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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 ..... r.The assessee filed objections before the DRP.The DRP partly upheld the orders of the AO/TPO.In pursuance of the directions of the DRP,the AO completed the assessment u/s.143 (3)r.w.s.144C of the Act,on 29.01.2016,determining the income of the assessee at Rs. 50.99 Crores. 2.Assessee,a 100% subsidiary of the Nissei ASB Machine Co.Ltd.Japan(ASBJ),is engaged in manufacturing of injection stretch blow-moulding machines, moulds and parts, components and 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 Rs. 50.99 crores. 3.First effective ground of appeal (GOA1-10)is about making an upward adjustment of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 further argued that the AE-business should be compared with the companies who had similar function profile as that of the assessee vis-a-viz its AE business,that it had conducted a search for comparables engaged in contract manufacturing activities of machi - nery/equipments,that it had identifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk 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 foreign exchange fluctuation risk and other normal risk associated it other manufacturing activities,that at best the AE could be considered a bulk customer, that the sales made to non- AE.s were retail sales, that in retail sales it was involved in marketing as well as designing of the moulds, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 recognised that markets of the AE -segment(export) and the non-AE segment (domestic)were completely different,that even then they compared those segments,that it was an entrepreneur in India and sold its goods directly to its customer, that the pricing would be based on completion scenario in the country, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 upward adjustment of Rs. 27.31Croes,that he gave an allowance of 3% on account of 'delay in receivables and after sales services and other efforts made under the non- AE business',that the assessee filed additional evidences before the DRP and argued that it was a contract manufacturer or akin to contract manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions 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 agreement with its AE for supply of goods and working capital adjustment is required to be made.All these factors would affect the ALP of the transactions.Considering the peculiar facts and circumstances of the case,we are of the opinion that the matter needs further verification and investigation.So,in the interest of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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