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TMI Blog2013 (11) TMI 930X X X X Extracts X X X X X X X X Extracts X X X X ..... g the previous year relevant to the assessment year under consideration, it entered into certain international transactions with the Associated Enterprises (AEs) which were duly reported. A reference was made u/s 92CA(1) by the Assessing Officer (A.O.) to the Transfer Pricing Officer (TPO) for computation of Arm's Length Price (ALP) in relation to such international transactions. The TPO, vide his order dated 10.10.2011, proposed total adjustments to the extent of Rs. 11,01,10,403. Accordingly, the A.O. framed the draft assessment order. The assessee raised certain objections before the Dispute Resolution Panel (DRP) in respect of such proposed adjustments. The DRP gave certain directions to the A.O. The matter was reverted to the TPO for giving effect to the DRP's directions. In the order giving effect, the TPO reworked the adjustment on account of import of spares and equipments and sale of equipments/components at Rs. 5,10,61,123 as against its earlier proposed adjustment on this score at Rs. 6,72,06,437. The A.O. in his final order passed on 25.09.2012 made adjustment inter alia, of Rs. 5.10 crore on account of import of spares and equipments and also sale of equipments/compone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Sales chosen by the assessee was incorrect. In his opinion, the correct PLI should be Operating profit to Total cost (OP/TC). On the perusal of the segmental details furnished by the assessee during the course of proceedings before him as tabulated above, the T.P.O. observed that the amount of AEs sales was shown at Rs. 322.58 crore while that of Non-AEs at Rs. 1061.69 crore. From the report in Form No. 3CEB, the TPO noticed that the quantum of total international transactions including sales, purchases and services was only at Rs. 137 crore. The assessee was confronted with this fact, upon which it was stated that some of the AE purchases had gone into the Non-AE sales and similarly some of the Non-AE purchases were reflected in the AE sales, The TPO observed that the assessee did not admittedly maintain segmental accounts for AE and Non-AE transactions and it was only for the purposes of transfer pricing proceedings that the audited segmental accounts were furnished by splitting the total figures. Due to such huge difference in the magnitude of international transactions, recording the AE sales alone in the segmental accounts at Rs. 322 crore and the total of international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of comparables. This company was found by him to be functionally different from that of the assessee for the reason that it was primarily into Cotton and man-made fibre yarn with 43.62% of its total turnover from this division alone. This enterprise also dealt with saleable tea which accounted for 16.94% of the total sales. In view of these facts, the TPO rejected this case as comparable as also for the reason that the assessee was engaged in the business of turnkey project, which this company was not. As the TPO was left with only three comparable cases from the assessee's list of cases, he conducted a fresh search with key phrase "turnkey project" and found five more comparable cases. After addressing to the assessee's objections to such cases, the TPO short listed total comparable cases to six by also including three cases left from the assessee's list of comparables. One case of TRF Limited, which was originally included by the assessee in its TP study but later on dropped, was also included. Two new cases, namely, Engineers India Limited and Sriram EPC were also included in the final list of six comparable cases as under:- Sr. No. Company OP/TC% OP/Sales % 1. Tata P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng out ratio of material consumed to sales in respect of the Non-AE segment. He stated that such correct ratio was only 77% as against 86% originally considered by the TPO. In the light of the above arguments it was contended that when profit rate from internally comparable cases was available, then the internal TNMM should not have been disturbed. In the opposition, the learned Departmental Representative relied on the impugned order. 11.2 First thing which we need to determine is the extent of the reliability of the so called segment-wise figures of AE transactions and Non-AE transactions furnished by the assessee during the course of proceedings before the TPO for contending that the internal TNMM should be applied. Admittedly no such segment-wise accounts were maintained by the assessee. Such figures of AE and Non-AE transactions were segregated by the assessee from the common pool of figures. While making such classification and to demonstrate that its so-called profit rate under the TNMM from internal comparables was favourable to such profit rate from Non-AE transactions, the assessee also included in the sales of AEs, the amount of sales to Non-AEs for which the material w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. 11.4 It is relevant to note that sub-clause (i) of rule 10B(l)(e), which is first step in the computation of ALP under TNMM, talks of ascertaining the profit margin realised by the enterprise from an international transaction entered into with an associated enterprise. We have noticed the definition of 'International transaction' above as a transaction between two or more associated enterprises. A bare perusal of this provision divulges that this step contemplates the determination of actual profit realized on transaction be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of 'international transactions' and the mandate of rule 10B(l)(e). Approving the course of action adopted by the assessee for calculating profit margin in respect of AE and Non-AE segments would require rewriting of the relevant provisions as discussed supra. By considering some transactions with Non-AEs also as a part of the AE segment, the computation of the operating profit margin in respect of AE transactions at 6.54% has completely lost its significance. Once the figure of OP/OC margin at 6.54% is itself incorrect, there can be no question of comparing it with that of Non-AE segment at 4.20%, which again stands distorted because of the exclusion of certain purchases and sales from/to Non-AEs from this segment eventually finding their way into the AE segment. We, therefore, uphold the view taken by the authorities below on this count. 11.6 The next objection taken by the TPO in disregarding the figures furnished by the assessee as of AEs and Non-AEs is the difference in the ratio of material consumed to sales. The TPO worked out such percentage at 73% in respect of AE segment and 86% in respect of Non-AE segment in his original order. The DRP reduced such percentage in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the TPO in his final order. 12.2 In respect of Tata Projects Limited, the TPO had earlier computed ratio of OP/TC at 4.98% which was reduced to 4.13% in the fresh calculation. The assessee is disputing this calculation also to the extent of exclusion of Amortization of value of investment and Provision for doubtful debts from the operating cost. Insofar as the Amortization of value of investment is concerned, we hardly see any relevance of this expenditure with the operations of the business. As regards the provision for doubtful debts, it is relevant to note that it is a provision which has been considered as non-operating and not the actual incurring of bad debts. Obviously a provision for doubtful debts cannot be considered as operating cost. We, therefore, uphold the calculation of OP/TC at 4.13% in respect of Tata Projects Limited. 12.3 Next is Walchandnagar Industries Limited. The TPO originally calculated OP/TC ratio at 11.74%. However, in the subsequent proceedings, such rate of OP/TC was reduced to 9.63%. Here also the assessee is assailing the exclusion of Depreciation transferred from revaluation reserve, Provision for doubtful debts and Expenditure capitalized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed party transactions in this case are around 20%. It was argued that the assessee adopted filter of 10% of related party transactions for the purposes of inclusion of cases in the list of comparables. As this filter was not disturbed by the TPO, the learned AR argued that the case of TRF Ltd. ought to have been excluded. In the opposition, the learned Departmental Representative strongly supported the inclusion of this case in the list of comparables. 12.6.3 Having heard the rival submissions and perused the relevant material on record, we find that the related party transactions in this case are admittedly a little more than 20% but less than 25%. On page 11 of the order passed by the TPO, it can be seen that he adopted filter of related party transactions at 25%. In the case of ACTIS Advisers Pvt. Ltd v. Dy. CIT[2011] 10 taxmann.com 24 (Delhi), the Delhi Bench of the Tribunal has held that a case can be taken as uncontrolled if its related parties transactions do not exceed 25% of the total revenue. In reaching this conclusion, the Tribunal took assistance from various provisions of the Act. Thus, it is discernible that the limit of 25%, though, not expressly, set out in the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of intersegment revenue in the Product & services segment, the learned Departmental Representative contended that both the segments were rightly considered by the TPO as one unit. In the rejoinder, the learned AR submitted that the Inter-segment revenue was recorded at market driven agreed price as mentioned on the next page and in that view of the matter it would not affect the revenue of Projects & Services. 12.6.5 We find substance in the contention of the learned AR for adoption of results of "Project & services" segment of this comparable case instead of the entity level. There are only two segments of TRF Limited, viz., Product & services and Project & services. It has been rightly pointed out by the ld. DR that the total revenue of Rs. 11551.07 lakh of "Product & services" segment includes a substantial part comprising of Inter-segment revenue of Rs. 5049.19 lakh. It is evident that the amount of Rs. 5049.19 lakh is 'Inter-segment revenue', which obviously refers to the goods or services supplied by the Product & services segment to the Project & Services. When the goods or services under Product segment are supplied at market rate, the separate profit of the Project segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % of the total turnover. The TPO observed on page 7 of his order that "this entity is not engaged in the business of turnkey project, hence rejected as comparable". 12.7.2 We find that the observations made by the TPO that Gillanders Arbuthnot & Company Ltd. is not engaged in the business of turnkey project, is incorrect. It is relevant to have a glance at page 681 of the paper book, being a copy of the Annual report of Gillanders Arbuthnot & Company Ltd., which contains information about its various business segments, such as, Trading, Tea, Property, Plastic Container, Textile and "Engineering Division". The same page contains information about the further break-up of the Engineering Division as comprising of manufacture and sale of "Steel Structurals, Pipes and equipments and Designing, Supplying, erectioning and Commissioning of projects on turnkey basis". From the above extract of the information given by the said company under the Engineering Division, it is vivid that it is also engaged in the business of projects on turnkey basis. It can further be noticed that the total revenue of this concern from Engineering Division is at Rs. 74.17 crore. The TPO has excluded this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the related party transactions are much more than the filter of 25%. We, therefore, order for the exclusion of this case from the list of comparables. 12.9 Last case which has been included by the TPO in his list of comparables is that of Sriram EPC Limited. This company is focused on providing turnkey solution for ferrous and non-ferrous, cement, aluminum, copper and thermal power plant. When we consider TNMM, it is the broader functional similarity which is considered. As the assessee is also engaged in the business of turnkey project, in our considered opinion, the TPO was right in including this case in the list of final comparables. 12.10 We, therefore, sum up our conclusion on inclusion or exclusion of cases in the final list drawn by the TPO. The cases of Tata Projects Limited, Walchandnagar Industries Limited, Mcnally Bharat Engg. Co. Limited and Sriram EPC Limited are held to have been rightly included. The case of TRF Limited is held to have been rightly included, but it should be considered on segment level instead of entity level as adopted by the TPO. The case of Engineers India Limited is directed to be excluded. The case of Gillanders Arbuthnot & Company Ltd. (on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 143(3) read with section 144C(13) at the relevant point of time. The case before us is that the AO did not grant such standard deduction and we are required to ascertain as to whether or not his action is sustainable in law. As has been noticed above that the law as on the date as also retrospectively applicable to the relevant assessment year is against the granting of such standard deduction, we see no reason to hold that the assessee be allowed +-5% standard deduction in contravention of the legal provisions. This benefit of up to 5% can be allowed only if the variation between the price charged/paid in respect of international transaction and ALP determined by taking the results of comparable cases does not exceed 5%. In case such variation is more than 5%, then no such benefit of 5% can be allowed on standard basis. As the matter of computation of ALP and the resultant addition, if any, has been restored by us to the AO/TPO in earlier paras, we direct that this point may be considered in accordance with our above observations. 14.1 The next issue is against the adjustment of Rs. 4,29,03,966 pertaining to payment of royalty. The facts concerning this issue as recorded in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdance with its AP(DIR Series) No.76 dated 24.02.2007. It is in pursuance to the deemed approval by RBI under the automatic approval scheme that the assessee made payment of royalty and technical fee to its AE. It is relevant to note that such payment has been approved or deemed to have been approved by the RBI. When a payment is made after obtaining due approval from the RBI, how its ALP can be computed at Rs. Nil, is anybody's guess. The fact of approval of the payment by the RBI has been succinctly recorded by the TPO in his order as well. He still chose to propose adjustment in respect of full payment. In our considered opinion, when the rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered at ALP. We, therefore, direct to delete addition of Rs. 4.29 crore made by the A.O. in this regard. 15. The next issue is against not giving credit of Rs. 23,30,040 for demand adjusted against refund for the assessment year 2007-2008 while determining the tax payable by the assessee. The Assessing Officer is directed to verify the factual aspect in this regard and pass appropriate order after al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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