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TMI Blog2014 (9) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.1 That the assessing officer/DRP erred on facts and in law in not considering the audited segmental profit statement of the appellant submitted during the course of assessment, allegedly on the ground that - a. The audited segment report is issued and signed by the sister concern of the representatives of the appellant and the results are at variance from audited accounts and TP report. b. That the annual account of the appellant does not provide separate value of domestic purchases and imports. c. That the appellant has failed to provide the allocation keys for preparing the segment profit report. d. That the auditors have conducted 'test checks' to prepare the segment profit analysis of the appellant. 2.2 That the assessing officer/DRP erred on facts and in law in not considering the combined profitability of international transactions undertaken by the appellant with associated enterprise and transactions undertaken with unrelated third parties in domestic market, for the purpose of benchmarking the transaction of import of goods undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... steel/resin, search and screening process undertaken by the appellant, in the transfer pricing document, resulted in 2 comparable companies, earning a mean operating margin of 0.21%, as under: Company Name Sales Crs Trading Income/ Sales (%) OP/OC (%) OP/Sales (%) Stanes Motor Parts Ltd. 18.23 98.57% 3.44% 3.57% Spectra Industries Ltd. 21.58 96.39% (-3.07%) -3.15% Average PLI 0.18% 0.21% PLI of Assessee 5.00% 2.4 It was submitted that since the operating profit margin (OP/OC%) of the appellant company in the import segment at 5% was much higher than the average of two comparable companies at 0.21%, the international transactions of import of parts and steel/resin entered into by the appellant were to be considered at arms length price. 2.5 Ld. TPO however for benchmarking purpose, aggregated two transactions, namely - international transactions wherein the appellant purchased goods from associated enterprise and sold it in domestic market - along with domestic transactions wherein, the appellant purchased goods from domestic market and sold it again in the domestic market, as one transaction and accordingly computed the profitability of the appellant wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08.2011, the profit earned by the appellant under different segments was filed before the TPO and is enclosed at pages 160-166 of the paper book. 3.1 In terms of the audited and certified segment profitability of the appellant, the profit margins of the appellant under trading segment are as under: Particulars Trading Segment Revenue Export (AE'S) Domestic Sale of Imported Goods (AE'S) Other Domestic Sale Service/Sales Revenue 77,47,651 79,35,91,469 66,11,53,663 Export Incentive 6,320 - - Miscellaneous Receipts - 4,38,545 - Operating Income 77,53,971 79,40,30,014 66,11,53,663 Exchange Fluctuation income 58,956 4,12,39,132 3,662 Total Operating Income (A) +(B) 78,12,927 83,52,69,146 66,11,57,325 Expenditure Cost of Service/COGS 70,37,203 75,90,83,619 66,02,40,565 Indirect Operating Expenses 1,06,232 1,08,81,348 90,65,424 Total Operating Expenses 71,43,435 76,99,64,967 66,93,05,989 Operating Profit 669,492 65,304,179 (8,148,664) OP/Sales % 8.64% 8.23% -1.23% 3.2 The TPO however disregarded the aforesaid audited and certified segmental accounts of the appellant, on the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segmental profitability as shown in audited financial statements vis-à-vis segmental profitability submitted before the TPO on 26.08.2011. 4.3 In this behalf assessee filed a detailed reason on TPO's disagreeing with the segment report filed as annexure to TP study report. The same are as under: (i) Commission and Service charges segment has been further bifurcated into domestic segment wherein, the appellant has earned commission from the supplier of the goods which was an Indian entity and the purchaser was also an Indian entity. (ii) Trading segment has been further bifurcated into domestic segment, wherein the appellant has merely acted as a reseller/trader of goods purchased from an Indian entity and sold it to again an Indian entity. (iii) Interest income and income from sale of fixed assets being wrongly considered as operating income has been excluded from other operating income. (iv) Exchange fluctuation income/loss has been considered on actual basis in every segment. (v) Indirect operating expense has been rationally distributed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in the case of Technimount ICB India P. Ltd. vs. ACIT [ITA No.7098/Mum/2010], wherein the Tribunal qua the question, whether for determining ALP, segmental results should be taken into account or whether profits at the entity level needs to be considered, has held as under: "The only objection for not considering the same was that they were not audit. This was only a procedural requirement and once the same was complied with, the audited segmental accounts should have been admitted as additional evidence by the DRP in order to impart substantial justice to the assessee. Therefore, the audited segmental results filed by the assessee is admitted and the matter is restored back to the file of Assessing Officer for denovo consideration in accordance with law" 4.8 Accordingly, since the operating profit margin over sales earned by the appellant in undertaking the transaction of sale of goods purchased from associated enterprise, in accordance with the audited segment account, at 8.23% is within safe harbor range of +/- 5%, than the average operating profit margin of the comparable companies considered by the TPO at 8.82%, the international transaction un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itability of the international transactions on a stand alone basis; and entity level comparison is to be resorted to, only when such stand alone comparison is otherwise not feasible. 4.14 Reliance in this regard is placed on the following decisions, wherein it has been held that arms length price should be determined on a transaction to transaction basis: - Development Consultants (P.) Ltd. v. Dy. CIT [2008] 23 SOT 455 (Kol.) - Star India Ltd. v. Asstt. CIT [IT Appeal Nos. 3846 /3585 (Mum.) of 2006, dated 28-5-2008] - Aztec Software & Technical Services Ltd. v. Asstt. CIT [2007] 107 ITD 141 (Bang.) (SB) 4.15 Reliance is also placed on the decision of Special Bench of Tribunal in the case of L.G. Electronics India Pvt. Ltd. vs. ACIT (ITA No.5140/Del/2011), wherein, it is held as under: "21.12 We have noticed above that sub-section (1) of section 92 read with rule 10B requires computation of income from 'an' international transaction having regard to its arm's length price. It means that each international transaction is required to be subjected to the TP provisions d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2009 - Starlite vs. DCIT: ITA No. 925/Mum/2006 - SMCC Construction India Ltd v. Addl. CIT: 44 SOT 63(Delhi) (URO) - Emerson Process Management (India) Pvt. Ltd. vs. DCIT (ITA No.7878/Mum/2011), - Phoenix Mecano (India) Ltd. vs. DCIT 49 SOT 515 - Hindustan Unilever Ltd. vs. ACIT (ITA No. 7868/Mum/2010) - 3i Infotech Ltd. vs. ITO (ITA No. 21/MDS/2013) - Sandoz (P) Ltd. vs DCIT (25 ITR(Trib) 347) 4.21 It is clear that assesses OP margin over sales earned by transaction of sale of goods purchased from associated enterprise, in accordance with the audited segment account, being within safe harbor range of +/- 5% of OP margin of the comparable companies considered by the TPO at 8.82%, the international transaction undertaken by the appellant should be considered at arm's length. 5. Incorrect selection of Bharat Power Corpn. Pvt. Ltd. 4.22 The TPO has considered Bharat Power Corpn. Pvt. Ltd. in the final set of comparable with OP over sales at 13.63%. This company is functionally not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OCL and other Public Sector Undertakings. In that sense of the matter, 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." 4.24 Thus Bharat Power Corpn. was incorporated only with an objective of providing services and supplies to Coal India limited and its subsidiaries companies, it has a fixed customer base with fixed demand and supply. It assumes lesser market risk and incurs less on account of marketing and advertisement. In view of the aforesaid, Bharat Power Corpnshall be excluded from the final set of comparable companies. (i) Products dealt by the company: Bharat Power Corpn is undisputedly engaged in trading of spare parts of mining and earth moving machineries. Further, Clause 9 of the Annual Accounts of the company also provides that the company deals in only one class of goods, spare parts for mining and earth moving machineries. Whereas assessee is operating in automobile industry and engaged in the business of trading of spare parts of automobile cars. In contradistinction Bharat Power is having a distinct product profile as it is in trading o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olistic economy and the appellant is established in a competitive market, the same shall not be considered as functionally similar to the appellant and excluded from the final set of comparable companies. 4.26 Reliance in this regard is also placed on sub-clause (2) of clause B of Rule 10 of Income Tax Rules, reproduced as under: "10 B. ..... (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an industry as are increasing revenues making companies. A declining revenue company may be faced with issues such as competition in the market place, new technology introduced by competitors, choked working capital, these issues are reflective of the market. c. The arithmetical mean is a measure of central tendency and elimination of diminishing revenue making companies would introduce skewness in the set of comparables. Elimination of companies with diminishing revenue is not representative of the population. d. The retention of diminishing revenue companies alongside increasing revenue companies tends to even out the risk profile of comparable companies. e. If companies based on diminishing revenues/persistent losses are rejected than companies with abnormal growth in revenues/profits should also be rejected for Arm's Length Analysis. f. The diminishing revenues should not be criteria to reject companies that fulfill other comparability criteria as comparables. The comparability analysis should be based on FAR analysis and proper selection of comparables. &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Limited, in the final list of comparable companies. There is no justification to deviate from what DRP itself has adopted in preceding year. Re: Final comparable companies: 4.35 After excluding Bharat Power Limited and including Spectra Industries Limited as comparable company in the final set, the average profit margin of the final comparable companies works out to 0.425% S.No. Company Name PBIT/(Sales-rent_inc)*100 1 Stanes Motor Parts Ltd. 4.00 2 Spectra Industries Limited -3.15 Average 0.425% 4.36 Accordingly, since the operating profit margin over sales earned by the appellant in undertaking the transaction of sale of goods purchased from associated enterprise, in accordance with the audited segment account, at 8.23% is higher than the average operating profit margin of the comparable companies considered above at 0.425%, the international transaction undertaken by the appellant should be considered at arm's length. 4.37 Further, even if considering the operating profit margin computed by the TPO at (-) 0.0988%, the margin of the appellant is within safe harbor (+/-) 5% of the average of the comparable companies at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (appellant) 5.32% OP/Sales (comparables) 8.82% 4.42 Consequently, as the operating profit margin over sales of the appellant, considering international transaction of export of goods and import of goods from the unaudited segment accounts at 5.32% is within safe harbor range of +/-5% of the average operating profit margin of the comparable companies considered by the TPO at 8.82%, the international transaction undertaken by the appellant should be considered at arm's length. 5. Ld. CIT DR Shri Yogesh Verma relied on the orders of lower authorities. 6. We have heard the rival submissions and perused the material available on record. In our considered view ld TPO and DRP have not appreciated the facts that assessee has made out a strong prima facie case about Bharat Power Corpn., being not an appropriate comparable in terms of functionality and FAR. With the material on record both the authorities ought to have given objective findings on the submissions made by the assessee in this behalf. 6.1 Besides DRP itself in preceding year has accepted the inclusion of assessee's comparable Spectra Industries Limited, in final list of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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