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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 ..... sociated 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 appearing for the Revenue has not contested the aforesaid factual matrix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of three year's financial data and accordingly, the arithmetic mean of the average operating margins was determined at 9.62%. At this point, it may be noticed that the TPO has differed with the assessee on this aspect and while ascertaining the operating margins of the comparable 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 tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India) Ltd. 38.36 10. Beacon Industries Pumps Ltd. 11.34 11. Johnson Pump (India) Ltd. 14.17 Mean 14.57 9. The arithmetic mean of operating margin of the comparable cases arrived at 14.57% was compared with the operating margin of the assessee in respect of manufacturing segment which was 1.57%. Accordingly, an adjustment of ₹ 5,21,97,453/- was computed which was required to be made to the international transactions pertaining to Manufacturing segment of the assessee so as to bring it to the level of arm's length price. Pertinently, bifurcation of assessee's financial results into manufacturing and trading segment was done only in the course of proceedings before the TPO and so far as the segment of Trading activity is concerned the TPO accepted 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the transactions between the assessee and its associated enterprises. The case made out by the Ld. Departmental Representative is that the transactions with the associated enterprises are not purely identical with the transactions with third parties and in support reference has been made to a Tabulation in para 6.2.3 of the order of the TPO. As per the Ld. Departmental Representative, internal TNM Method canvassed by the assessee was in relation to benchmarking on the basis of sales made, but not that of purchases from associated enterprises, which was of a substantive value. The segmental statement between associated enterprises segment and third parties segment was based on sales, and in-fact the purchases are not evaluated separately. It was therefore contended that the approach of the TPO was quite justified. 12. We have carefully considered the rival submissions. The dispute on this aspect relates to a plea put-forth by the assessee during 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies segment were functionally comparable in every aspect. Therefore, it was canvassed that based on the aforesaid internal TNM analysis, the international transactions of the assessee in the Manufacturing segment were at an arm's length price. 13. In-fact, the internal comparables do have a more direct and closer relationship to the tested transactions rather than the external comparables. In other words, the profitability of an assessee from the controlled transactions can be benchmarked more meaningfully with reference to the assessee's profitability from similar transactions carried out in uncontrolled conditions, i.e. with third parties. In the present case, assessee pointed out that the associated enterprises segment and the third parties segment were functionally comparable and therefore the third parties segment was a good uncontrolled comparable available to benchmark the international transactions entered with the associated enterprises. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icant portion of total operating expenses, as explained above were allocated considering net sales of each segment as the reasonable allocation key. Your good self would appreciate that Transactional Net Margin Method ('TNMM') requires a functional similarity rather than product similarity. Thus, under both the aforesaid segments, there is a functional similarity viz. manufacturing function though the product may not be identical. In view of the above, the internal comparability of profit from sale of manufactured products under AE and Non-AE segment would be the most appropriate method to benchmark the international transactions pertaining to manufacturing segment. 15. The aforesaid shows that the segmentation of Manufacturing segment into associated enterprises segment and Third parties segment was done by the assessee on product basis, i.e. the associated enterprises segment reflect profitability on products which require consumption 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the operating margin of the Third party segment. The operating margin derived from the international transaction pertaining to purchase of raw material and components purchased from AEs (forming a part of in the AE segment) would be benchmarked against the comparable operating margin derived from the third party transactions (covered in the AE segment). The operating margin derived from the international transaction pertaining to sale of finished products to AEs (forming a part of in the AE segment) would be benchmarked against the comparable operating margin derived from the third party transactions (covered in the AE segment). 17. On the basis of the aforesaid fact analysis, which has not been controverted by the TPO, we find that in the present case internal comparison of the operating margins using internal TNM Method is liable to be upheld in order to compute arm's length for the international 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 associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had capitalized the entire amount in its books of account but no depreciation was claimed, and it claimed deduction for the principal portion of the lease rentals. In the assessment year 2003-04, Assessing Officer observed that since the assets were registered in the name of the assessee thereby giving it ownership, the expenditure towards re-payment of principal values of the assets was to be treated as a capital expenditure and the amount was disallowed. Following the aforesaid, in the present year also the Assessing officer disallowed the claim of the assessee towards re-payment of principal value of lease rentals amounting to ₹ 12,14,618/- and ₹ 5,30,371/- on account of vehicles and computers respectively. 21. In this background, the learned counsel for the assessee pointed out that the dispute for the assessment year 2003-04 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 appearing for the Revenue has not contested the aforesaid fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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