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TMI Blog2013 (10) TMI 872X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions. 3. The learned AO erred in rejecting the selection of the TNMM adopted by the assessee as the most appropriate method in the circumstances of the case and comparing net profit margins with external comparables for computing the arms length price of international transactions. 4. The learned AO erred in rejecting the selection of the TNMM/net profit margins adopted by the assessee without properly giving the assessee an opportunity of being heard in this regard and also without assigning valid reasons for the same. 5. The learned AO erred in adopting the cost plus method as the most appropriate method in the circumstances of the case for computing the arms length price of international transactions. 6. The learned AO erred in adopting the cost plus method for computing the arms length price without properly giving the assessee an opportunity of being heard in this regard and also without assigning valid reasons for the same. 7. The learned AO erred in making an addition of Rs.30,70,02,006/- by holding that international transactions of the Manufacturing - Tools segment were not at arms length. 8. In making addition of Rs.30,70,02,006/- by holding that international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 144C(13) of the Act, wherein by way of order dated 30.10.2012 the total income has been determined at Rs.134,81,22,200/-. The substantive difference between the returned and the assessed income is on account of transfer pricing adjustment while determining the Arm's Length Price (in short 'ALP') of the international transactions carried out by the assessee with its Associated Enterprises (in short 'AEs'). The assessee-company had undertaken certain international transactions with its AEs for which the income is required to be computed having regard to the ALP, as provided in Section 92(1) of the Act. A reference under Section 92CA(1) of the Act was made by the Assessing Officer to the Transfer Pricing Officer (i.e. TPO) for computation of ALP in relation to the international transactions carried out by the assessee. In terms of the order passed by the TPO under Section 92CA(3) of the Act dated 28.10.2011, the following adjustments were proposed to the ALP stated by the assessee :- Sr No Description of international transaction Proposed adjustment 1 Export of finished goods in respect of manufacturing of tools division 30,70,02,0661 2 Manufacturing of wire segment 60, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id Grounds while filing the appeal before the Tribunal. 8. The above factual matrix brought out by the learned counsel is not disputed by the learned CIT(DR) and it is pointed out that the adjustment was discussed in the body of the assessment order but it remained to be considered in the computation of income, which was merely a mistake rectifiable under Section 154 of the Act by the Assessing Officer. 9. Be that as it may, it is quite clear that no such addition has been ultimately made in the computation of income by the Assessing Officer and tax liability in relation to such adjustment has not been determined against the assessee. In this background, the only premise that can be drawn is that the grievances raised in the Grounds of Appeal Nos. 3, 5, 6, 9, & 10 relating to the addition of Rs.60,48,143/- in respect of international transactions of the manufacturing wire segment, as proposed by the TPO in his order dated 28.10.2012, do not arise out of the impugned order of the Assessing Officer passed under Section 143(3) read with Section 144C(13) of the Act dated 30.10.2012. Therefore, the aforesaid Grounds do not require any adjudication for the present. So, however, we may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is that while determining the ALP of the international transactions with its AEs, the Assessing Officer's jurisdiction is limited to making adjustment in respect of transactions with AEs alone and not in respect of non-AE transactions undertaken by the assessee. It is contended that in the present case, the adjustment determined in respect of Tools manufacturing segment is with respect to the total sales undertaken by the assessee, including the transactions with the non-AEs. In this context, the learned counsel submitted that the aforesaid plea is notwithstanding the primary grievance of the assessee that the determination of ALP by the Assessing Officer is also otherwise unjustified. The learned counsel referred to the following computation of adjustment made by the TPO in para 7.1 of his order :- Sr No Particulars Figures 1 Total cost of manufacturing of tools segment 547,02,63,000 2 Operating margin of the assessee (PLI) 2.01% 3 Operational margin adopted by TPO 7.63% 4 Difference between the PLI 5.62% 5 Arm's length profit @ 7.63% on cost 41,73,81,066 6 Arm's length profit shown by the assessee 11,03,79,000 7 95% of the ALP determined (pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only with regard to the transactions in the Tools manufacturing segment carried out with the AEs and not to the entire transactions in the segment which include the transactions with the non-AEs also. In other words, the addition is to be confined, if otherwise warranted, to the component of transactions with the AEs alone and not to the entire segmental results. Thus, on Ground of Appeal No. 2, assessee succeeds as above. 17. In Ground of Appeal No. 4, the point made out is that in its Transfer Pricing Study (in short 'TP Study') assessee had considered the Profit Level Indicator (i.e. PLI) as Operating Profit/Operating Revenue. Accordingly, the PLI of assessee's Tools manufacturing segment was calculated at 1.98% as detailed at page 172 of the Paper Book. The learned counsel pointed out that the PLI adopted by the assessee in its TP Study, being Operating Profit/Operating Revenue has been altered by the TPO without giving any opportunity of being heard in this matter. In this context, the learned counsel referred to the computation of adjustments made to the ALP contained in the order of the TPO whereby the PLI adopted by the TPO is Operating Profit/Operating Cost. Learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nity of being heard. Considered in the aforesaid light, in the present case it is axiomatic that so far as the issue of the PLI adopted by the assessee in respect of Tools manufacturing segment of Operating Profit/Operating Revenue is concerned, the same has been altered by the TPO without giving the assessee any opportunity of being heard and therefore in our view the matter ought to be remanded back to the AO/TPO for consideration afresh. We hold so. Thus, on this aspect also assessee succeeds. 21. By way of Ground of Appeal Nos. 7 and 8, assessee has assailed the addition of Rs.30,70,02,006/- made by the Assessing Officer by holding that international transactions of the Tools manufacturing segment were not at arm's length. The appellant-company has assailed the said addition on three aspects. The first aspect is that the Assessing Officer erred in rejecting the segmental results of Rajasthan Udyog & Tools Limited and Hittco Tools Limited, which have been adopted by the assessee as comparable cases. On the said aspect, plea of the assessee is that out of the five comparables cases considered by it in its TP Study, Assessing Officer accepted three of them and excluded two, namel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ols Limited has been excluded on account of it being in continuous losses and functionally incomparable. In this context, we find that the Tools manufacturing segment of the assessee is engaged in the manufacture of cemented carbide and high speed steel tools for metalworking applications and tools for mining and construction. M/s Rajasthan Udyog & Tools Limited is engaged in the manufacturing of diamonds tools, castings and cutting machines stone edge and spare parts. It has primarily three segments - Diamond Tools and Gang Saw Blades, Stone Cutting Machines and Diaga Mono Blade Cranes. The assessee considered the Diamond Tools and Gang Saw Blades segment as comparable for the purpose of benchmarking of its international transactions in Tools manufacturing segment. A similar position has been taken by the assessee in its TP Study for assessment year 2006-07 as well as for assessment year 2007-08, whereby the Diamond Tools and Gang Saw Blades segment of the said concern was considered as comparable for purpose of benchmarking the international transactions carried out in its Tools manufacturing segment. In the Paper Book filed before us, assessee has furnished copies of orders pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the action of the TPO in excluding the said concern, in our view, is not well founded and is liable to be set-aside. 26. Another reason advanced by the TPO to reject the said comparable is that the said concern is in continuous losses. On this aspect, we find that as per the data contained in the TP Study for assessment year 2006-07, copy of which has been placed in the Paper Book, the Diamond Tools and Gand Saw Blades segment of the said concern was declaring profits in 2004, 2005 and 2006 also. However, it is only for the year under consideration that the relevant segment of the said concern has been declared a loss. Therefore, it cannot be factually tenable to hold that the relevant segment of the said concern has been continuously making losses, as sought to be made out by the TPO. For both the above reasons advanced by the TPO we have not found any factual support and therefore we direct the Assessing Officer to include the results of the Diamond Tools and Gang Saw Blades segment of M/s Rajasthan Udyog & Tools Limited as comparable for the purposes of carrying out the benchmarking analysis of the international transactions pertaining to Tools manufacturing segment of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subsequent years ending on 31.03.2010 and 31.03.2011 the said concern is making profits, as per the material placed in the Paper Book. Therefore, it cannot be said that the said concern is consistently loss-making and accordingly, we do not find enough reasons to sustain the action of the TPO in excluding the said concern from the list of comparable. 30. Another aspect made out by the assessee is that the TPO did not allow the plea of the assessee to remove an extraordinary debit made in its Profit and Loss account of Rs.2.8 crores while computing the operating margin for determining the PLI. The assessee claimed that this amount has been written- off from the value of assets of its Titex Division, which had the effect of debiting additional depreciation to the Profit and Loss account resulting in reduction of profits. As per the appellant, it is an extraordinary and non- recurring charge and represents a one time debit in Profit and Loss account to reflect the abnormal reduction in the value of the assets of Titex Division. Thus, the said "Impairment Loss" was required to be removed so as to compute the normal profits. 31. At the outset, it is submitted that if such extraord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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