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TMI Blog2016 (4) TMI 377X X X X Extracts X X X X X X X X Extracts X X X X ..... MM as MAM for determination of ALP. - Decided against assessee Rejection of the Multi Year Data adopted by the assessee while computing the margins of the comparables and considering the current year data by the TPO for the purpose of determining the ALP - Held that:- 3 Rule 10D(4) further states that the information and documents specified under sub-rules (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date. Therefore, it is revealed by the provisions of transfer pricing that unless and until the current year data does not gives a true and correct picture of the uncontrolled comparable price more than one year data are not required to be considered. Only in the case when the current year data does not give a true and correct picture and more than one year data not being more than two years prior to the financial year can be considered if such data reveals the fact which have an influence on the determination of transfer pricing. In the case on hand, the assessee has not brought on record any fact to show that the current year data are not reflecting the correct uncontrolled comparable price. Therefore, this ground of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in not maintaining the consistency of applying the PLI while computing the ALP in respect of the international transactions. In view of the above facts and circumstances of the case, we set aside this issue to the record of the TPO for applying the uniform PLI as applied in the case of mass production segment as well as in the Assessment Year 2008-09. - I.T.(T.P.) A. Nos.1019 & 1020/Bang/2014, I.T.(T.P.) A. No.974/Bang/2014 - - - Dated:- 24-2-2016 - SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER For The Assessee : Shri Sampath Raghunathan, Advocate. For The Revenue : Mrs. Neera Malhotra Ms.S. Praveena. ORDER Per Shri Vijay Pal Rao, J.M. : These are cross appeals for the Assessment Year 2008-09 and appeal by the assessee for the Assessment Year 2009-10 against composite order dt.29.05.2014 of the Commissioner of Income Tax (Appeals)-IV, Bangalore. 2. For the Assessment Year 2008-09, the assessee has raised the following grounds :- 1 Assessment and reference to Transfer Pricing Officer are bad in law. a) The order issued by the Deputy Commissioner of Income-tax - Circle 11(3) [ AO ] under section 143(3) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in law in rejecting one method [ Cost Plus Method ] and selecting another method [ Transactional Net Margin Method ] as the most appropriate method without providing cogent reasons to the Appellant for rejecting the method adopted by the Appellant. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. c) The AO/TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant s analysis with fresh benchmarking analysis on his own conjectures and surmises and introducing new comparable companies, without providing an opportunity to the Appellant. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. d) The AO/ TPO erred in rejecting the segment-wise profit and loss for FY 2007-08. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. 3 Erroneous data used by the AO/TPO a) The AO/TPO erred in law and the Ld. CIT(A) further erred in confirming use of data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law and the Ld. CIT(A) f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to transfer pricing matters made by the AO / TPO and upheld by the Ld. CIT(A) is bad in law and liable to be deleted. 3. Ground No.1 is general in nature and no argument has been addressed by the learned counsel for the assessee. Accordingly, no specific adjudication is required in respect of Ground No.1. 4.1 Ground No.2 is regarding rejection of the Transfer Pricing analysis as well as Cost Plus Method (in short CPM ) and adopting another method being TNMM as Most Appropriate Method (in short MAM ) by the Transfer Pricing Officer (TPO). The assessee, Essilor Manufacturing India Pvt. Ltd. (EMIL) is engaged in the business of manufacture of plastic-opthalmic lenses. The assessee is a wholly owned subsidiary of Essilor International S.A., France. The assessee is manufacturing lenses and selling the same to its foreign group companies as well as marketing and distribution to the group companies in India. The raw material for manufacturing of ophthalmic lenses is imported by the assessee from its overseas group companies. Thus the assessee is purchasing the raw material from its Associated Enterprises (AEs) and also selling the plastic ophthalmic lenses to its AEs as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jai Mata Glass Co. Ltd. 9.79 15.88 21.72 17.50 3. La Opala R G Ltd. 44.16 43.24 41.35 42.84 4. Techtran Polylenses Ltd. 52.54 55.34 54.62 54.17 5. Triveni Glass Ltd. 22.22 16.09 NA 20.23 Arithmetic Mean 34.83 The TPO found that only two of them namely GKB Opthalmics Ltd. and Techtran Polylenses Ltd. are functionally similar as they are in the business of manufacturing of lenses and 3 others are in the business of manufacturing of glass for commercial purpose. Accordingly the TPO rejected the three of the comparables selected by the assessee as under : 1. Jai Mata Glass Co. Ltd. 2. La Opala RG Ltd. 3. Triveni Glass Ltd. The TPO thereafter carried out a fresh search and selected two more comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacture functions or in the case of intra group provisions of services. The method usually assume the incurrence of low risk of cost will then be better reflected the value being added and hence the market price. The CPM is also generally used in transactions involving by contract manufacturer, toll manufacturer or a low risk assembler which does not own product intangible as incurred little risk. Thus the learned Authorised Representative has submitted that in view of the decision of the co-ordinate bench in the case of GE Medical Systems Pvt. Ltd. (supra), the orders of the authorities below in rejecting the CPM as MAM be set aside and allow the CPM as MAM for determination of ALP in view of the international transactions. 4.3 On the other hand, the learned Departmental Representative has relied upon the orders of authorities below and submitted that the TPO has specifically pointed out that the assessee has categorized certain portions of the expenses as unapportionable whereas these expenses pertains to the assessee and were required to be apportioned between AE and non-AE sales. Further, the assessee is not a contract manufacturer but the assessee is purchasing the raw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral in nature without any particulars on the three comparable companies chosen by the TPO. 50. One of the pleas raised by the Assessee was that functional similarity is to be first seen before choosing an appropriate method and that the TPO in choosing CPM has given weightage to product similarity rather than functional similarity. The Assessee had further pointed out that the comparable chosen by the TPO were manufacturing medical consumables viz., disposal syringes, disposable sutures, disposable needles etc., and that the same cannot be compared with contract manufacturing of tubes, inserts, detectors, tanks and other parts and accessories for medical diagnostic imaging equipment which the Assessee manufactures and which are incorporated by the AE into equipment which are capital goods. On the above submission, the learned DR has submitted that it cannot be said that product similarity has no relevance. Product similarity is also important. If there is no product similarity then even though there may be functional similarity then CPM may not be the right method. The conclusions of the CIT(A) in this regard are found to be correct in the present case. The TPO in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of the assessee. Accordingly, we uphold the orders of the authorities below on this issue in rejecting the CPM as MAM and adopting the TNMM as MAM for determination of ALP. This ground is decided against the assessee. 5.1 Ground No.3 is regarding rejection of the Multi Year Data adopted by the assessee while computing the margins of the comparables and considering the current year data by the TPO for the purpose of determining the ALP. 5.2 At the time of hearing, the learned Authorised Representative of the assessee has not advanced any argument on this ground. However, it is settled proposition of law as well as the mandate of the provisions of transfer pricing that so far as it is possible the current year data of the comparables are to be used for the purpose of determination of ALP. It is provided under Rule 10B(4) of the I.T. Rules that the data to be used in analyzing the comparability of the uncontrolled transaction shall be the data relating to the financial year in which the international transaction has been entered into. Only as an exception the data relating to not more than two years prior to the such financial year may be considered, if such data rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion calculated on straight line method is higher than the comparable companies and accordingly a suitable adjustment is required to be made for the purpose of determination of ALP. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of ACI Worldwide Solutions Pvt. Ltd. Vs. DCIT in IT(TP)A No.652/Bang/2012 as well as in the case of 24/7 Customer.com Vs. DCIT in IT(TP)A No.227/Bang/2010. 6.3 On the other hand, the learned Departmental Representative has submitted that there is no provision under the Rules that permits any adjustment for depreciation. Further, the assessee did not claim the adjustment on account of depreciation before the TPO and what was claimed by the assessee is only the capacity utilization adjustment and not the depreciation adjustment. The CIT (Appeals) has not discussed any such objection raised by the assessee. Thus the learned Departmental Representative has submitted that in the absence of examination of this claim by the TPO, it cannot be entertained at this level. 6.4 We have heard the rival submissions as well as considered the relevant material on record. The assessee has claimed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral Optics (Asia) Ltd. 21,660,000 23.69 12.71 3. Techtran Polylenses Ltd. 54,854,370 22.40 10.66 4. GKB Vision Ltd. 60,068,894 20.39 2.34 Average 33,348,938 19.89 7.60 Essilor India (without capacity adj.) 28.04 22.85 6.6 Though at the first look it is apparent that the depreciation expenditure of the assessee is much higher than the comparable companies, however, the exact figure has to be determined not by taking into consideration the depreciation expenditure alone but all other related expenses like lease rental if any paid by the comparable companies on the leased assets instead of using its own assets as well as maintenance cost of the assets. It is pertinent to note that there is a direct but opposite relation between the depreciation cost and maintenance cost of the asset. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd as under : a) Rejection of General Optics (Asia) Ltd. from the set of comparable companies selected by the learned Transfer Pricing Officer. b) Claim for grant of depreciation adjustment; and c) Claim for grant of capacity utilization adjustment. 8.2 We have heard the rival submissions as well as considered the relevant material on record. The learned Authorised Representative has submitted that the TPO has selected two new comparables including General Optics (Asia) Ltd. which is not functionally comparable with the assessee. He has further submitted that this company serves the industrial consumers and he has not indicated any personal care segment. The learned Authorised Representative has submitted that this company has been manufacturing and exporting precision optical system and components. It also delivers integrated solutions to the clients in the field of design , build and test complex, opto-mechanical and opto-electronic systems. It also caters the need of defense and armed forces as well as atmospheric science products and space remote applications. The learned Authorised Representative has submitted that this company is engaged in the multiple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant facts regarding the nature of the business activity of this company as well as the products manufactured by this company. From the Schedule 16 of the profit and loss account, the product description given includes pre-optic component, instrument assemblies/sub-assemblies. The raw-material consumed by this company includes glass, lenses and metals. Thus it is clear that this company is not in the manufacturing activity of optical, plastic lenses of human care but the product of this company is catering to the needs of the industry, armed forces and other organizations in the field of space applications, night vision equipments, etc. Accordingly, in the facts and circumstances of the case, we admit the additional ground raised by the assessee and set aside the issue of functional comparability of this company to the record of the Assessing Officer/TPO for proper examination and verification of the issue and decide after considering the relevant facts as well as the objections of the assessee. 9. For the Assessment Year 2008-09, the only issue raised in the revenue s grounds is regarding the directions of the CIT (Appeals) in allowing the working capital and risk adjustment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustments, i.e. working capital adjustment and risk adjustment while arriving at the arm s length price. In this case, the assessee in his transfer pricing study, has not made any working capital adjustment or risk adjustment. The Assessing Officer has, in fact, granted working capital adjustment. When the assessee is confronted with the possible transfer pricing adjustment due to change of some comparables and addition of certain other comparables by the TPO, this claim of risk adjustment is made by the assessee. Though, in principle, on the facts and circumstances of the case, as the assessee has not worked out the risk adjustment and as the Assessing Officer has already allowed 0.47 percent as working capital adjustment, we are of the opinion that no further adjustment is necessary. 10.2.2 On the basis of the aforesaid line of reasoning, the TPO is directed to grant working capital adjustment, and thereafter, there is no necessity of providing any further adjustments. It is ordered accordingly. Thus it is clear that while issuing the directions to TPO the CIT (Appeals) has followed the decision of the Mumbai Bench of this Tribunal in the case of Exxon Mobil Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benchmarking analysis and comparable companies selected by the Appellant in the transfer pricing study report maintained as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 [ the Rules ] without considering the functional and risk profile of the Company. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. b) The AO/ TPO erred on facts and in law in rejecting one method [ Cost Plus Method ] and selecting another method [ Transactional Net Margin Method ] as the most appropriate method without providing cogent reasons to the Appellant for rejecting the method adopted by the Appellant. The Ld. CIT(A) erred in upholding the actions of the AO/TPO. c) The AO/TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant s analysis with fresh benchmarking analysis on his own conjectures and surmises and introducing new comparable companies, without providing an opportunity to the Appellant. The Ld. CIT(A) erred in upholding the actions of the AO/ TPO. d) The AO/TPO erred in selecting comparables operating under a dissimilar functional profile and earning abnormal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 Relief a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. c) Further, the Appellant prays that the adjustment in relation to transfer pricing matters made by the AO / TPO and upheld by the Ld. CIT(A) is bad in law and liable to be deleted. 11.1 The grounds raised for the Assessment Year 2009-10 are common to that of the Assessment Year 2008-09 except the Ground No.2(g) regarding incorrect profit level indicator in case of reference (Rx) segment. 11.2 We have heard the rival submissions as well as considered the relevant material on record. For the Assessment Year 2009-10, the assessee has carried out the manufacturing activity in two segments i.e. (i) mass production segment and (ii) reference manufacturing segment. While computing the ALP and making adjustment the TPO has applied operating profit/sales in respect of the mass production segment but applied operating profit/op ..... X X X X Extracts X X X X X X X X Extracts X X X X
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