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TMI Blog2015 (12) TMI 684X X X X Extracts X X X X X X X X Extracts X X X X ..... report Erred by not accepting the data pertaining to EOU operations provided in the transfer pricing study report by Appellant and by not agreeing to the transfer pricing study conducted for benchmarking the international transactions pertaining to domestic operations using combined transaction approach under TNMM. International transactions pertaining to EOU operations 3. Non applicability of transfer pricing provisions to EOU operations of the Appellant Erred in making an adjustment to the international transactions of the Appellant without considering the fact that the transfer pricing provisions should not apply in relation to EOU operations of the Appellant since the same is entitled to tax holiday under section 10B of the Act. 4. Stovec Industries Limited is a comparable company Erred by concluding that Stovec Industries Limited is not comparable to the Appellant and hence should be excluded for computing the operating margins of comparable companies for arriving at arm's length price in relation to the international transactions pertaining to EOU operations. 5. Use of multiple year data Erred in considering the operating margins earned by comparable com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions pertaining to domestic operations excluding trading activities Erred on the facts and in law by not considering the Appellant's contention made on a without prejudice basis of benchmarking the international transactions pertaining to domestic operations excluding trading activities, which as proposed by TPO cannot be categorized under business support services, using TNMM as most appropriate method. 13. Benchmarking of international transaction pertaining to import of trading spares Erred by comparing the international transaction pertaining to import of trading spares with controlled transactions of the Appellant itself and benchmarking the said transaction using Resale Price Method ('RPM') as the most appropriate method and also by not agreeing to the fact that the international transaction pertaining to import of trading spares forms part of the domestic operations. 14. Applicability of +/- 5% range Erred by computing the arm's length price of the international transactions pertaining to receipt of commission and import of spares for trading as the mean arm's length price determined, without taking into account the lower 5% variation from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding that Stovec Industries Limited was not comparable to the assessee and hence should be excluded for computing the operating margins of comparable companies for arriving at arm's length price in relation to the international transactions pertaining to EOU operations. The assessee has identified Stovec Industries Limited as one of the comparables in its Transfer Pricing Report for F.Y. 2005-06. However, the same was rejected for the reasons that; a) Both companies were manufacturing differently b) Stovec was a loss making company c) There were different risk perceptions / risk assumed The same has been mentioned in the show cause notice. Stovec was in manufacturing of rotary screen printing machine components and spares while the assessee is in the business of manufacturing of machine modules required for machine use in printing packaging and ancillary to packaging industries and also that functions of Bobst company is of module / part of manufacturing of machines and sell its products to associate enterprises and not to ultimate customers as against Stovec Industries Limited which sells its products to ultimate products. 4.1 Further, the Transfer Pricing Officer (in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ox and gear motor drive system segment as taken by the assessee in its TP study. The assessee further has submitted that in assessee's own case for A.Y. 2009-10, the DRP held industrial machinery segment of Stovec as functionally comparable to the assessee. 4.3 We are aware that every year is independent, but the decision taking in similar set of circumstances has strong persuasive value of other years. In A.Y. 2009-10, the DRP has directed to take industrial machine segment of Stovec Industries Limited for comparability. There is nothing on record to suggest that there is functional difference in case of Stovec Industrial Limited for the year under consideration i.e. A.Y. 2006-07 with that of A.Y. 2009-10, so the TPO is directed to take industrial machinery segment of Stovec Industries Limited for comparability. He has directed accordingly. 5. Coming to the margins of Stovec Industries Limited. The assessee in its TP study report considered weighted average margin of three years margins as (-) 1.10% and submitted single year margin for F.Y. 2005-06 as (-) 1.81% to the TPO. The TPO allowed working capital adjustment sought by the assessee. The workings for computing the working c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under the provisions of rule for following reasons. (i) Provisions of clause (d) of sub-rule 2 of Rule 10B states that comparability of international transaction with uncontrolled transactions shall be justified to reference to conditions prevailing in the market in which the respective parties to the transaction operate and also the overall economic development and (ii) Rule 10B(4) specifies that most appropriate data to be used (which must be available when rules are to be complied with) shall be the data relating to financial year in which transaction is entered into and where relevant data relating to two years preceding such financial year. This also supports by OECD guidelines and Transfer Pricing Rule of other countries. 5.2 In this regard, the assessee has placed reliance on various judicial pronouncements to support the fact that a company can be rejected as persistent loss maker if it has incurred losses for more than 3 years. In the case of Quark Systems (P) Limited vs. DCIT (2010) 38 SOT 307 (Chd.) (SB) observed that merely because a comparable is making loss, it cannot be excluded from the list of comparable for the purpose of computation of arm's length price. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparison in TP study for necessary, which is profit making one, there is a need for more attention qua the conditions prescribed in clause (a) to (d) of Rule 10B(2) of IT Rules, 1962 for an ultimate judgment of comparability of impugned transaction. So, the persistent loss making means continuous loss making for more than 3 years but in the case before us i.e. Stovec has earned a margin of 2.39% in comparable segment in F.Y. 2003-04. Hence, it could not be considered as loss making, so the same should be excluded for computing operative margin of comparable companies for arriving at ALP in relation to international transactions pertaining to EOU operations. The Assessing Officer is directed accordingly. 6. The next issue as raised by ground No.11 is with regard to commission on marketing of machines and commission of marketing of spares. The ground Nos.11, 13 and 2 are dealt as under: 6.1 The assessee has earned commission on sale of machinery at 5% while on spares at 15%, so the TPO applied 15% of commission of the spares to machinery while making adjustment accordingly. In this regard, the learned Authorized Representative has pointed out that this issue has been discussed a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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