost of Rs. 251.04 Crores included many number of items in addition to the raw materials, and this is evident from the table at para six above. If that is so, when from such total cost, deduction of ALP material cost alone is done, it will not give the cost of non ALP purchases. This will not give any meaningful figure at all. What has to be deducted from total cost is not only the material cost pertaining to purchase from AEs but also that part of other expenses attributable to such purchase which have a bearing on total operating margins. In other words, Assessing Officer divided the total operating ..... X X X X Extracts X X X X X X X X Extracts X X X X
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