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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 ..... of manufacturing wire segment was dismissed as they do not arise out of order of the Assessing Officer - Decided against Assessee. Rejection of Transfer Pricing Analysis – Held that:- The TPO has clearly misdirected himself in computing the transfer pricing adjustment in respect of all transactions of the assessee's Tools manufacturing segment and not limiting it to the transactions with the AEs - the entire exercise of conducting a transfer pricing analysis is to compute ALP of an international transaction alone - the adjustment that is required to be made is to be limited to the international transactions with the AEs and not to the entity/segmental level transactions – Relying upon IL Jin Electronics (I) (P.) Ltd. Versus Assistant Commissioner of Income-tax , Circle-11(1), New Delhi [2009 (11) TMI 669 - ITAT DELHI] - There was enough merit in the plea of the assessee and conclude by directing the Assessing Officer to re-compute the adjustment 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 - Decided in favour of Assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax, Circle - 10, Pune (in short 'the Assessing Officer') passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 (in short "the Act") dated 30.10.2012, which is in conformity with the directions given by the Dispute Resolution Panel, Pune (in short 'the DRP') dated 05.09.2012 for the assessment year 2008-09. 2. In this appeal, Grounds of Appeal raised by the assessee read as under: - "1. The learned AO erred in passing the impugned order which was not in accordance with law, the statutory provisions, and which is void and of no legal effect. 2. The learned AO erred in rejecting the transfer pricing analysis undertaken by the assessee by aggregating its international transactions. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, wires, ribbons, heating elements, cold finished tubes/pipes and manufacturing of hot extruded seamless stainless steel tubes/pipes, etc.. The business of the company was divided into three segments, which read as under :- (i) Tooling-specialises in tools for metal cutting. (ii) Mining and Construction - focuses on tools and service for mining and construction contracts with respect to comprissiong of crushing plants used in mines. (iii) Materials Technology-Specialises in high value added products metallic materials. For the assessment year under consideration, assessee-company filed a return of income declaring total income of Rs.104,06,33,924/- which was subject to scrutiny assessment under Section 143(3) read with Section 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 28.10.2011 had proposed an addition of Rs.60,48,143/- in respect of international transactions of the assessee's manufacturing wire segment which was also proposed by the Assessing Officer in the draft assessment order under Section 143(3) read with Section 144C(1) dated 26.12.2011 and also upheld by the DRP. Further, in para 7.3 of the final assessment order dated 30.10.2012 the Assessing Officer noted the said adjustment proposed by the TPO. So, however, it is contended that while computing the income at the end of the assessment order, the Assessing Officer has not actually added the said sum in the returned income and no tax thereon has been demanded. The learned counsel explained that in order to be cautious and not to be denied an adjudication on technicality, the assessee still preferred the aforesaid 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transactions formed an integral and integrated part of its manufacturing tools business, the aforesaid transactions were considered to be closely linked with the activity of manufacturing of tools and thus assessee adopted a combined transactions approach in order to carry out the benchmarking analysis. Accordingly, assessee applied the Transactional Net Margin Method (TNM method) as the most appropriate method in order to benchmark the international transactions of the Tools manufacturing segment. The TPO has accepted the TNM method of benchmarking, as adopted by the assessee subject to certain variations which are disputed before us. 12. In so far as the Ground of Appeal No. 1 is concerned the same is general in nature and requires no adjudication and hence it dismissed. 13. In Ground of Appeal No. 2, the grievance 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 To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transactions with the AEs. Pertinently, the entire exercise of conducting a transfer pricing analysis is to compute ALP of an international transaction alone. Section 92(1) of the Act prescribes that any income arising from an international transaction shall be computed having regard to the ALP. Therefore, the objective of the computing ALP is to determining the income arising from an international transaction. Therefore, the adjustment that is required to be made is to be limited to the international transactions with the AEs and not to the entity/segmental level transactions. Similar view has been expressed by our Coordinate Benches in the cases of (i) IL Jin Electronics India (P) Ltd. (supra); (ii) Kyungshin Industrial Motherson Limited (supra); and, (iii) Demag Cranes Components (India) Pvt. Limited (supra). Following the aforesaid precedents, we therefore find enough merit in the plea of the assessee and conclude by directing the Assessing Officer to re-compute the adjustment, if so warranted, 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed opinion, such an approach impinges on the principles of natural justice and the assessee is rightfully aggrieved. In so far as the opportunity of raising objections before the DRP is concerned, in our view, the same cannot take the place of an opportunity that was required to be allowed before the TPO/AO. The assessee had an opportunity before the DRP is of no consequence for it is the fairness and reasonableness of furnishing of an explanation before the TPO/AO which is the issue. In-fact, in a somewhat similar situation the Hon'ble Supreme Court in the case of Tin Box Company vs. CIT (2001) 249 ITR 216 (SC) held that once it is established that the Assessing Officer had not given to the assessee an appropriate opportunity of being heard, that the assessee had an opportunity before the higher appellate authorities was really of no consequence, for it was the assessment order that counted inasmuch as the assessment order was required to be made only after the assessee had been allowed a reasonable opportunity 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 manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th respect to its Tools manufacturing segment. The assessee benchmarked the same against the arithmetic mean of the average operating margins of the following five comparables as per which the operating margin of the assessee was higher and therefore the international transactions between the assessee and its AEs in respect of the activity of Tools manufacturing segment was considered to be at an arm's length from Indian Transfer Pricing perspective. The details of the five comparable cases selected by assessee is as under :- Name of the company Average operating margin on operating revenue (%) Electronica Machine Tools Ltd. 1.30% Hittco Tools Ltd. -7.48% Rajasthan Udyog Tools Limited -18.18% Rapicut Carbides Ltd. 8.89% Zenith Birla (India) Ltd. 15.03% Arithmetic mean -0.09% 23. However, the Assessing Officer has excluded M/s Rajasthan Udyog Tools Limited and Hittco Tools Limited from the list of comparables. As per the discussion in para 7.1 of the order of the TPO, M/s Rajasthan Udyog Tools Limited has been excluded on account of it being in continuous l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transaction has been entered into. In other words, the contemporaneous information and documents are liable to be considered as far as possible for the purposes of comparing uncontrolled transactions with the international transactions sought to be tested. So, however, it is also to be noted in the present case, that the Revenue has not made out any case as to in what manner, the Diamond Tools and Gang Saw Blades segment of M/s Rajasthan Udyog Tools Limited is carrying out different activities then those carried out in assessment years 2006-07 and 2007-08. The aforesaid aspect becomes important because factually speaking in the assessment years 2006-07 and 2007-08, the said concern's Diamond Tools and Gang Saw Blades segment has been accepted as functionally comparable to assessee's Tools manufacturing segment. From the impugned orders of the lower authorities, we do not find any such distinction being brought out. On the basis of the material on record, it is evident that the assertion of the TPO that the said concern is functionally incomparable is a mere bald assertion devoid of factual support. Therefore, the action of the TPO in excluding the said concern, in our view, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the same has not been disputed by the Assessing Officer/TPO. 28. On this aspect, the learned CIT(DR) has referred to the discussion made by the TPO in the impugned order and has pointed out that assessee had himself submitted the profit margin of the said concern differently on different occasions. Apart therefrom it is sought to be made out that the said concern is also stated by the TPO to be functionally incomparable. 29. We considered the rival stands and find that no cogent reasons have been advanced by the TPO to exclude the said concern from the list of comparables. Ostensibly, the said concern was accepted as functionally comparable in assessment years 2006-07 and 2007-08 and there is no material to depart from the said proposition especially when no case has been made out that in the instant assessment year that the activities of the said concern have undergone any change. The other point made by the TPO to the effect that the said concern is consistently loss making is also not borne out of the record. It is only in 2004 and 2005 that the said concern had losses but it had profits in 2006 and also for the subsequent years ending on 31.03.2010 and 31.03.2011 the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced below, the PLI of assessee's Tools management segment of 1.98% is higher than the arithmetic mean of comparable margins, thus the international transactions between the assessee and the AEs in respect of Tools management segment can be considered to be at arm's length price from the Indian Transfer pricing perspective :- 33. The aforesaid plea of the assessee has not been factually faulted by the Revenue before us. Since we have already upheld assessee's plea to include the two companies i.e. M/s. Rajasthan Udyog Tools Limited and M/s Hittco Tools Limited as comparables in order to benchmark its international transaction transactions of the Tools manufacturing segment, the other aspect of excluding the debit of Rs.2.8 crores representing 'Impairment Loss' in order to calculate the PLI of the assessee is not being adjudicated as the same is rendered academic. Thus, Grounds of Appeal No. 7 8 are allowed to above extent. 34. In so far as the Grounds of Appeal Nos. 11 and 12 are concerned relating to the application of the proviso of Section 92C of the Act and non-use of multiple years data of the comparables as canvassed by the assessee are concerned, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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