9911796707
TMI Blog2018 (4) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... plies with the Arm's Length Standard for the year under consideration. D.R. merely relied upon the Auditor's Note in the Accounts, which, according to assessee, is not relevant because from the accounting perspective, it is one line of business and accordingly, assessee was not required to disclose segmental reporting in its Note to the Accounts. The assessee filed the segmental accounting on both the segments before the authorities below, which have not been disputed by them. Therefore, there is nothing wrong in the analysis submitted by the assessee for the purpose of benchmarking of ALP. Both the segments cannot be clubbed together to determine the ALP. CIT(A), even on the alternative point considered that even if the TPO's approach of clubbing of both the segments is to be followed for the year under consideration and certain comparables which are not relevant to the issue are excluded, the assessee's would be entitled for full relief on account of T.P. adjustment. The reason given by the CIT(A) have not been disputed by the Ld. D.R. through any evidence or material on record. CIT(A) also considered that manufacturing activity in the IMFL segment largely comprises of contract m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,07,791/- 4. Reimbursement of expenses paid 225,976/- 5. Reimbursement of expenses paid 503,353/- 2.1 The A.O. then referred assessee's case to TPO under section 92CA(1) of the I.T. Act, to determine the ALP in respect of these international transactions and an adjustment of ₹ 2,31,23,800/- was made by the TPO in relation to the international transactions pertaining to purchase of CAP from A.E. While so holding, the TPO - ♦ Clubbed the Bottled in India Scotch ("BIIS") and India Made Foreign Liquor ("IMFL") segments and compared the net profit margin (NPM) of the combined manufacturing operations of the Appellant with those of broadly comparable independent companies. ♦ The TPO also rejected 5 companies out of the set of 12 comparable companies selected by the Appellant for benchmarking the above transaction. ♦ Used the final year (FY 2004-05) financial data for the purpose of arriving at an arm's length price for the above transaction. 2.2 No adverse inference has been drawn by the TPO with regard to international transactions related to market support services and reimbursement of expenses. 3. The assessee aggriev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MFL is sold by the appellant under the brand names Old Smuggler Rum, Old Smuggler Gin and Curtis No. 1. The IMFL is also manufactured and bottled by the Appellant on a contract basis for Seagram Manufacturing Private Limited ("SMPL") under a Technical and Marketing Assistance Agreement ("TMAA"). The IMFL so manufactured and bottled is sold by the appellant under the latter's brand names (Royal Stag, Imperial Blue, and Fling Vodka). For this activity, the Appellant receives income in the form of a fixed fee on number of cases manufactured and bottled for SMPL. 3.3 It was further explained that for the purpose of benchmarking of international transactions pertaining to purchase of CAP from A.E, assessee has segregated its manufacturing operations into two different segments on the basis of their functional differences. This was also stated in the assessee's notes to accounts in the Audit Report. (1) Bottled in India Scotch ("BIIS") and (2) Indian Made Foreign Liquor ("IMFL"). The key indicative difference between the two business segments summarized as below : ♦ The raw material imported by the appellant is the CAP which is mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that are not similar to the controlled transactions under examination should be excluded from the comparison. ♦ The TNMM compares the profitability of the controlled transaction, measured in relation to (1) costs or sales or (2) assets, to the profitability of the uncontrolled transaction in similar circumstances. The focus is on transactions rather than business line or the operating income of the company. ♦ The expression "in relation to" means in connection with and implies connection between a thing in relation to something else. Thus, there should be relationship between profit and assets or between profit and costs or sales. That relationship may be expressed as a ratio between net profit to assets, or between profit and costs or sales. ♦ Reliance is also placed on the decision of E-gain Communication (P) Ltd. v. ITO [2008] 23 SOT 385 (Pune) in which it was held as under : "It is thus evident from that both OECD Guidelines and US regulations insist on necessary adjustments for difference on issues affecting profitability. The transactional net margin method may afford practical solution to otherwise insoluble transfer pricing problems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s July, 2010, which advocates the same philosophy for application of TNMM. Para 3.9 of OECD guidelines reads as follows : "3.9 Ideally, in order to arrive at the most precise approximation of fair market value, the arm's length principle should be applied on a transaction-by-transaction basis." In addition, Para 2.58 of the OECD Guidelines states: "2.58 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction" 3.6 The assessee again relied upon the order of the Pune Tribunal in the case of E-gain Communication (P.) Ltd. (supra), in which it was further held "if the differences are such that they cannot be subjected to evaluation, then transaction may have to be eliminated for the purposes of comparison." It was also submitted that ITAT, Mumbai Bench has affirmed in the case of Addl. CIT v. Tej Diam [2010] 37 SOT 341 that "while applying TNMM, comparison of only net profit margins realised by an enterprise from an international transaction can be considered while making comparison with the profit margin of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Profit 62,588,748 NPM (percent) (Net Operating Profit/Total Income) * 100 12.21% 3.9 The assessee follows a consistent approach for segmentation of expenses between the segments pertaining to BIIS and IMFL. Segmental profit and loss account of the assessee, along with the underlying allocation keys used for segregating revenue and expenses for the year under consideration were filed. The expenses have primarily been allocated either on the basis of gross revenue in the respective segments i.e., Sales Ratio or number of cases produced i.e., Bottling Ratio. Further, direct expenses that can be specifically identified with business segments have been charged accordingly on an actual basis. The assessee further submitted that the allocation of keys used for segregation are robust and applied consistently on a year-on-year basis. The TPO, while undertaking the impugned transfer pricing adjustment on account of international transaction pertaining to purchase of CAP, clubbed the BIIS and the IMFL (Domestic) segments of the assessee. The entity wide NPM of 6.02% arrived in the manufacturing segment (BIIS + IMFL) was compared with the arithmetic mean of the year (F.Y.2004-05) updated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o arrive at a conclusion that the process of manufacturing of IMFL also requires Concentrate Alcoholic Beverage (CAB) and accordingly rejected the segmental approach followed by the assessee on the pretext that there is no international transaction comprised in the domestic segment. It was submitted that the Accounting Standard is not a governing law for an economic analysis as warranted for transfer pricing purposes. From the perspective of AS-17, the assessee is engaged in the manufacture and sale of alcoholic beverages. From the accounting perspective it is one line of business and accordingly, the assessee is not required to disclose segmental reporting in its notes to the accounts. However, this does not preclude the assessee from preparing internal robust segments from an economic and a transfer pricing perspective as undertaken by the assessee in its transfer pricing study for the year under consideration. The assessee has also quoted the following example : "Company 'A' is the manufacturer of televisions and manufactures two types of television sets (a) Flat CRT color TV's 51' (b) Flat CRT color TV's 29'. For manufacturing of Flat CRT color TV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionale for clubbing the two segments just because the appellant has not drawn any segmental accounts as prescribed under the Accounting Standard (AS) 17 (Segment Reporting), in my view, is not appropriate. AS 17 cannot be said to be a governing law for the economic analysis to be undertaken for transfer pricing purposes. 20. The TPO appears to have been mislead by the notion that the appellant's IMFL segment also includes international transaction comprising of import of CAP. There is no concrete evidence that the TPO could place on record in this regard. 21. I have also considered the submissions of the appellant. The appellant has been able to aptly distinguish the two business segments (i.e. BUS and IMFL). The international transaction undertaken by the appellant only with respect of its BUS segment. Further, the allocation keys used for segregation of BUS and IMFL segments are robust and applied consistently on a year-on-year (YOY) basis by the appellant. This has been discussed in para 7.71 and 7.72. 22. I am of the opinion that the appellant's submissions that while applying TNMM, comparison of only net profit margins realized by an enterprise from an internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited 2.01 4 IFB Agro Industries Limited 2.06 5 Radico Khaitan Limited 6.73 6 Sri Rama Distilleries Limited 34.08 7 Tilaknagar Industries Limited 4.20 8 Arthos Breweries Limited X 9 Blossom Industries Limited X 10 Khoday India Limited X 11 Rajasthan State Ganganagar Sugar Mills Limited X 12 Thiru Arroran Sugars Limited X Arithmetic Mean 6.80 Transfer Pricing Adjustment Particulars Amount (Rs.) Operating Income (Manufacturing - BUS + IMFL) 132,04,08,637 Operating Expenditure 124,08,04,645 Net Profit 7,96,03,992 NPM % 6.02% Revenue related to manufacturing 132,04,08,637 NPM at 6.80% 8,97,87,787 NPM earned 7,96,03,992 Difference (Transfer Pricing adjustment) 1,01,83,795 23. Exclude the outliers. The appellant also contended that the following comparable companies should be excluded from the final set as these were outliers and represent extreme positions. The inclusion of comparables with extreme results (heavy losses or extraordinary profits) tends to skew the arithmetic mean of the comparable set and distort the arm's length results. The appellant's NPM of 6.02% will accordingly be above the arm's length margin o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05* ALP (+/- 5 percent tolerance band) 77.63 Value of Intl. Transaction 75.04 Net profit margin to an appropriate base 26. The appellant submits that the TPO erred in not considering the actual turnover of its IMFL operations pertaining to contract manufacturing and bottling for a third party, namely Seagram Manufacturing Private Limited ("SMPL") under the Technical Marketing Assistance Agreement ("TMAA"), The appellant highlighted that that the manufacturing activity in the IMFL segment largely comprises of contract manufacturing and bottling of liquor for SMPL under a TMAA for which it receives a fixed return per case manufactured. Accordingly, the net profit margin computed by excluding the pseudo turnover and taking into account the true turnover for bottling activities undertaken for SMPL, would work out at 9.82 percent which is more than 7.78 percent arm's length NPM arrived at by the TPO. The appellant's also filed detailed working calculations in relation thereto. Since Issue No. 1 has already been decided in favour of the appellant based on which the appellant is entitled for a full relief on account of transfer pricing adjustment, Is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the Tribunal observed that "TPO in his order contended that Audited Annual Reports of the assessee did not contain any segmental reporting and rejected the audited segmental filed during the course of transfer pricing assessment proceedings. However, failed to appreciate that assessee had already filed segmental accounts as part of its T.P. documentation. The segment, if any, ought to have been restricted to the international transaction under review". The Tribunal held in this case as under : "Where in course of transfer pricing proceedings, assessee had furnished segmental reports, TPO could not have adopted entity level reports for benchmarking international transaction." 6. We have considered the rival contentions and perused the material on record and do not find any justification to interfere with the order of the Ld. CIT(A). The assessee entered into international transaction with respect to purchase of Compound Alcoholic Preparation ("CAP") which was considered by the TPO/AO. The TPO clubbed BIIS and IMFL segments and compared the net margin of the combined manufacturing operations of the assessee with those of the broadly comparable ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is in accordance with the relevant Transfer Pricing Regulations. The assessee's international transaction pertaining to purchase of CAP, thus, complies with the Arm's Length Standard for the year under consideration. The Ld. D.R. merely relied upon the Auditor's Note in the Accounts, which, according to assessee, is not relevant because from the accounting perspective, it is one line of business and accordingly, assessee was not required to disclose segmental reporting in its Note to the Accounts. However, the assessee filed the segmental accounting on both the segments before the authorities below, which have not been disputed by them. Therefore, there is nothing wrong in the analysis submitted by the assessee for the purpose of benchmarking of ALP. Both the segments cannot be clubbed together to determine the ALP. 6.1 The Ld. CIT(A), even on the alternative point considered that even if the TPO's approach of clubbing of both the segments is to be followed for the year under consideration and certain comparables which are not relevant to the issue are excluded, the assessee's would be entitled for full relief on account of T.P. adjustment. The reason given b ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
