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TMI Blog2015 (1) TMI 520X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Daga Capital Management Pvt. Ltd. (SBMum ITAT) (d) CIT v General Insurance Corporation of India (2002) 254 ITR 203 (Bom.) (e) CIT v BSES Ltd. (2008) 113 TTJ 227 (Mum.) (f) Space Financial Services v ACIT (2008) 115 TTJ 165 (Del.) 1.3 The learned Commissioner of Income Tax (Appeals) -I, Pune erred in not following the decision of Pune bench of ITAT in the case of Appellant Company for Assessment year 2004- 05 where the ITAT has deleted such ad-hoc disallowance made by the learned Assessing Officer. 2.1 The learned Commissioner of Income Tax (Appeals) -I, Pune erred in law and on the facts of the case in confirming the adjustment amounting to Rs. 22.49 lakhs to the value of international transactions entered into by the Appellant with its Associated Enterprises pertaining to export of components and spares disregarding the benchmarking of international transactions using the "aggregation of transaction" approach followed by the Appellant using third party comparable companies. 2.2 Further, the learned Commissioner of Income Tax (Appeals) I, Pune erred in law and on the facts and in circumstances of the case in comparing segmental profitability of the Appellant i.e. between " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The CIT(A) applying the ratio laid down by the Hon'ble Bombay High Court in Godrej Boyce Manufacturing Co. Ltd. Vs. CIT (2010) 234 CTR 1 (Bom), held that disallowance made by the Assessing Officer of Rs. 8,94,020/- be reduced by 50%. 7. The assessee is in appeal against the order of CIT(A). 8. The learned Authorized Representative for the assessee pointed out that no disallowance was warranted in the case. Further, reliance was placed on the ratio laid down by Delhi Bench of the Tribunal in Interglobe Enterprises Ltd. Vs. DCIT in ITA No.1362 & 1032/Del/2013 and in ITANo.l580/Del/2013, order dated 04.04.2014. 9. The learned Departmental Representative for the Revenue pointed out that the provisions of Rule 8D are applicable and hence the disallowance made by the Assessing Officer needs to be upheld. 10. We have heard the rival contentions and perused the record. The assessee during the year under consideration had received dividend of Rs. 46,75,002/- which was declared as exempt. The contention of the assessee that no direct financial cost was attributable to such investments was accepted by the Assessing Officer and no disallowance in this regard was made. However, disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent parts of the world. The assessee was engaged in distribution / sale of Cummins after sales products i.e. spares through its network of dealers throughout India, Nepal and Bhutan. It also provided overhauling job work services, reconditioning services and operations and maintenance services for IC engines sold by Cummins India Ltd. During the year, the TPO noted that the assessee had entered into the following international transactions which were reported in Form No.3CEB. Sr No. International Transaction Amount Rs. Method adopted 1 Import of components & spares of IC engines 29,45,48,522 Transactional Net Margin Method 2 Export of components & spares of IC engines 87,48,479 Transactional Net Margin Method 3 Receipt of services, such, access to customized parts catalogues, international site license, annual subscription charge, etc. 2,43,127 Transactional Net Margin Method 4 Receipt of IT support services 1,09,20,790 Transactional Net Margin Method 5 Payment of training fees 94,235 Transactional Net Margin Method 6 Rendering of services - warranty claims lodged with Associated Enterprises 76,55,292 Transactional Net Margin Method 7 Provision of te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been sold to associated enterprises and third parties outside India were the spares of IC engines, which were bought out by the assessee. It was thus, held that assessee's international transaction was one of trading and was being proposed to be compared with the trading of similar item with third parties. The TPO further held that with reference to Rule 10B and OECD Guidelines at para 1.19, the assessee had contended that specific characteristics of the property transferred or the services provided were the key factors to be considered for examining the comparability. The TPO held that what had been transferred was the property in the shape of spares to the associated enterprises and also to the third parties and they remained the same and there was no difference as far as specific characters of the property transferred was concerned. It was further observed that there might have been difference in the total quantum of exports to third parties and to the associated enterprises, but that itself would not change the specific characters distinct of the transactions. The plea of the assessee that the exports to third parties were made at premium was rejected in the absence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee which is reproduced under para 4.2 at pages 16 to 24 of the appellate order observed that there was no merit in the plea of the assessee that no adjustment on this account had been made in the earlier years even though case of the assessee was subjected to transfer pricing since assessment year 2002-03. The next objection of the assessee relating to rejection of aggregation method applied for benchmarking, the CIT(A) upheld the observations of the TPO to be more appropriate. Another objection of the assessee before the CIT(A) was that the TPO had no basis or reason for rejecting the external TNMM adopted by the assessee. The CIT(A) held that where exports to associated enterprises was not a regular activity but was as per the business exigency of the group company, it was important to look at the third party uncontrolled transactions available internally before looking for such transactions outside internal ambit. The CIT(A) further held that the internal TNMM method was more appropriate comparable as the same would be nearest in characteristics. As per the CIT(A), internal TNMM method had to be first given preference. The next objection of the assessee was that two comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport placed at pages 75 to 182 of the Paper Book and it was pointed out by the learned Authorized Representative for the assessee that the activities of the assessee were for aftermarket support of internal combustion engines in the form of spare parts supports and also, for rendering after sales service. For carrying out the aftermarket support for the IC engines sold by Cummins India Ltd. and other Cummins entities, the assessee was engaged in sale of spare parts, administration, reconditioning services for Cummins engines sold and also for the training programmes and publishing various types of literatures to its customers in using the Cummins engines. Our attention further was drawn to the FAR analysis carried out in the TP study which is placed at pages 101 onwards of the Paper Book and as per the learned Authorized Representative for the assessee, sourcing activity was integrated and inter-linked activity. The learned Authorized Representative for the assessee further pointed out that for the said sourcing activity, comparable companies search was carried out and by using the prowess data base, TNMM method was applied to the operating profits and total turnover which is 2.13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot disturbed the TNMM analysis but has disturbed the aggregation of transactions. The learned Authorized Representative for the assessee stated that both in the earlier years and in the subsequent years, same principle of aggregation had been accepted by the TPO and no adjustment had been made on account of arm's length price. Further, reliance was placed on the following decisions:- 1. Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT in ITA No.l683/PN/2011; 2. M/s. Panasonic India Pvt. Ltd. Vs. ITO in ITA No.l417/Del/2008 and another; and 3. M/s. Intimate Fashions (India) Pvt. Ltd. Vs. ACIT in ITA Nos.2116/Mds/2010 & 2108/Mds/2011. 20. The learned Departmental Representative for the Revenue in response placing reliance on the orders of authorities below pointed out that the assessee was engaged in trading of spares and out of total turnover of 4 billion exported to associated enterprises was not main business of the assessee. Since it was not regular business of the assessee, going on the basis of OCED guidelines, the TPO segregated the activities and applied the percentage which needs to be upheld. 21. We have heard the rival contentions and perused the record. 22. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,09,20,790 Transactional Net Margin Method 5 Payment of training fees 94,235 Transactional Net Margin Method 6 Rendering of services - warranty claims lodged with Associated Enterprises 76,55,292 Transactional Net Margin Method 7 Provision of technical services 3,29,017 Transactional Net Margin Method 23. The assessee applied TNMM method to benchmark its international transactions by aggregating its different international transactions except item Nos.5 and 7, claiming that the said transactions were source activities. While applying the TNMM method, the assessee searched for external comparable companies. The assessee applied operating margins on net sales as Profit Level Indicator in its TP study. The TPO objected to the aggregation of the different international transactions 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also finds an echo in the OECD guidelines under Chapter III wherein the following extract is relevant:- "Ideally, in order to arrive at the most precise approximation of arm's length conditions, the arm's length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include 1. Some long term contracts for the supply of commodities or services; 2. Rights to use intangible property; and 3. Pricing a range of closely linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Two or more transactions can be said to be linked when these transactions emanate from a common source being an order or a contract or an agreement or n arrangement and the nature, characteristics and terms of these transactions are substantially flowing from the said common source. For example, a master purchase order is issued stating the various terms and conditions and subsequently individuals orders are released for specific quantities. The various purchase transactions are closely linked transactions. 13.8 It may be noted that in order to be closely linked transactions, it is not necessary that the transactions need be identical or even similar. For example, a collaboration agreement may provide for import of raw materials, sale of finished goods, provision of technical services 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t transactions. In-fact, it is the nature and characteristic of the activities which would be required to be analyzed having regard to the facts and circumstances of each case as to whether they can be considered as individual/independent transactions or a single transaction for the purpose of transfer pricing regulation. In the present case, as we have noted earlier, it is only on account of the manufacturing activity that the activity of commissioning and installation of the equipment arises and pertinently all the aforesaid activities are negotiated and contracted for at one instance. With regard to the segmental profitability referred by the Assessing Officer, the position has been clarified by the assessee. According to the assessee, in the financial statements affirmed by the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. Vs. ACIT (supra). 26. In view of the ratio laid down by Pune Bench of the Tribunal in Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT (supra), it is held that where number of transactions are closely linked transactions, then the same can be aggregated and construed as a single transaction for the purpose of determining the arm's length price. In case, there is close link exists between the different transactions, the same should be treated as composite transaction and appropriate method should be applied to work out the transfer pricing analysis. Where two or more transactions emanate from common source being an order or contract or an agreement or an arrangement, then such transactions could be said to be closely linked as the nature, characteristic and terms 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 warran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port to the IC engines sold worldwide. Further, the claim of the assessee was that the export to third parties was made on urgent basis and hence, the premium was charged and further, the frequency of such transactions was low and consequently, higher margins of profits. The first major activity carried on by the assessee was of import of spare parts to Rs. 29.45 crores as against which, the export of spare parts was only Rs. 0.87 crores. The payment for IT support received from associated enterprises was Rs. 1.09 crores and the payment for access to customized part catalogues was Rs. 0.02 crores. Further, the assessee had received Rs. 0.76 crores against warranty administration. All these international transactions are linked to the main business 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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