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TMI Blog2017 (2) TMI 1012X X X X Extracts X X X X X X X X Extracts X X X X ..... n independent assessee,in similar circumstances,had claimed that adjust -ment on account ‘delay in receivables’ ‘geographical factors’ etc. was approximately 3% or 8%. No judicial forum has adopted the said percentage on account of delay in receivables/ bulk manufacturing/ geographical location. Even if they had some material supporting their stand,same has not been brought on record. Thus, the order passed by them is a non-speaking order and it falls under the category of an order passed without assigning reasons. Such orders cannot be endorsed. A comparable cannot and should not be rejected only on the basis of loss suffered by it for a particular year. A persistent loss making comparable can be excluded. But, in the case under consideration,the comparable had not suffered loss year after year. After admitting that internal TNMM could not have been applied straight away, the DRP should have deliberated upon the issue of determination of ALP in a more rational manner. But,it just adopted the easiest route- an ad hoc allowance. It is a fact that more than 60% of the sales turnover of the assessee is with non- AE.s and the profit ratios of non-AE.s and AE.s cannot be same. Beside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub assemblies of machines and moulds.During the assessment proceedings, the AO found that the assessee had entered into International Transactions (IT.s) with its Associated Enterprises (AE.s).He made a reference to the Transfer Pricing Officer (TPO) to determine the Arm s Length Price(ALP)of the transactions. After receiving the order of the TPO,the AO issued a draft order including the adjustment suggested by the TPO.The assessee filed its objections before the DRP.As per the directions of the DRP,the AO completed the assess - ment on 29/01/2016, u/s.143 (3) r.w.s.144C (13) of the Act.He determined the income of the assessee at ₹ 50.99 crores. 3. First effective ground of appeal (GOA1-10)is about making an upward adjustment of ₹ 14.13 crores to the total income of the assessee.During the Transfer Pricing (TP) proceedings, the TPO found that the assessee had entered into following IT.s.with its AE.s : SN. Description Method Amount (in Rs.) 1. Purchase of raw material TNMM 11,36,22,102/- 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE and non- AE businesses.It filed detailed note about the risk profile of both the businesses and submitted that in the case of AE-business it was not the seller of the products,that it was rather a provider of manufacturing services conducted as per the AE s order, specifications and schedules with limited risk,that in most of the cases the AE.s would undertake the painting additional customisation of the semi-finished goods as per the requirements of the end customers of the AE.s,that in case of non-AE business it operated as an entrepreneur to sell its products to the end users,that price of the products for non-AE business solely depended on the market acceptability and various risk undertaken by it,that in case of AE business the assessee was akin to a contractor manufacturer or a limited risk manufacturer ,that the business model in both the cases were quite different, that internal TNMM should not have been applied for determining the ALP considering the peculiar facts of the case .The assessee relied upon the case of Wrigley India Pvt. Ltd. (ITA/5648.5649 and 5650/Del/12 , Piagio Vehicle Pvt.Ltd.(ITA/1480/PN/2010);Drilbits International Pvt.Ltd.(ITA/1361/PN/ 2010).It was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the contention of the TPO considering internal TNMM was not correct. The assessee referred to the case of Thyssen Krupp Industries India Pvt.Ltd.(TS-721-ITAT-2012 )and submitted that AE-segment should not have been compared with the non AE segment, that it would be appropriate to bench mark the AE segment with external contract manufacturing entities. 4.1. After considering the available material,the DRP held that the TPO had rightly rejected the transfer pricing study conducted by the assessee, that the AE and non-AE transactions of the assessee were not similar and should not have been bundled together,that application of TNMM at entity level did not properly benchmark the AE transactions,that the assessee had failed to prove that it was engaged in contract manufacturing for its AE.s, that no such claim had been made by it in the study report,that it was not entitled to any fixed remuneration on cost plus basis, that examination of the agreement with the AE showed that sale price of goods were fixed on mutual negotiations and same were valid for a period of 1 year,that the assessee would bear risks involved in fluctuation of raw material prices,that it would also bear f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he segments,that in the non-AE segment products were sold to the customers, that in the AE-segment the assessee would be selling services,that both the segments were different at the market level that regulated their respective prices and the structure which determined their remunerations, that the revenue authorities had compared both the segments stating that there was no difference between them , that TPO and the DRP had provided adjustments for various differences which they deemed were existent between those twe segment,that the TPO had adopted the internal TNMM approach considering the fact that profit margin of non-AE segment were higher than AE-segment,that TPO had not considered the fact that non-AE-segment too had controlled transactions like royalty and purchase payment,that there was glaring difference in the FAR of the AE and the non-AE segments,that the AE segment carried out only four functions whereas the non-AE segment had to undertake 13 functions, that a segment which would bear only limited risks could not be compared to a segment which would bear all risks,that a contract manufacturer could not be compared with an entrepreneur,that the revenue authorities had r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .) Ltd. (133ITD 543). The Departmental Representative(DR)argued that the assessee had not characterised itself as contract manufacturer in the TP study ,that it had mentioned itself as akin to contract manufacturer, that non AE segment had risks like marketing,designing,bad debt expenses which increased the cost and reduced the profit margin of the assessee , that the said factors amounted to automatic grant of adjustment in non AE segment, that onus was on the assessee to provide data if he wanted certain adjustment , that the assessee ahd not brought on record anything to prove that it was semi finished goods to two of its AE.s, that non AE segment could be sued to bench mark the AE segment transactions, that the assessee had not prepared separate segments for commissioning after sales marketing designing any other activities,that the AE was not having any other significant value added functions. 6. We have heard the rival submissions and perused the material before us.We find that the assessee was supplying goods to its AE.s and non-AE.s,that assessee had considered the entity level data for determining the ALP of the IT.s.,that the TPO applied internal TNMM and made an u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not been brought on record.Thus,the order passed by them is a non-speaking order and it falls under the category of an order passed without assigning reasons.Such orders cannot be endorsed.As a representatives of the State,they are supposed to raise and collect only Due taxes from the subjects.As per the scheme and provisions of the Act,due taxes cannot be dete -rmined by making adhoc allowances/disallowances.Before the DRP,the assessee had filed a list of comparables and it was not considered in proper perspective. A comparable cannot and should not be rejected only on the basis of loss suffered by it for a particular year.A persistent loss making comparable can be excluded.But, in the case under consideration,the comparable had not suffered loss year after year.After admitting that internal TNMM could not have been applied straight away,the DRP should have deliberated upon the issue of determination of ALP in a more rational manner.But,it just adopted the easiest route- an ad hoc allowance.It is a fact that more than 60% of the sales turnover of the assessee is with non- AE.s and the profit ratios of non-AE.s and AE.s cannot be same. Besides,the assessee had entered in to an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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