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TMI Blog2015 (10) TMI 1747X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in rejecting the methodology followed for benchmarking of international transactions while it has been accepted in the preceding assessment year as well as succeeding assessment year i.e. A Y 2005-06 and AY 2007 -08 respectively. 2. Rejection of benchmarking analysis performed by the Appellant: 2.1. The learned DCIT erred on the facts and in circumstances of the case pursuant to the directions of the learned DRP in rejecting the aggregation methodology followed for the manufacturing activity of the Appellant presented in its Transfer Pricing documentation without giving any cogent basis. 2.2 The learned DCIT erred on the facts and in circumstances of the case pursuant to the directions of the learned DRP in rejecting the aggregation methodology followed for the manufacturing activity of the Appellant presented in its Transfer Pricing documentation without establishing the deficiency or inefficiency in the documentation of the Appellant as required under section 92C(3) of the Income-tax Act, 1961 ["the Act"]. 2.3 The learned DCIT erred on the facts and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketing aspects are concerned, but these functions represented by their operating expenses does not affect the gross profit margin computed having regard to all direct and indirect cost of production. 5. Disregard of Rule 10B(2) and Rule 10B(3) of the Rules 5.1 The learned DCIT erred in law and facts and in circumstances of the case in disregarding the comparability factors specified under Rule 10B(2) of the Rules and the provisions contained in Rule 10B(3) of the Rules that specify that an adjustment should be made to account for differences between the transactions that may materially affect the price of such transactions. 5.2 The learned DCIT erred in law and facts and in circumstances of the case in not allowing adjustments for the significant and material differences in functions performed, assets employed and risk assumed by the Appellant while making internal comparison. 6. Benefit of the variation / reduction of 5 percent from the arithmetic mean 6.1 Without prejudice to the aforesaid grounds, the learned DCIT pursuant to the directions of DRP has erred in not granting the benefit of the variation/ reduction of 5 percent from the arithmetic mean as provided in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opting TNMM method on aggregate basis. During the financial year, the assessee's operating profit margins were 6.57%, whereas the operating profit / sales of the comparable companies was 4.64%. Based on the said analysis, the assessee had concluded that its international transactions were at arm's length price. The TPO on the perusal of details and documents filed by the assessee was of the view that each of the transactions undertaken by the assessee were different in its nature and scope and as per the TP regulations, each of these transactions should have been benchmarked separately. The TPO was of the view that undue shelter had been taken by the assessee by aggregating these transactions together by detailing them to be closely inter-linked with each other. The TPO show caused the assessee in this regard that aggregation of the transactions and benchmarking them together, following TNMM method was not acceptable. The TPO further noted that the TP study report reveals that the company is specialized in manufacturing of electrical appliances i.e. water heaters, which were sold in the domestic market as well as were exported to the associate enterprises and also to non-associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and as such, the export to associate enterprises could not be compared with the sale to non-associate enterprises. The TPO considered the submissions of assessee that though the assessee had used the imported raw material in case of products sold to non-associate enterprises, but the same were also used in respect of products sold to associate enterprises. Thus, eventually, the base remained the same, but even thereafter, the margins in respect of sales to associate enterprises were substantially thinner than the margins derived from sales to non-associate enterprises. The TPO further observed that where the margins from associate enterprises' sales were compared with the margins from non-associate enterprises' sales and even if the chances of controlled transactions affecting the purchase price were considered, the same was neutralized by starting at the same base. The TPO was of the view that merely because the enterprises were engaged in controlled transactions, the same should not be the reason of automatic rejection criterion. After analyzing of other differences pointed out by the assessee i.e. in functions and risk i.e. product differences, product risk and credit risk, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved that where the assessee had selected functionally non-comparable companies for TNMM analysis and benchmarked its international transactions on entity level, when internal comparables were available for benchmarking at gross margin level. It further held that the data used by the assessee for benchmarking was not reliable and therefore, the TPO was justified to proceed further to determine the arm's length price as per clause (c) of section 92C(3) of the Act. The DRP further held that none of the comparables chosen by the assessee were into manufacturing of water heaters and / or geysers. Thus, the TNMM analysis involves the comparables so chosen by the assessee was not the most appropriate method to benchmark the international transactions. While dealing with the objections of the assessee as to why the CPM method adopted by the TPO cannot be held as the most appropriate method, the DRP held that However, if we see the broad picture, it seems that in terms of functions, assets and risks, the internal comparable in any case would be better and closer for the purposes of benchmarking than the external comparables having no functional similarity. Moreover, the margins adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad entered into four international transactions, under which, material was imported and the finished products were exported both to associate enterprises and non-associate enterprises. In addition, there were domestic sales of the products manufactured by the assessee. The learned Departmental Representative for the Revenue pointed out that the DRP had rejected the adoption of TNMM method as nature and scope of transactions were different and their separate margins could be worked out. The learned Departmental Representative for the Revenue further pointed out that the assessee had picked up five comparables and in none of the cases, comparables engaged in similar business as that of the assessee. 11. The learned Authorized Representative for the assessee in rejoinder pointed out that in assessment year 2011-12, identical transactions were conducted by the assessee and the TPO had accepted the method applied by the assessee and also the aggregation of international transactions. 12. We have heard the rival contentions and perused the record. The limited issue arising before us is the appropriate method to be applied for benchmarking the international transactions entered into by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our international transactions i.e. purchase of components / raw materials, sale of water heaters and spare parts, product development and ancillary services and reimbursement of expenses for exports. The assessee had followed the TNMM method in respect of first three transactions and CUP method in respect of fourth transaction. No adjustment has been proposed by the TPO and the international transactions with the associate enterprises have been found to be at arm's length price. Similarly, in assessment year 2007-08, order of the TPO under section 92CA(3) of the Act is dated 29.10.2010 and for assessment year 2008-09 is dated 31.10.2011 and the value of the international transactions with regard to the arm's length price has not been disturbed by the TPO. The perusal of the assessment order passed for assessment year 2010-11, dated 20.01.2015, the TPO has referred to the five international transactions as reported by the assessee in its TP study report i.e. import of components and raw materials, import of water heaters and spare parts, export of water heaters and spare parts, payment of management fees and reimbursement of expenses. The first four transactions reported by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove said explanations have been rejected by the TPO/DRP without any basis, wherein similar explanation has been accepted by the TPO itself in all the other years. The conduct of the business and the products manufactured are identical in the year under consideration, when compared to the other years i.e. assessment year 2005-06, 2007-08, 2008-09 and 2010-11. In the entirety of the above said facts and circumstances, we are of the view that the adoption of TNMM method was the most appropriate method for benchmarking international transactions with its associate enterprises and we find no merit in the order of Assessing Officer in adopting CUP method to benchmark the international transactions with its associate enterprises. We hold that the TNMM method should be applied on aggregate basis for benchmarking international transactions of the assessee. 14. We find support from the order of Tribunal in John Deere India (P.) Ltd. Vs. DCIT (supra), wherein the Tribunal vide order dated 20.02.2015 had decided the issue on both the aspects i.e. where a method has been consistently followed by the assessee why the same should not be applied to benchmark its international transactions and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f there is no change of the facts in respect of the a particular issue and the Revenue has a particular approach or method to determine the taxability then there must be consistency and this view is expressed by the Hon'ble Supreme Court in the case of Radhasoami Satsang Vs. CIT 193 ITR 321 (SC). It is also certainly strange that in the A.Y. 2008 -09 the TPO has again accepted the TNMM method as an appropriate method which was adopted by the assessee and has not disturbed the result. We may refer here to the few decisions of the other Co-ordinate Benches in which it is held that when the facts involved are similar in various years and the Revenue has accepted the method adopted by the assessee in some years then there is no reason to take a different stand in the subsequent years without explaining the reasons how the facts in the said year are different than the preceding years: i. Alfa Laval (I) Ltd. 149 ITD 285 (Pune). ii. H.A. Shah & Co. Vs. CIT 30 ITR 618 (Bom). iii. Brintons Carpets Asia (P) Ltd. 139 TTJ 177 (Pune) iv. Drilbits International Pvt. Ltd. 62 DTR 171 (Pune). v. Agility Logistics (P) Ltd. 145 ITD 566 (Mum). vi. Skol Breweries Ltd. 153 TTJ 257 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facturing tractors. According to the TPO the said company cannot be considered as a comparable for determining the ALP in the case of the assessee. The TPO has also stated that KAMCL is a PSU and hence, on the point of management, the TPO expressed his reservation to accept the said company as a comparable. In respect of HMT Ltd., the TPO states that the said company is not only manufacturing of tractors but also engaged in other activity. The TPO has further noted that VST Tillers is also engaged in different business and therefore and cannot be accepted as a comparable. On one more comparable entity i.e. a Escorts Ltd. the TPO has stated that Escort is also selling farm equipments along with tractors and therefore the said company cannot be considered as a comparable entity. 20. The main objection of the assessee is on the approach of the TPO it is submitted that in the preceding year the TPO accept those companies as a comparable have determining the ALP when in that year also all the facts and figures were before him in the A.Y. 2006 -07 the TPO adopt the different approach. In respect of the reservation of the TPO to accept the Escorts as a comparable, the assessee's content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e export segment of the assessee company. It is also seen that the assessee has share in the sale of tractors in domestic market also. We, accordingly, hold that the transaction of export of tractors to its AEs is at ALP within the settle parameters. 15. The Tribunal further dealt with the second aspect of the issue i.e. the application of most appropriate method and observed as under:- "22. Let us deal with another objection of the TPO on the appropriate method whether the TNMM which is adopted by the assessee is a correct appropriate method or CUP which is applied by the TPO. This issue stands covered in favour of the assessee by the decision of the ITAT, Pune in the case of Drill bits International Pvt. Ltd. (supra). In the said case the TPO had rejected TNMM method and had computed the ALP by adopting the CPM. The assessee explained that there are various differences in the two segments in the form of marketing functions, credit risk, types of customers, etc. etc. and hence, the CPM could not applied. The Tribunal held that considering the differences in the functions performed and the assets utilized, suitable adjustments are not possible to be made and hence, the said case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see that major time of the junior and serior staff is utilized for the domestic segment since while dealing with various public sector units by the assessee several follow ups like collection of the orders, physical despatch of goods, follow up for the payment etc., are required to be done, hence major part of the total expenditure is to be allocated to the domestic unit and balance to the export segments. We are thus of the view that learned TPO was not justified in rejecting such submission of the assessee treating the same as having no basis. In our view, the apportionment of these costs is justified because major time of the employees is devoted towards the domestic segment. We also find substance in the submission of the learned Authorised Representative that assessee has also to incur selling and administrative expenses, freight expenses, bank interests etc., which cannot be ignored as ultimately the income-tax is levied on net profit and therefore, comparison of the net profit of the domestic export segment is more proper. The assessee at page No. 141 of the paper book has given working of the net profit of the two divisions as per which, the net profit of the domestic segme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dopted TNMM but the said method was rejected by the TPO, and TPO substituted CPM in the place of TNMM. When the matter reached before the Tribunal it is held that CPM cannot be applied since there were various differences in the export segment and domestic segment such as market functions, geographic difference, volume difference, credit risk, related party transactions etc. In our opinion the said principles are clearly applicable in the present case. As we have already observed that the assessee has also share in the domestic market and we again compared the parameters of the domestic market with the export market as there is a difference in the export segment and domestic segment on account of credit risks, marketing, warranty, etc. etc. We, therefore, hold that on principles as well as on the rule of consistency, the TPO/DRP are not justified in holding that the CPM is an appropriate method for determining the ALP in respect of export of the tractors to the AEs and we approve TNMM as a most appropriate method adopted by the assessee for determining the ALP. We also hold that even after excluding KAMCL the average operating profit margin of the 7 companies are at 5.71% as agains ..... X X X X Extracts X X X X X X X X Extracts X X X X
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