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TMI Blog2015 (5) TMI 644X X X X Extracts X X X X X X X X Extracts X X X X ..... national transactions of purchase of raw material and components from associated enterprises as well as sales of finished goods effected to the associated enterprises. On the basis of the aforesaid benchmarking, the profitability of international transactions under the associated enterprises segment computed at 3.25% is higher than the profitability of transactions under the Third parties segment computed at 2.80%. Hence, the international transactions entered with the associated enterprises under the Manufacturing segment on account of purchase of raw material and components and also sales are consistent with the arm s length price and no transfer pricing adjustment is thus required to be made. - Decided in favour of assessee. Disallowing the expenditure incurred on lease rentals for use of Vehicles and Computers - Held that:- The dispute for the assessment year 2003-04 as relied to make disallowance was still not final and therefore the matter may be set-aside to the file of the Assessing Officer with the directions to decide the issue in the light of the ultimate decision with regard to such dispute in the assessment year 2003-04. The learned Departmental Representative appearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. DRP/AO erred in not granting the benefit of +/- 5% range as envisaged by the proviso to Section 92C(2) of the Act. 5. Without prejudice to Ground 2, the Ld. DRP/AO erred in using data which was not available to the appellant at the time of conducting the transfer pricing analysis for computing the transfer pricing adjustment, not allowing the use of multiple year data as prescribed under Rule 10B(4) of the Rules thereby unfairly penalising the appellant for an act that was impossible to perform on the part of the appellant. 6. Without prejudice to Ground 2, the Ld. DRP/AO erred in applying the adjustment made to the import prices pertaining to AEs across the entire raw material consumption rather than applying it proportionately based on the ratio of raw materials consumed from AEs to total raw materials consumed. 7. The Ld. DRP/AO erred in disallowing the expenditure incurred on lease rentals for use of vehicles amounting to ₹ 12,14,618 and ₹ 3,30,371 on the premise that this expenditure is of capital nature. Without prejudice to Ground No. 7, the Ld. DRP/AO erred in not allowing the depreciation under Section 32 of the Act on such lease rentals paid during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 92(1) of the Act, the Assessing Officer referred the matter of computation of arm's length price of the international transactions to the Transfer Pricing Officer (in short 'the TPO') in terms of section 92CA(1) of the Act. The TPO after allowing the assessee requisite opportunity of being heard determined the arm's length price of the international transactions pertaining to the manufacturing activities of the assessee at an amount higher than the stated values by a sum of ₹ 5,21,97,453/-. In terms thereof, the Assessing Officer passed a draft assessment order dated 31.12.2010 u/s 144(3) r.w.s. 144C(1) of the Act against which assessee preferred objections before the DRP. By way of an order dated 02.08.2011, the DRP rejected the objections raised by the assessee and thereafter the Assessing Officer passed an order u/s 143(3) r.w.s. 144C(13) of the Act dated 30.09.2011 determining the income of the international transactions in conformity with the order of the TPO in terms of Section 92CA(4) of the Act and accordingly, he made an addition of ₹ 5,21,97,453/- to the returned income on account of transfer pricing adjustments. 6. By way of present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable cases he has not considered the multiple year's data and has instead considered the data relating to the financial year in which international transactions have been entered into. The aforesaid point of difference has not been agitated by the assessee before us and is not being dealt with further. Another aspect of the issue relates to the use of data by the TPO, which was not available in public domain at the time assessee conducted its Transfer Pricing Study. The said approach of the TPO has also not been disputed by the assessee and we do not deal with the same any further. 8. The major points of difference between the assessee and the Revenue can be understood as follows. Firstly, the TPO noticed that the principal activity of the assessee was the manufacture and trading of fluid power hydraulic equipments and related components. The Assessing Officer further noticed that out of the total turnover of the assessee of ₹ 121.69 crores, approximately 40% income has been earned from trading activity and another 40% income from sale of pumps, gear pumps and valves. Thus, as per the TPO, there was a substantial activity of trading undertaken by the assessee. The TPO f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted the position that it was at arm's length price and no addition has been proposed. The addition in question has been made only with regard to the Manufacturing segment. 10. By way of Ground of Appeal No. 2, assessee has assailed the approach of the TPO while computing the arm's length price in relation to the Manufacturing segment by applying the external TNM Method. At the outset, the Ld. Representative for the assessee pointed out that the TPO erred in determining the arm's length price of the international transactions pertaining to the Manufacturing segment by ignoring assessee's plea to consider internal TNM Method in preference to the external comparables considered by the TPO. The Ld. Representative pointed out that initially in the Transfer Pricing Study assessee had considered the manufacturing and trading activities as a single segment on the ground that the trading activities was closely interlinked with the manufacturing activity. However, on the asking of the TPO, assessee had furnished the segmental profitability statement showing profitability for the manufacturing and trading activities separately. At that stage, assessee had submitted that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the course of the proceedings before the TPO whereby assessee canvassed that the international transactions in the Manufacturing segment be benchmarked by using internal TNM Method. No doubt, in the Transfer Pricing Study carried out by the assessee initially it had adopted the external comparability on an aggregated segment of Manufacturing plus Trading activities. The TPO had rejected the aggregation of the two activities and benchmarked the Manufacturing segment independent of the Trading segment. At that stage, assessee put-forth a plea that the benchmarking of the Manufacturing segment be carried out by using the internal TNM Method. Before the TPO, assessee pointed out that in the Manufacturing segment, the products manufactured by assessee consumed various raw materials and components, which were procured domestically from third parties as well as imported from associated enterprises and overseas third parties. Assessee segregated the products which did not consume raw material and components procured from associated enterprises from those products which consumed such raw material and components. Similarly, assessee separately identified the sales of these products. Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terprises. 14. Pertinently, assessee also undertook similar analysis with regard to its Trading segment before the TPO. In the Trading segment also, assessee tabulated the associated enterprises segment and the third parties segment and pointed out that the operating margin in the associated enterprises segment was higher than the operating margin in the third parties segment. The said calculation is a part of the Tabulation furnished to the TPO, a copy of which has been placed in the Paper Book at page 114. This approach of the assessee was similar to the approach in relation to the Manufacturing segment as discussed earlier. In so far as the international transactions entered with the associated enterprises in the Trading segment are concerned, the TPO was satisfied that they are at an arm's length price as no adjustment has been proposed by him. However, similar approach taken by the assessee with respect to the Manufacturing segment has not been accepted by the TPO. In our considered opinion, the grounds taken by the TPO to reject the assessee's plea for internal TNM comparable are neither germane and nor justified, apart from being inconsistent with his stand relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of raw material and components from associated enterprises whereas the Third parties segment reflects profitability from products which do not entail purchases of raw materials and components from associated enterprises. The TPO has pointed out that the sale of finished goods in the associated enterprises segment includes a component of sale of ₹ 8,37,000/- of products which do not consume any raw material or component purchased from associated enterprises. The assessee had explained that this was a minor transaction involving Gear pumps & Cylinders out of total sales of finished goods to associated enterprises of ₹ 2.36 crores (approx). It was explained that profitability of this minor transaction was included in the associated enterprises segment to ensure comprehensive benchmarking of international transaction of sales to the associated enterprises. In our considered opinion, the said minor transaction does not vitiate the segmentation of Manufacturing segment into associated enterprises segment and Third parties segment done by the assessee for the purpose of internal TNM Method. 16. On the basis of the aforesaid, we find that the bifurcation of Manufacturing se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of purchase of raw material and components from associated enterprises as well as sales of finished goods effected to the associated enterprises. On the basis of the aforesaid benchmarking, the profitability of international transactions under the associated enterprises segment computed at 3.25% is higher than the profitability of transactions under the Third parties segment computed at 2.80%. Hence, the international transactions entered with the associated enterprises under the Manufacturing segment on account of purchase of raw material and components and also sales are consistent with the arm's length price and no transfer pricing adjustment is thus required to be made. On this aspect, we uphold the plea of the assessee and accordingly, the Ground of Appeal No. 2 raised by the assessee is allowed. 18. Apart from the aforesaid, assessee has also raised other Grounds of Appeal challenging the adjustment made, even as per the methodology of the external TNM Method applied by the TPO. On this aspect, it has been canvassed that the TPO has erred in rejecting certain comparables adopted by the assessee and at the same time he has also erred in selecting certain comparables which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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