9911796707
TMI Blog2015 (1) TMI 520X X X X Extracts X X X X X X X X Extracts X X X X ..... phold the aggregation of transactions in the TP study carried on by the assessee where the said transactions after benchmark were at arm's length price, no adjustment was to be made. In view thereof, we find no merit in the analysis carried out by the TPO by benchmarking the transactions of exports to third parties with exports to associated enterprises resulting in addition of ₹ 22.49 lakhs. In view of our discussion herein above, we delete the addition of ₹ 22.49 lakhs - Decided in favour of assessee. - ITA No.1616/PN/2011 - - - Dated:- 31-12-2014 - SHRI G.S. PANNU AND Ms. SUSHMA CHOWLA, JJ For The Appellant : Shri Arvind Sonde For The Respondent : Shri Mazhar Akram ORDER PER SUSHMA CHOWLA, JM: This appeal filed by the assessee is against the order of CIT(A)-I, Pune dated 25.02.2011 relating to assessment year 2005-06 passed under section 143(3) of the Income-tax Act. 2. The assessee has raised the following grounds of appeal: 1.1 On the facts of the case and in law, the learned Commissioner of Income Tax (Appeals) - I, Pune erred in confirming the disallowance u/s.14A to the extent of ₹ 4,47,010/-. 1.2 He erred in not appreciating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nadvertent delay in payment of appeal fee before the prescribed date. Prayer was made to condone the delay in filing the appeal belatedly. In the facts and circumstances, we find merit in the plea of the assessee and we condone the delay of 3 days in filing the appeal late before us and proceed to decide the appeal after hearing both the parties. 4. The issue raised vide ground of appeal No.1 is against the disallowance of ₹ 4,47,010/- under section 14A of the Act. 5. The brief facts relating to the issue are that, during the year under consideration, the assessee had received interest on dividends of ₹ 46,75,002/- which was claimed as exempt under sections 10(15), 10(34) / 10(35) of the Act. During the course of assessment proceedings, the assessee was asked to explain as to why proportionate disallowance under section 14A of the Act should not be made. In reply, the assessee claimed that assessee company was having share capital and reserves surpluses of ₹ 101 crores as on 31.03.2005 as against unsecured loans of ₹ 64 crores only. Further, it had no secured loans and therefore, the investments in tax free assets were claimed to have been made from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the provisions of Rule 8D of the Rules to the years prior to 01.04.2008 and it was held that proportionate disallowance out of administrative and personnel expenses may be made, keeping in mind the facts of the case. In view thereof, we direct the disallowance of ₹ 2 lakhs out of administrative expenses. The ground of appeal No.1 raised by the assessee is partly allowed. 11. The issue in ground of appeal No.2 raised by the assessee is against the transfer pricing adjustment of ₹ 22.49 lakhs. 12. The brief facts relating to the issue are that, the assessee company was dealing in the business of sale of spares and after sales service of engine manufactured and sold by M/s. Cummins India Ltd. For the year under consideration, the assessee had furnished the return of income declaring total income of ₹ 46,06,31,680/-. The Assessing Officer made a reference under section 92CA(1) of the Act for computation of arm's length price in relation to the international transactions as detailed in audit report in Form No.3CEB. The Transfer Pricing Officer (in short TPO) issued a questionnaire to the assessee requisitioning the assessee to furnish the details / explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales as Profit Level Indicator in its TP study. The TPO issued a show cause notice to the assessee which is reproduced under para 7 on pages 3 to 5 of the TPO order. The objection of the TPO was that the assessee had aggregated its different international transactions which were distinguishable in their nature and scope and further, the transactions were such, where separate profitability in respect of the transactions could be arrived at, if an attempt was made. The TPO further observed that the aggregation or grouping of the various international transactions undertaken by the assessee and benchmarking them under the umbrella of TNMM was not acceptable and a proposal was made for making the following adjustments to international transactions relating to export of bought out spares:- During the year under consideration it is seen that the assessee has exported bought out spares to AEs for ₹ 87.49 lakhs against which the assessee has earned profit before taxation to sales at 28.83%. Assessee has also exported the spares to the third parties against which the company has earned profit before taxation, to sales at 54.54%. It is clear from these figures that assessee has e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO thus, held that the exports to associated enterprises and third parties were nothing but need based purchases by associated enterprises and third parties and basic characteristic of the transaction were identical. It was further contention of the TPO that if the assessee contends to have charged premium to third parties, then the same should have been charged to the associated enterprises as well. The second contention of the assessee with reference to the Rule 10B of the I.T. Rules in respect of the difference and geographical location size of the market, government orders in force, etc. was rejected by the Transfer Pricing Officer in the absence of the assessee having furnished complete facts and figures in that regard. The method adopted by the assessee of clubbing the transactions and then applying TNMM method at the entity level was rejected by TPO for the reason that the Indian Transfer Pricing Regulations as well as OECD Guidelines have provided for clubbing of transactions only under certain circumstances. As the assessee had failed to separately benchmark its transactions relating to export of spares to its associated enterprises, the TPO held that the assessee had fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument of the assessee on difference in risks and geographical locations was theoretical in nature per the CIT(A), could not be accepted. The order of the TPO / AO was thus, upheld by the CIT(A). 16. The assessee is in appeal against the order of CIT(A). 17. The learned Authorized Representative for the assessee pointed out that the assessee was a distributor / trading company and was engaged in the sale of spare parts i.e. the components of diesel engines sold by M/s. Cummins India Ltd. It was further pointed out by the learned Authorized Representative for the assessee that the assessee was the local supplier for components and was also selling spare parts to the companies, who had purchased products from M/s. Cummins India Ltd. The learned Authorized Representative for the assessee pointed out that the assessee had entered into various international transactions and in the TP study, transaction at serial No.l, 2, 3, 4 and 6 i.e. except the payment for training services and amounts received for technical services were considered as one segment which was the sourcing activity which in turn, was linked to assessee s trading activity. It was further stated by the learned Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the reply of the assessee thereafter and pointed out that the total exports to the associated enterprises were at ₹ 87,48,479/- as against the exports to third parties during the year at ₹ 4,16,326/- After carrying out the said analysis, it was reported by the assessee company that in view of the volume of transactions and the variety of items exported, the management of the company was of the view that it was not feasible to disclose quantitative details in respect of export of IC engine spare parts to the associated enterprises. The said note was appended and is part of an Appendix-I to the submissions made to the TPO and placed at pages 200 to 204 of the Paper Book. 18. The learned Authorized Representative for the assessee then referred to the information sought by the TPO in respect of segmental Profit Loss Account from exports made by the assessee to associated enterprises and non-associated enterprises and in this regard, it was pointed out that there was significant variation in the exports to the third parties and to the associated enterprises and also the spare parts exported to third parties and associated enterprises were different in nature. Further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsisted of customer support through sale of spare parts of Cummins Engines, of Cummins products manufactured worldwide and also by Cummins India Ltd. The assessee claimed that it has nationwide network of 5 Zones, 6 Regional and 14 area offices and over 90 dealers and 7 parts depots. The assessee warranties for the spare parts. Another line of activity was that the assessee provided other services which included annual maintenance contracts and publication of literature in relation to the said Cummins Engines sold by the Cummins entities. Further, every IC engine sold by Cummins India Ltd. was communicated to the assessee by way of engine dispatch advice and on receipt, the assessee company warrants the products by agreeing to provide 4 free services for a period of two years. Out of the various activities carried on by the assessee, trading of spare parts constitute one of the main activities of the assessee. The international transactions were claimed by the assessee to consist of import of spare parts from the associated enterprises and other transactions including export of spare parts, provision of warranty administration, other services to, and receipt from various services f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which as per him were distinguishable in their nature and scope and further, the transactions were searched with separate profitability in respect of each of the transactions. The TPO thus, rejected the aggregation of the various international transactions undertaken by the assessee and also held that the benchmarking the said transaction under the umbrella of TNMM was not acceptable. The TPO thereafter, noted that the assessee had exported bought out spares to its associated enterprises and had also exported the spares to third parties against which, it had earned higher profits. The TPO was of the view that adjustments had to be made on account of difference in the margins from exports to third parties as compared to exports to associated enterprises. The TPO thus, applied internal TNMM method and worked out the arm's length price of the international transactions resulting in adjustment of ₹ 22.49 lakhs in relation to export of bought out spares of IC engines to its associated enterprises. The said addition was applied by the Assessing Officer and upheld by the CIT(A). 24. The first issue arising in the present appeal is whether in view of the OECD guidelines and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the supply of vital components to an associated manufacturer; it may be more reasonable to access the arm s length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm s length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis. 31. In this background, considering the legislative intent manifested by way of Rule 10A(d) read with Rule 10B of the Rules, it clearly emerges that in appropriate circumstances where closely linked transactions exist, the same should be treated as one composite transaction and a common transfer pricing analysis be performed for such transactions by adopting the most appropriate method. In other words, in a given case where a number of closely linked transactions are sought to be aggregated for the purposes of bench marking with comparable uncontrolled transactions, such an approach can be said to be well established in the transfer pricing regulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and payment of royalty. Different methods may be chosen as the most appropriate methods for each of the above transactions when considered on a standalone basis. However, under particular circumstances, one single method maybe chosen as the most appropriate method covering all the above transactions as the same are closely linked. (Underlined for emphasis by us). 32. In this background, we may now examine the facts of the present case. The primary activity of the assessee is to manufacture material handling equipments viz. cranes and hoists. It is seen from the documents placed in the Paper Book that the assessee enters into a single negotiation with the customers, which, inter-alia, includes manufacturing and supply of the material handling equipment, provision of commissioning and installation services, etc. Though the assessee raises different invoices for supply of equipments and separately for erection and commissioning charges, however, it is evident that the negotiations for the same are carried on at one go. In fact, at the time of hearing, it was specifically queried from the learned counsel as to whether the assessee is undertaking installation/commissioning activiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Auditors, the activities have been clubbed together in accordance with the Accounting Standards prescribed by the ICAI. It was clarified that the segmental profits were worked out by the assessee only at the asking of the TPO during the proceedings before him. The learned counsel pointed out with reference to the chart in this regard placed in the Paper Book and submitted that the segmental profitability was not computed on the basis of any separately maintained records viz. books of account or vouchers but was computed by undertaking a statistical exercise. The costs were allocated as a proportion of sales/revenues and not an actual basis. In view of the aforesaid fact situation, we do not find that the availability of separate segmental profits in the present case can be a justifiable ground for the TPO to say that the transactions are not closely linked within the meaning of Rule 10A(d) of the Rules. Thus, the activity of installation and commissioning/engineering services is closely linked with the manufacturing activity and deserves to be aggregated and construed as a single transaction for the purposes of determining the ALP as per the method adopted. 34. In view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of such transaction substantially flow from the said common source. 27. In the above said background, we analyse the different international transactions entered into by the assessee as pointed out by us in the paras hereinabove. The business of the assessee company was to provide aftermarket support to IC engines sold, in the form of sale of spare parts and rendering of after sales service including warranty administration. The assessee is thus, providing after sales support for engines sold by Cummins India Ltd., Cummins INC, etc. which were under warranty period and also post warranty period. The servicing, repair and annual maintenance contract, warranty period and for post warranty period were the services provided by the assessee for carrying out most of the above said activities. The sale of spare parts was claimed to be the principal activity of the assessee. The repair maintenance and the warranty administration including services of the IC engines requires the support of the spare parts which were sold by the assessee. Where the assessee was engaged in aftermarket support of engines manufactured and sold by Cummins entities, the question arises whether the sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess being carried on by the assessee and such closely linked transactions are to be analysed in aggregate to determine the arm's length price. The aggregation of the import of spare parts, export of spare parts, IT support services, access to customized parts catalogue and amount received for warranty consideration are inter-related transactions, which were the sourcing activities of the assessee company and have to be aggregated in order to benchmark the international transactions. The assessee had benchmarked the arm's length price of all the transactions by comparing results of the comparable companies which were found to be at arm's length price. The assessee had also furnished the segmental Profit Loss Account for the exports to associated enterprises and as compared to the export to third parties and percentage of services over total sales in respect of export to associated enterprises works out to 0.2069% and in respect of exports to third parties works out to 0.0098%. 29. The plea of the assessee in this regard was that besides difference in the value of exports to third parties and to associated enterprises, the spare parts exported to third parties and to ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
